Loyalty Programs: Love or Loss Aversion
Loyalty Programs are ubiquitous these days.
From airlines to super-markets, drug stores to coffee shops, even the local hair salon or dry cleaners are offering some form of reward program for repeat purchasers. All looking for ways to incentivise consumers to keep up the good work of driving them towards their revenue targets.
And for those with more sophisticated programs, a rich source of consumer data: a continuous stream of information on buyer attitudes and behaviours, preferences and possible triggers to purchase. Despite protestations of customer-centricity, the slant towards the benefit largely residing in the hands of the brand or business is clear to see.
“Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behaviour — behaviour which is potentially beneficial to the firm.” [Wikipedia]
When loyalty is discussed among many of us marketing folk, the idea that customers show brand loyalty because they ‘love’ the brand is a recurring theme. And, whilst true in some rare cases, the reality is that the relationship between a consumer and a brand is far more complicated when it comes to the subject of loyalty and loyal behaviour.
One realisation that deserves further exploration and discussion is the fact that rather than love or true brand affinity driving repeated in-brand purchases, it is in fact a severe case of Loss Aversion.
Loss Aversion is a Behavioural Economics concept that can be encapsulated in the phrase “losses loom larger than gains” (Kahneman & Tversky 1979), and it proposes that the pain of a loss is psychologically about twice as powerful as the pleasure of a gain.
What we previously had is more valuable to us than what we could have in the future.
We are attached to it, we put a higher value on it than in many cases its own intrinsic value.
Consider the fact you may own a bicycle. The bicycle is 10 years old and spends most of its life in the garage. You give little to no thought to this bicycle on a day to day basis. But then you hear your partner discussing giving this bicycle to someone else, suddenly that bicycle takes on more significance, even though you don’t use it, you don’t want to lose it. It’s irrational, yes, but it is a behavioural bias that we are all prone to.
This concept comes into play strongly with loyalty programs.
Wallets and purses are filled with loyalty cards bearing a few stamps that never get thrown away, loyalty cards are swiped daily with rewards remaining un-utilised for months or even years. But no industry displays loss aversion at work more than perhaps the airline industry.
Despite a continuing decline in the brand and customer experience of almost every airline, reduced value of points earned and an ever-increasing difficulty in finding ways to redeem the rewards, ‘loyal’ customers continue to make in-brand purchases even when a better alternative comes along.
No doubt there is some element of having already invested in the brand (and the loyalty program) but the main driver for keeping many people loyal is the psychological discomfort at the thought of losing what they already have. Airlines have capitalised on this fear of loss by also building in tier structures that reflect a consumer’s status within the loyalty program, which compounds the idea of loss with a blow to the ego.
Because we all like status. It feeds our ego and makes us feel special, makes us feel good, even if we profess not to care.
We all get a small psychological thrill when we know we have moved up the status chain in almost all areas of life.
And to know that with this increase in status comes additional ‘treats’ or rewards; well, it just compounds our fear of loss.
As a marketer with over two decades exploring the nature of loyalty and advising clients on how best to both inspire and maintain loyalty, I used to believe I was immune to such biases. That because I intellectually understood the factors at play, I would be able to practice true rationality myself when it came to my behaviour and the brand decisions I made.
But I was in for a surprise, and one that only served to reinforce how much of loyalty is down to loss aversion. As a British Airways frequent traveller, trotting the globe regularly for work over many years, I had become a member of their loyalty program, the Executive Club.
With every flight, the tier points added up and so I rose in their status hierarchy. I loved that I could skip the long check in queues and fast-track through security, but the additional benefits of extra luggage, lounge access and more reward points for every mile flown didn’t really matter to me.
But then things changed. I changed jobs and my airline travel decreased by 80%, no more 6 flights a week.
At the same time British Airways reconfigured how flyers earned their tier points; forcing their customers to either spend more on a ticket or take almost double the number of flights to get the same amount of points to keep one’s status.
And when that happened, I am ashamed to admit I went to surprising lengths to maintain something that not only was I barely going to make use of, but something that held so little actual value for me.
Because I am not someone who sits in the lounge, I love to walk around and browse the shops, I rarely take additional luggage and advanced seat reservation doesn’t normally apply as my flights are often last minute. All this combined with my lack of need to be wheels up for the foreseeable future meant most of the actual benefits of the Executive Club status didn’t apply to me.
And yet, as my membership year neared its end, I became consumed with the idea of missing the required number of tier points to retain my long-held status with British Airways. It would play on my mind, pop up unexpectedly and then finally led me to make one of the most irrational and financially irresponsible decisions in recent history.
With one qualifying week to go, I found an extortionately expensive return business class flight from London to NYC that would give me the points I needed to maintain my status for another year.
This might have been worthwhile had I also envisaged a nice long weekend filled with brunches with friends and walks in the Park; but due to work commitments, I couldn’t leave until Saturday and had to be back by Sunday night meaning it was going to be a literal round trip.
Close to 24 hours of being airside with no fresh air.
Yet I went ahead and bought my ticket. And a few days later I spent my weekend flying to NYC and back with only a 6 hour stop wandering around JFK. Irrational and more than a little insane.
However, what made me feel both somewhat vindicated but also slightly worried, was hearing I am not the only one to indulge in such irrational behaviour.
For on the return flight I struck up a conversation with a fellow passenger, sharing what I was doing, and whilst expecting an “are you nuts” response, was greeted with a similar story. They had been paying an extortionate amount for each flight as they approached their ‘year end’ in order to earn enough points to maintain their status.
Whilst of small consolation on my return flight, I had at least some company in my crazy.
And at a Luxury Brands conference in March of last year, a group of marketers, advertising creatives and strategists also shared over dinner how they too had gone to equally bizarre lengths to ensure they maintained their status in various loyalty programs. Rather worrying given we work in the industry that designs and creates these programs.
So yes, it is true, Loyalty programs are built around utilising the psychological principles of reciprocity and commitment, but they most definitely also rely on the significant role that loss aversion plays.
That and our predictable irrationality when it comes to decision making.