The psychology of rewards and why you should leverage them

Should customer loyalty be a priority?

There are many reasons why businesses might prioritize loyalty programs as part of their customer acquisition and retention strategies for growth. For one, shoppers seek them out. According to Forrester, 63% of US consumers surveyed consider built-in loyalty programs important when it comes to their research and buying experience.¹

Going further, some of the most notable benefits of loyalty programs include:

• Increased revenue. Loyal customers may spend more and have a higher customer lifetime value than one-time customers due to their proven experience with a brand. They may also be willing to try new products from a business that they already trust. One report found 80% of U.S. consumers said they increased their purchasing frequency from brands after enrolling in their loyalty programs.²
• Greater efficiency. Loyalty programs can help improve customer retention, which can help business streamline costs. Studies have found that improving retention by just 5% can boost profits by more than 25%.³
• Brand advocacy. Businesses can turn loyal shoppers into brand advocates who help increase awareness and inspire friends and family to become customers.
• Access to data and insights. Businesses can use rewards programs to learn more about their most loyal customers’ interests, preferences, and behaviors. They can then use these insights to optimize their customer experience strategies and reach new groups of potential customers with similar characteristics.

How does psychology relate to customer rewards?

It’s important for enterprises to understand the psychology of loyalty, so they can build the most effective customer engagement and rewards programs for their business goals.

For example, businesses can harness these theories and practices by rewarding customers with perks and benefits:

Positive reinforcement

As many parents, teachers, and bosses know, positive reinforcement can be effective in motivating people to stay engaged and complete certain actions. Similarly, businesses can use positive reinforcement to enhance behavioral loyalty.

Rewards programs, for instance, provide customers with special perks, points, or exclusive offers each time they spend money. As a result, customers may start associating making a purchase with getting a reward, encouraging them to repeat this behavior.

Endowment and goal gradient effects

The endowment effect occurs when someone values an object that they own more highly than its market value. They might highly value the object because of an emotional attachment or simply because they possess it and have already invested in it. For businesses, this means that customers might deem exclusive rewards or perks to be more valuable than they are because they put in the effort to receive them. Gen Z and millennials are particularly likely to feel that they’re “getting something for free” if they buy a gift using rewards.⁴

According to the goal gradient effect, as someone gets closer to achieving a goal — like receiving an award — they’ll make more of an effort to reach that goal. For businesses, that means customers might ramp up their spending as they get closer to receiving a perk or loyalty reward.

For example, an ice cream shop might offer a “buy 10 cones, get one free” offer. The goal gradient effect indicates that a customer might buy cones more frequently as they near their tenth purchase. To help harness this effect, businesses should provide clear ways for customers to track their progress towards receiving loyalty awards, such as through their app or even physical punch cards.

Exclusivity and social status

Customers aren’t just interested in the financial benefits of rewards programs. They may also be eager to achieve a higher social status and exclusive perks. In fact, 63% of Gen Z would be more likely to date someone who was “rewards-points savvy.”⁴

Consider tiered or VIP membership programs. They can appeal to people’s desire to stand out from their peers, receive special treatment, and avoid the fear of missing out (FOMO). A fashion brand, for example, might reward top-tier customers with exclusive access to certain products. In this case, they may not even have to provide a discount or financial incentive. The perceived exclusivity and status can be enough to drive engagement.

Understanding psychology as part of your customer retention strategy

It’s important for businesses to understand the psychology behind rewards so they can build loyalty programs that help improve customer retention and engagement. There’s no one-size-fits-all rewards strategy, either. A truly successful program provides perks that are tailored to your customers’ needs and seamlessly integrated into cross-channel shopping experiences, reaching shoppers no matter where they decide to buy.

That’s where PayPal’s comprehensive online payments solution can help. PayPal gives enterprises the tools to streamline checkout experiences both online and in-person, making it quick and easy for customers to pay with their preferred payment methods — from digital wallets and cryptocurrencies to buy now, pay later options. With PayPal's unified vault, you can also securely save customer payment information for repeat purchases or subscription programs.

After all, the future of online checkout will be about more than just processing transactions. To compete, businesses will have to deliver frictionless, personalized experiences that inspire customer loyalty and retention for long-term growth.

Learn more about how to drive digital customer engagement with PayPal.