Market Movers Understand the Psychology Behind Customer Retention and Loyalty

An understanding of the psychology behind customer retention.

Max Savransky, Chief Operating Officer at Loyalty & Reward Co - a loyalty management consultants and blockchain loyalty specialist - breaks down the psychology and data approach to customer retention.

The discussion includes a review of the 4 psychology concepts that include operant conditioning, social identity theory, endowed progress effect, and decision affect theory.


AL Lalani:

Welcome to another discussion of Annex Cloud Market Movers, where we bring in experts and luminaries to help us with the current times. Today's topic is near and dear to our heart, it's on the topic of diving deep into customer loyalty and retention. Which is a very important topic, considering the times. With me joining today all the way from Sydney, Australia is Max Savransky. Max is the CEO, or the COO of Loyalty & Reward Co. loyalty & Reward Co. is a strategy forum helping companies with their loyalty programs. Max, welcome to the show.

Max Savransky:

Thank you so much for having me, Al.

Al Lalani:

Wonderful. Max, I think we have a lot to talk about, but more importantly, currently in a lot of companies that are revisiting their loyalty programs. If they have one, they are starting to think about whether they've structured it correctly, whether they've got the right incentives in place. If they haven't had one for a while, it's now the right time to start thinking about one because of whatever the economy leads us in the next few months or years, it's retention is going to be very, very important for customers to bank on. With you, you help a lot of companies build and structure their loyalty programs, but sometimes we go so narrow into an implementation that it gets just too mundane. I want to start a little broader with you and have an understanding of how people can think about, broadly, the psychology of retention as a whole. And maybe you can provide some insights there to start.

Max Savransky:

Yeah. Look, I think that's a really great question. And I think before we dive into retention psychology, and there are lots of concepts that we can discuss. I think it's really important just to acknowledge that in this day and age retaining customers actually is quite difficult because of the clutter that is present in the market. And throughout our consulting, I suppose days, we've seen a really big shift in consumer expectations. This is really driven by the likes of Amazon and Spotify and Netflix and Uber, and these companies are really framing what consumers want, and what they expect. So before we dive into psychology, I just want to state that, there are really, from my perspective, there are five things that I believe consumers want now and expect across all brands. The first thing is they want brands to know who they are and what they're like.

They want brands to be able to respond to them quickly. They want brands to be able to engage with them wherever they choose, be web or app, or bricks and mortar. They want brands to be able to create a conversation with them and meaning. And they also want brands to be able to reward them for loyalty. So whether that might be in the form of points, or status, or discounts, or whatever it might be. So brands that can deliver to these expectations, from my perspective, will absolutely win in 2020 and beyond. And I think from a loyalty program perspective, that provides a really great vehicle to then be able to let brands formalize this and deliver something meaningful. And I think that really leads us quite nicely into psychology. And it's absolutely worthwhile for brands to understand some interesting psychology concepts, which would then illustrate how applying those concepts can then lead to greater retention.

I want to talk about a few today, and I must note that there are a lot, but we're only going to talk about a few. So the first one is called operant conditioning. Now, this is essentially a concept that states that reinforced behavior is repeated. A psychologist by the name of B.F. Skinner, who I'm sure a lot of your listeners have probably heard of. He ran an experiment with rats. And what that was, he put a rat on a box, and there was a lever. When the rat hit that lever, a little pellet of food came out. So the more the rat tapped the lever, the more it then resulted in food. And therefore the learning was that positive reinforcement resulted in the desired behavior being repeated. So from a brand perspective, to maximize retention, brands should really consider some sort of positive reinforcement for the behavior that they want the member to exhibit.

The next one, which I think is quite interesting, is something called social identity theory. And this is essentially a psychologist by the name of Tajfel. He proposed the concept where a person's self-esteem and pride were actually directly based on their membership in different groups. Now, if you consider loyalty program design, a program which then serves to make the member feel a sense of exclusivity and belonging can actually play a central role in the member then adopting the brand, whether it's subconsciously or otherwise, as an element of their own self-definition. And again, for brands who wish to maximize retention, they should really always look at building more of an emotional connection with their members, alongside a transactional connection as well.

Another one that I want to talk about is something called the endowed progress effect. Now this concept states that consumers who are provided with artificial advancement towards a goal, actually exhibit greater persistence towards reaching that goal. There was an interesting experiment conducted by a couple of psychologists called Nunez and Dreze, and it was done on a carwash. And what they did was they had two groups of people. The first group of people got a stamp card which had eight stamps on it, and none were stamped. The second group got a card that had 10 stamps in it, but the first two were actually stamped, so there was artificial progress in place there. So in other words, both needed to get eight stamps before they got a free car wash. And what they saw was that the group that already had the two stamps actually exhibited a significantly higher redemption rate, which was 34% versus the first group, which was 19%. Thereby demonstrating that artificial advancement was actually something that was driving the brands to always get the members started.

And then the last one is something called decision affect theory. And the concept here states that unexpected outcomes actually have a greater emotional impact than expected outcomes, even when the reward is of lower value. This was highlighted back in 1987 by a psychologist called Schwartz. And he ran an experiment in an office where repeatedly throughout the day he placed a small coin on a photocopier for different people to find. He then interviewed those people, and what he found was that the people who found the coin actually had a significantly better outlook on life in general than those that didn't. And the moral of that story really is that it doesn't cost a lot to make someone's day. And to maximize retention, brands really should consider ways of how to weave in these kinds of surprise and delight strategies into their program design.

Al Lalani:

Wonderful. And I think many of these different things can interweave itself into a great loyalty program, and it didn't seem much in conflict because you have to reinforce and create the right boundaries and structure of the program. You have to potentially make it interesting for people to consume the program and not just be a transactional program, but be an emotional program. We call it an experiential program, so it's throughout the customer journey experience in capacity, but some sort of idea. Have certain ways of artificially advancing, as you mentioned, we call it seeding the program. You give people a seed that can then grow into a tree eventually, just another way of saying it. And at the same time, giving them something that they may not expect. And so it's the unexpected that causes the fun and the excitement to come and reenergize and be part of that community, so to speak. So all of these programs are great. And so how do you apply these concepts, or the psychology into then designing a framework for the loyalty program? And how do you apply these in day-to-day methodologies?

Max Savransky:

There are a number of different loyalty program design frameworks. And I guess, as strategy consultants, we work with a range of clients to work out what the optimal framework design is for their particular business. Now it's worthwhile saying that there's absolutely no one size fits all solution. You might find that different frameworks work better for different industries. So what I might do is I might just highlight a few of these today, and then just talk a little bit about what works and what doesn't, and how that law to psychology also feeds in as well.

So if you look at, for example, hospitality, so restaurants, cafes, they typically use the punch card framework. Which is very simple and highly prevalent. So a member will pick up a card, they will purchase a coffee, they will get a stamp. And when they order five coffees or 10 coffees, they get a free coffee. So it's really easy to get as well. And this type of framework can absolutely manifest itself in a physical card or a digital card. So if you look at something like hotels.com, they have a digital stamp card where every time the card is stamped, this follows the member staying a night. The difference is in terms of complexity, the difference is that the free room after 10 stays has been completed is that it's actually based on an average value, versus in a coffee shop where it’s literally just bought 10, get one free. Now this framework can be a little bit challenging in the sense that it's quite tough to collect data about the member because they're not really giving any of their data to the retailer or to the restaurant.

But, having said that, it's still the most prevalent program in the world. Now this framework actually leverages that endowed progress effect that I just talked about, where companies can absolutely start members on a journey if they want to, thereby increasing that engagement. The second one is one that I think everyone knows, and that is essentially loyalty currencies. Now, these usually manifest themselves as points programs, and can really span from everything from grocery, through to banking, through to airline, hotels, retail business to business, and more. And the most well-known programs in this space, of course, are ones with really large databases with millions of members. And a really good example of this type of framework is the frequent flyer programs. So we're talking, it depends on what country, of course, whether it's Australia or the US. We're talking tens of millions of members.

And these programs also typically feature a lot of other engagement elements, such as tiers, which might then appeal to the member's sense of social belonging. If you think about how it's structured, there are the points earning element, but then there's also those softer benefits such as priority boarding and upgrades and lounge access. And people, members I should say, in the higher tiers, really feel a sense of belonging. And they really feel that exclusivity and emotional connection. I don't think there's any program in the world that does this as well as the airlines. The other thing is that the larger programs like this are also well set up to capitalize on their existing coalition networks. Again, if you think of a grocery or an airline program, members can earn points across a wide range of retail partners, therefore consistently giving them value.

And for the program, what it does is it gives the opportunity to talk to members about a wide range of different things. And this is why throughout what we've seen in COVID-19, even the airlines who weren't flying, they still had a really great opportunity to talk to members about points that they might be able to earn simply by using their co-branded credit card. Or an initiative that was really great was to allow members to keep their status credits for an additional six to 12 months, thereby guaranteeing that exclusivity. So these kinds of programs are absolutely really well placed to capitalize. Then there's a design called the member benefits design. Now, this is something that you might find in say telecommunications. Where if I join a company like Optus, I might have access to a whole bunch of different perks.

So these could be anything from, discounted movie tickets, or presale to certain events, or whatever it might be. And every member gets the same benefit. These are typically really easy to set up, and reasonably cost-effective because these benefits can be provided either by the telephone, or they can be provided by a range of third-party partners. The challenge here is that this type of design really is a little bit problematic when it comes to driving actual behavioral change. And in this kind of design, a really good opportunity is to leverage the psychological principle called decision affect theory. Where you're actually able to incentivize members by surprise and delight initiatives. So if you think of an example where a member might receive some sort of an incentive-based on their anniversary, or based on a recharge, something that they're not expecting as part of the standard program. And that's a really good way than to stimulate them and build that emotional connection to that particular brand. And, of course, insulate that member from switching to a competitor.

And then the last one is just your standard discount program, which a lot of retailers will typically use. And with these kinds of programs what happens is, whether it's points-based or whether it's a straight discount, a member will come in, they will transact, and they can either receive a discount on the spot based on their spending, or they can receive a delayed discount. And that's a classic example of operant conditioning. Where members are continually being rewarded for the behavior that the retailer wants, which is actually that spent.

But I think, Al, you're right, the key is really how to stimulate that ongoing engagement over the entire customer lifecycle. And that's the toughest thing for brands to achieve because it involves putting a plan together that is more than just the first couple of months of a member joining. And there has to be a robust strategy in place to then be able to really maximize the share of wallet against their competitors, and really make sure that the member is engaging, which is outside of just that purely transactional element.

Al Lalani:

Absolutely. And I was just having a conversation on LinkedIn with another person on this specific topic of airlines. And while airlines are the most proliferate loyalty membership base that's out there, even though they now have all these coalition networks where you can both earn and burn and still be active in that loyalty program, so to speak, it's not as active as it was before. The core benefit is challenged, the core is the keep engagement going. One of the things that were very interesting to me that was being explored by some of the smaller airlines now that are trying to be more innovative is they're rewarding for additional behaviors that may not be related to any of those behaviors, social behaviors are things safe. And through Twitter, they share about the same experience they had and being able to recognize that behavior. And ideally, even be rewarded for that behavior within the loyalty program is something that an airline would normally not consider, but now they're starting to.

Psychologically, that I might not have the rule as otherwise seen. So all of these are great, and it's keeping people in touch. One of the other things that we look at is enrollment might be sometimes a vanity metric. Like you might have a million members, you might have 750,000 members, or you might have eight million members. But how do you look at the activation, the engagement rate for those customers? And how active they are on an ongoing basis makes a much bigger difference at the same time for the ultimate success of the program, whatever metric you're trying to drive from a KPI perspective. What I really liked what you mentioned, and I think anything next thing we should dive deeper into is that data part of the approach, which is, some of these programs may not lend themselves, especially if they're very broad, transactional, or punch card type programs, may not really lend themselves to getting enough data.

And a loyalty program is a great way to have a full dataset of the customer experience on the first touch, to them becoming a purchaser, to becoming a repeat purchaser, to maybe even becoming an advocate of your brand. And so what are your ways that you advise people and in being able to use the frameworks to collect enough data about your customer, and then maybe even apply that data towards the improvement of the program or lifetime value as a whole?

Max Savransky:

So what's really interesting, Al about your question is that a lot of the clients that we work with, and indeed because we generally join hundreds and hundreds of loyalty programs. I, myself, am probably a member of at least 200 different programs. And one of the things that we see very very often is the lack of a really good quality lifecycle marketing strategy. So I guess this really goes back to the whole piece about engaging and stimulating your members. So if you look at a lifecycle, just a very basic lifecycle, you've got someone who is then joining, then there's an onboarding process. And we have a saying in the industry that the seeds of churn are sown through the onboarding process.

And you wouldn't believe just how few companies actually have a good quality of onboarding process, where the basic would just be a few emails just to educate the member on the program benefits and really give them an opportunity to understand how they can extract value from the program. All the way through to really high-quality dynamic communications, where over a period of saying a couple of weeks, depending on how a member engages, they might receive a different variation of an email or a notification, depending on whatever touchpoint is being used. And that someone like that would be best practice. Then through the growth phase and the advocacy, that's where the growth really is where you want to structure all of your trigger and tactical, I suppose, engagement elements. Because that is something that will ensure that the member remains engaged for a much longer period. Because after that comes retention, and after that comes to win back. So the best way to insulate your brand against churn is really the first step is to put that high-quality lifecycle strategy in place.

Then what we normally tell our clients is really just make sure you have a test and learn the framework in place. And that really just talks to the fact that once you launch a program, or once you redesign a program, really what you need to be doing is you need to continually be evolving and testing what works well with customers and what doesn't. And that really goes back to the customer expectation piece. If you think back to all of the things that customers now want, that wasn't necessarily the case 10 years ago, or even five years ago. So it's really just about understanding what's happening in the market. And the good news is that because a lot of these brands have come into the market have set these expectations, all the other brands have to do is just look at what they're doing, and obviously try and replicate to some way around what's going to work best for their customers.

And then the last thing in terms of data is, we would strongly recommend to all brands to have some sort of a churn risk scoring. Because it's very, very important to understand the time when your member might look at this engaging. So if I give you a bit of an example, let's say, Al, you have been transacting regularly with a program that you're engaging with on a regular basis. Then all of a sudden something's gone wrong and you've called a call center, say several times, and the customer service rep may have a frown against both of those calls. And then after that, there may have been a drop in your spending.

Now, something like that should absolutely cause alarm bells for what the marketing team and for the brand. Because when they see something like that with a cohort they really need to put in place a strategy to then re-engage with those customers, and then bring them back with either high-value campaigns or some other initiative before they fully churn. So the advice that we would give here is that use the data that you have in the most meaningful way to first, engage with the customer as much as you can through the lifecycle, but also recognize those early disengagement signs because they are critical. And as many people have said before, it costs much less to retain a customer than it does to acquire a new one.

Al Lalani:

Yeah, absolutely. And the test and learn strategy, I really like. Right? And in addition to engagement, a lot of times we speak with customers and they'll think of loyalty programs as one and done. We've created one, we're done. Or maybe we've created some initial launch programs and we're done. But it's an ongoing process of constantly improving because as customers are changing, the environment is changing. COVID-19 obviously is brought in a whole new set of twists to this whole process. And so it's a constant strategy of adapting to the times, keeping people engaged. And essentially it's a full lifecycle marketing program, it just, it doesn't end. It's just like any other marketing tactic that you may have. And so I think that's a very important part that you bring in and at the same time, looking at the key metrics, whether it's churned risk or lifetime value metrics, as you mentioned CLV before, or also maybe even look at RFM data or something else that might help with understanding the customers and being able to market to them appropriately. A lot of times some of the customer's implementations are limited not just by not having the right strategy, or not having the right design framework, or maybe not even having the right data approach, but may be limited by technology. And not just technology for loyalty might be a technology across their ecosystem. For a large complex company, there is your ERP, which might hold some data. There might be your marketing cloud that holds some data. You have probably a CDP, you might have some other data warehouse.

So the technology stack of a large complex company can be made up of a gargantuan element of different companies and stacks that pull it together and make it all work together. And so from your perspective, while you bring all the strategy and the processes together, bringing technology to make these processes go to life is probably as important as the strategy itself. Any thoughts around the technology part of the equation in the success of a program?

Max Savransky:

Lots. So certainly if once brands have an understanding of their customer from a psychology point of view, they have a good idea of the framework that they want to use. And they have an understanding of a data approach, you're absolutely right. What they then need is the technology to be able to bring all of that together. And there are lots and lots of good quality loyalty platforms out there that can support pretty much anything that marketers, and indeed even on the smaller scale, SMEs need in order to maximize retention. And I guess our advice on this is really just to make sure that you pick and choose a technology vendor or platform that is best suited to your business and what you're trying to achieve. So if we look at some of the capabilities around good quality loyalty platforms, and we're really talking over the last five, 10 years when all of the new technology has really just facilitated anything that you want.

Some of the things might be a loyalty engine, which is anything that the marketers want around tiers and calculations and points. Offer and promotion engine to allow them to seed any kind of offer to their database through any kind of touchpoint as well. Rewards store, where the large coalition programs, might have a front end rewards store where members can redeem points, and that's not typically necessary for a smaller program where all of the benefits have gone straight back into the business. Then there's a consideration for multi markets. So you might have a global retailer that needs a technology stack, but what they really need to be looking at is a stack that can support them around the world, not just in a particular area. Because there are lots of complexities around there as well. From a marketing execution point of view, there's all of the ability to do the segmentation, develop campaigns internally within the loaded platform in their marketing module, or potentially you just use the tech stack for your loyalty and promo needs.

And then you use an external marketing engine as well. So all of that is possible too. What's becoming really important now is the whole zero party data capture. And essentially what that means is being able to engage directly with your members and collect information about them. Because that personalization layer is really something that's going to stimulate and is going to drive engagement. But before you can drive that engagement, you need to understand who your customer is, and as I said, and what they want. And then there's the analytics component as well, so all good quality technology stacks will have an analytics engine. So it's really just understanding, well, what kind of metrics do you need to be able to understand who your customers are, and then be able to market to them both now and into the future as well?

So that's a really critical part of any tech stack. And, of course, there's all of the other bits and pieces that we're not going to delve in, but we're talking about things like financial management, which is really important for large scale-points based programs, to understand what that liability is. And of course, in this day and age, you want a stack to support all of your security and fraud mitigation, and in the case of Europe, GDPR data requirements. So there's lots and lots of things to consider. And my suggestion to brands who don't necessarily have a lot of skills or know-how in the space is to really consult someone who can help them on that journey. Because for most companies a tech stack is a very large investment. Especially, Al, when you very correctly pointed out that a lot of companies would have lots and lots of different data sources. And really there could be some significant cost savings. If you're getting a loyalty platform onboard that can actually do the things that three or four other platforms that you currently have all in the one, so it's well worth some consideration.

Al Lalani:

No, I think those are all very good points. And I think you laid out a series of different things that people have to look at when choosing a loyalty technology provider. As you were talking, the only one or two things additional that came to my mind, just to add to what you said, and I'm sure there's more than you have as well, is just to your specific point is ensuring that the engagement layer is part of the technology stack for the loyalty platform. Because if you can engage your audiences and keep them active within the program for a longterm perspective, then again, the purpose may be beaten. And so if that is the objective to keep it emotionally active for the customer, a lot of new-age technology platforms provide that. And as well as being able to be flexible and scale for growth, as things grow as well.

And so I think, Max, we've covered the full gamut. I'm very excited about the discussion we've had today around starting from psychology all the way to technology on the two sides of the spectrum. I wanted to thank you for coming here today and providing this advice to our audience. And really quickly, if people wanted to reach out to Loyalty & Reward Co. for advice for a loyalty strategy, or support for recreating their loyalty programs or starting a new one, how can they reach you, or how can they reach your team?

Max Savransky:

The best way is probably to reach out to me directly on LinkedIn. Alternatively, please head to our website, which is, rewardco.com.au, and there they'll obviously find a way to get in touch with myself and our team and find a lot of the thought leadership that we've got on there as well, just around a lot of the blog articles that we write. Because our entire team writes lots of quite opinionated pieces around different loyalty programs and different elements of engagement, psychology, and so forth. Look, we're always happy to hear from people. And if anyone needs help specifically around loyalty program design, engagement strategies, commercial modeling, and all of that, we would love to hear from you.

Al Lalani:

Wonderful. Well, thank you again, Max. We appreciate you taking the time for everyone else. If you want to hear from experts like Max, please go to annexcloud.com/marketmovers. Thank you again, Max. Bye for now.

Max Savransky:

Thank you so much, Al. Appreciate it.

Al Lalani:


Featured Speakers


Al Lalani

Co-Founder, Annex Cloud


Max Savransky

Chief Operating Officer, Loyalty & Reward Co

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For more than 10 years, Annex Cloud has been the worldwide leader in technology and service solutions that transform customer loyalty experiences for organizations, extending valued customer engagements, ultimately making beloved brands. Powered by the modular, comprehensive and scalable Loyalty Experience Platform™ solution suite, Annex Cloud customers capture and use zero- and first-party data to seamlessly deliver value-based individualized experiences across the entire customer journey—from awareness to purchase to retention, loyalty, and advocacy. This one-to-one engagement helps enterprises accelerate growth by increasing average order value, repeat purchase frequency, and customer lifetime value. Annex Cloud is recognized by respected industry analysts and integrates with more than 100 market-leading technologies to seamlessly integrate loyalty across the tech stack.

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Loyalty & Reward Co is Australia's leading loyalty consulting agency. Working with major brands globally across multiple industries and markets including B2C & B2B, their experienced team provides a comprehensive insight into all aspects of loyalty including program design, consumer psychology, commercial modeling, marketing strategy, legal and regulatory, technical and platform solutions, data collection and usage, reporting and analytics, and post-launch operations. Loyalty & Reward Co use their data-driven Deep DIVE© approach to efficiently and cost-effectively design, implement and operate best-practice loyalty programs.

To learn more about Loyalty & Reward Co, visit rewardco.com.au

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