Why Loyalty Programs Work: The Psychology Behind Reward Schemes

In a world where businesses vie for consumers' attention, loyalty has become more precious than ever. Companies are constantly innovating and strategizing to keep customers not only satisfied but fiercely devoted. 

Why Loyalty Programs Work: The Psychology Behind Reward Schemes
Why Loyalty Programs Work: The Psychology Behind Reward Schemes

In a world where businesses vie for consumers' attention, loyalty has become more precious than ever. Companies are constantly innovating and strategizing to keep customers not only satisfied but fiercely devoted. 

And at the forefront of this battle for customer allegiance stand loyalty programs, the secret weapons that seem to work like magic. 

A GIF of a man dressed in a vibrant rainbow hoodie drawing a rainbow with his hands that says 'magic'.


You have likely encountered them before – those enticing schemes promising points, discounts, exclusive perks, or even that coveted "elite" status. Loyalty programs are everywhere, from the coffee shop around the corner to the global e-commerce giants. 

Here are a few well-known brands that incorporate customer reward schemes to alter customer behavior, reduce churn, and build customer loyalty:

  • Amazon Prime
  • American Express
  • Starbucks
  • Sephora
  • Beauty Insider

But have you ever wondered why these programs are so effective at keeping their customer base coming back for more? In this in-depth exploration, we will unlock the secrets behind the best loyalty programs anduncover the psychology that fuels our desire for rewards.

Types of customer loyalty programs

Loyalty programs come in many forms, each tailored to suit different customer preferences and business objectives. Understanding these diverse approaches is crucial for designing an effective loyalty program that resonates with your target audience.

An infographic that details the different types of loyalty programs.


In the table below, we will break down some of the most common types of loyalty programs and why they are effective. 


How they work

Why they are effective

Points program

Points-based loyalty programs are among the most prevalent and straightforward. Loyal customers earn points for each purchase, with the number of points typically corresponding to the amount spent. Over time, these points accumulate, and customers can redeem them for loyalty rewards, discounts, or other incentives.

Points-based systems incentivize frequent purchases as customers strive to accrue more points and unlock valuable rewards. The gamification aspect keeps customers engaged and coming back for more to earn additional points. The clear and quantifiable progression provides a sense of achievement and satisfaction.


Tiered loyalty programs operate on a hierarchical structure. Customers start at a basic level and progress through various tiers or membership levels as they demonstrate increased loyalty. Higher tiers offer increasingly exclusive perks and rewards.

Tiered programs create a sense of achievement and exclusivity. Customers are motivated to reach higher tiers, and once they do, they become more invested in the brand and its rewards, fostering long-term loyalty. 

Cashback and discount

Cashback and discount-based loyalty programs provide immediate financial incentives to customers. With cashback, customers receive a percentage of their purchase amount back as a credit for future purchases. Discounts, on the other hand, offer reduced prices on specific products online or in-store.

These programs appeal to price-conscious consumers seeking immediate value. The prospect of saving money encourages repeat purchases and keeps customers engaged with the brand. The clear financial benefit is a powerful motivator for customers, increasing purchase frequency

Referral programs

This customer acquisition strategy encourages existing customers to refer friends, family, or acquaintances to a business in exchange for rewards or incentives. Typically, the referring customer receives a reward when the referred individual makes a purchase or takes a desired action.

Referral programs leverage the trust and social connections between customers. People are more likely to try a product or service recommended by someone they know and trust. This type of word-of-mouth loyalty program not only brings in new customers but also deepens the relationship with existing ones, turning them into brand advocates.


Gamified loyalty programs incorporate elements of gaming into the customer experience. Customers can earn points, badges, or rewards for completing specific actions, challenges, or levels.

Gamification adds an element of fun and competition to loyalty programs, making them engaging and interactive. Customers enjoy the challenge and are motivated to participate to earn rewards, ultimately driving loyalty.


This type of loyalty program rewards repeat customers based on the number of times they engage with a brand or make purchases within a specified time frame. These programs encourage repeat business and help maintain top-of-mind awareness.

For businesses that rely on high-frequency transactions, these programs are particularly powerful. They motivate customers to return often, fostering habits and strong ties to the brand.


Subscription-based loyalty programs require customers to pay a recurring fee to access exclusive benefits. These programs are often associated with premium services and membership clubs.

Subscription-based programs create a sense of exclusivity and commitment. Customers are more likely to remain loyal when they've invested upfront in their membership. These programs are often seen in industries like streaming services, fitness clubs, and premium retail.

The psychology behind rewards programs 

The effectiveness of rewards programs in building and maintaining customer loyalty is deeply rooted in human psychology. These programs tap into fundamental psychological principles that drive human behavior, making them a powerful tool for businesses seeking to foster long-term customer relationships. 

Here are some key psychological aspects that underlie the success of rewards programs:

1. Desire for rewards

At the core of loyalty programs is the innate human desire for rewards and positive reinforcement. This desire has deep evolutionary roots – our ancestors were motivated to hunt, gather, and cooperate in groups because of the rewards, such as food and safety, that these behaviors offered.

A group of air men shaking their fists at the sky in celebration.


In rewards programs, customers are motivated to engage with a brand or business because they anticipate receiving something valuable in return. Whether it's earning points, discounts, or exclusive access, the promise of a reward activates the brain's pleasure centers and triggers a sense of anticipation and excitement.

An infographic that details the incentive theory which is that 'our behaviour is dictated by a desire for external rewards.'


2. The role of reciprocity

The principle of reciprocity plays a significant role in the psychology of reward programs. Reciprocity is the social norm that when someone gives us something or does us a favor, we feel an obligation to reciprocate. In the context of rewards programs, when a business offers customers rewards, it creates a sense of obligation for customers to continue engaging with that business.

A man waving and two large grizzly bears waving back. The GIF says 'meeting strangers who gladly reciprocate polite gestures.'


For example, when a restaurant provides a loyalty card where every fifth meal is free, customers feel appreciated and compelled to return to the restaurant to "return the favor" by making additional purchases. This sense of reciprocity fosters ongoing customer engagement and loyalty.

An infographic that details the idea of reciprocity.


3. Emotional connections with brands

Rewards programs are not just about transactions; they are about building emotional connections between customers and brands. Loyalty programs can create positive emotional associations with a brand, such as feeling valued, appreciated, and part of a community.

When customers feel emotionally connected to a brand, they are more likely to choose that brand over competitors, even if the products or services are similar. This emotional loyalty transcends mere transactions and becomes a deeper bond that withstands market fluctuations and competitive pressures.

For example, a hotel chain that offers loyal customers personalized greetings and upgraded rooms fosters feelings of special treatment and belonging, which can lead to a strong emotional connection with the brand.

An infographic that details the benefits of emotional branding.


4. The element of surprise and delight

Rewards programs often include surprise and delight elements, where customers receive unexpected rewards or gifts. This strategy taps into the psychological phenomenon of delight, creating positive memories and brand associations.

When customers are surprised by unexpected rewards, they not only feel appreciated but also experience a boost in their overall mood. This positive emotional response is linked to their interaction with the brand and can lead to increased loyalty and advocacy.

A man walking into his front door being pleasantly surprised. The GIF reads 'this is an unexpected surprise and delight'.


For example, an e-commerce site that occasionally includes a surprise gift in customers' orders enhances the customer's experience and leaves a lasting positive impression.

An infographic that details 4 reasons why you should incorporate surprise and delight into your business model.


5. Sense of progress and achievement

Humans have an innate desire to make progress and achieve goals. Rewards programs align with this aspect of human psychology by providing a clear path for customers to earn rewards, whether accumulating points, reaching a higher loyalty tier, or achieving a specific milestone.

The sense of progress and achievement in rewards programs keeps customers engaged and motivated to continue their journey. Customers set their sights on earning more points, climbing to the next loyalty level, or reaching a specific reward threshold. This sense of achievement triggers a release of dopamine, the brain's "feel-good" neurotransmitter, reinforcing the behavior and creating a positive feedback loop.

An infographic that details how the gamification process works.


6. Fear of missing out 

The fear of missing out (FOMO) is a powerful psychological motivator. Rewards programs often leverage FOMO by offering exclusive or time-limited rewards and promotions. When customers see others benefiting from these exclusive offers, they experience FOMO, driving them to participate and engage with the program.

A meme of the Emperor from Star Wars that states 'good...good... let the FOMO flow through you.'


For example, a clothing retailer may offer a limited-time discount on a popular item exclusively for loyalty program members. Seeing others take advantage of this offer can trigger FOMO in non-members, motivating them to join the program to access the same benefits.

An infographic that states the definition of FOMO.


7. Cognitive dissonance reduction

Cognitive dissonance occurs when individuals experience discomfort or tension due to conflicting thoughts, beliefs, or behaviors. Rewards programs can help reduce cognitive dissonance by justifying and validating customers' past purchasing decisions.

When customers participate in a loyalty program and receive rewards or recognition for their loyalty, it reinforces the idea that they made a wise choice by choosing that brand or business. This reduction in cognitive dissonance enhances customer satisfaction and reinforces their commitment to the brand.

For instance, if a customer has a choice between two similar coffee shops and opts for one with a rewards program, the rewards they receive validate their decision and reduce any cognitive dissonance they may have felt about choosing one over the other.

An infographic that describes what cognitive dissonance theory is all about.


Tangible loyalty program benefits for customers

This marketing strategy provides customers with a plethora of valuable benefits. These incentives and rewards make participating in a brand's loyalty program a highly rewarding experience. There are several tangible advantages that customers can gain from these programs.

1. Discounts and savings

Discounts are among the most straightforward and appealing benefits of loyalty programs. Customers can access exclusive discounts or enjoy reduced prices on their favorite products or services. Whether it's a percentage off, buy-one-get-one-free offers, or special pricing, loyalty programs help customers stretch their budgets further.

The different types of discount coupons available.


For example, a retail store's loyalty program might offer members a 10% discount on their first purchase and ongoing discounts on future purchases, incentivizing them to shop regularly.

2. Accumulation of rewards

Loyalty programs typically reward customers for their loyalty through point systems or other reward mechanisms. These rewards accumulate with each purchase or interaction, giving customers a tangible sense of progress. Customers can then redeem these rewards for free products, services, or other valuable perks.

An infographic that shows how airlines make money from their frequent flier program partners.


Consider an airline's frequent flier program. Customers earn miles for each flight they take, and over time, these miles can be redeemed for free flights, seat upgrades, or other travel-related benefits.

3. Free products or services

One of the most enticing aspects of loyalty programs is the opportunity to receive something for free. Many loyalty programs offer free products, services, or experiences to reward continued patronage. This can include a free coffee after purchasing a certain number of beverages or a complimentary spa treatment after several visits.

An example of different free products that customers of Gardner's Roger's supermarket can redeem with points.


For instance, a hotel loyalty program might offer a free night's stay after a certain number of paid nights, incentivizing customers to choose that hotel for future stays.

4. Exclusive access and early bird privileges

Loyalty programs often grant customers exclusive access to events, promotions, or product launches. This gives customers a sense of being part of an elite group and provides them with early access to desirable offerings.

An exclusive Swarovski reward for Black Friday presale.


A prime example is a ticket presale for concerts or sporting events. Loyalty program members may get the opportunity to purchase tickets before the general public, ensuring they have a better chance of securing seats at popular events.

5. Convenience and streamlined experiences

Many loyalty programs incorporate technology, such as mobile apps, to enhance the customer experience. These apps allow customers to easily track their rewards, make purchases, and access special features. The convenience factor encourages customers to engage with the brand more frequently.

A coffee store app that provides consumers with a multitude of different features.


For instance, a restaurant's loyalty app might allow customers to place orders for pickup or delivery directly from their smartphones, streamlining the ordering process and offering added convenience.

6. Personalization and customized offers

Loyalty programs often collect customer data to provide personalized offers and recommendations. This tailoring of offers to individual preferences enhances the overall shopping or service experience.

Personalized recommendations of products from Basic Piece.


A fashion retailer, for example, may use data from a customer's past purchases to suggest clothing items that align with their style and size preferences, making the shopping experience more enjoyable and efficient.

The emotional benefits of loyalty programs

Loyalty programs extend beyond tangible rewards; they often meet a range of customer needs and provide emotional benefits that enhance their overall experience with a brand. These emotional benefits contribute significantly to building deep and lasting customer loyalty. 

Here are some of the emotional advantages that customers can derive from participating in loyalty programs.

1. Feeling valued and appreciated

 Loyalty programs extend a warm embrace to customers by providing them with special treatment and personalized rewards. Gestures of acknowledgment, like birthday gifts and handwritten thank-you notes, extend beyond mere transactions, instilling a sense of genuine value and appreciation for the brand in customers.

This emotional connection builds a strong bond between customers and the company, creating a sense of loyalty that transcends mere purchases. Customers who feel valued are more likely to continue their patronage and become vocal advocates for the brand, amplifying its reach through positive word-of-mouth.

2. Sense of belonging

Loyalty programs have the remarkable ability to foster a sense of belonging and community among their members.

When customers share the same loyalty to a brand, they often feel like they are part of an exclusive club with a shared purpose. Interactions with other program members, whether in physical or digital spaces, further enhance this sense of kinship. These connections are emotional in nature, leading to a deeper attachment to the brand. 

The feeling of belonging creates a profound sense of loyalty that extends beyond transactions, making customers feel like they are part of a larger, meaningful community.

3. Trust and confidence

Consistency and reliability are foundational in building trust and confidence in a brand. Loyalty programs that consistently deliver on their promises—whether through rewards, exclusive perks, or exceptional service—reinforce customer faith in the brand.

Over time, customers develop a sense of security in their brand choice, knowing that their loyalty is rewarded and valued. This trust and confidence are emotional factors that significantly reduce customers' desire to explore offerings from competitors, ensuring long-term loyalty to the brand.

4. Excitement and anticipation

Loyalty programs add an element of excitement and anticipation to the customer experience. By incorporating gamification elements, challenges, and surprise rewards, brands infuse a sense of fun and adventure into interactions with their customers. 

Customers eagerly anticipate reaching new loyalty program tiers, unlocking exciting rewards, or discovering unexpected bonuses. These elements of surprise and delight generate positive associations with the brand, contributing to the overall long-term loyalty of customers.

5. Sense of achievement

Loyalty programs offer customers a tangible sense of achievement as they progress through program tiers or earn rewards. The journey towards these milestones triggers the release of dopamine, the brain's "feel-good" neurotransmitter, enhancing the overall emotional experience. 

Customers take pride in their achievements within the loyalty program, whether it's accumulating points or reaching a higher status. This sense of accomplishment motivates customers to continue their journey, setting their sights on even more significant achievements and rewards, further strengthening their loyalty to the brand.

6. Gratitude and reciprocity

When brands express gratitude for customers' loyalty through rewards, personalized communications, or exclusive offers, they tap into the principle of reciprocity. Customers, driven by an innate desire to reciprocate the brand's kindness, choose to remain loyal and consistently purchase products or services.

This sense of give-and-take fosters a deeper emotional connection and encourages ongoing loyalty. Customers appreciate brands that acknowledge their loyalty, and in return, they express their appreciation through continued patronage and advocacy.

7. Emotional loyalty

Beyond transactional loyalty, emotional loyalty is a profound bond that makes customers remarkably resistant to switching to competitors. Emotional loyalty goes beyond discounts and rewards; it is characterized by customers choosing a brand because they feel emotionally connected to it. 

This deep emotional connection is a testament to the success of a well-designed loyalty program, as it creates a loyalty that transcends mere financial incentives. Customers who are emotionally loyal are more likely to stand by the brand through thick and thin, becoming steadfast advocates and ambassadors.

8. Nostalgia and fond memories

Positive experiences within a loyalty program often lead to customers cherishing those moments with nostalgia and fond memories. These emotional connections can endure long after the actual interactions, creating a lasting impression of the brand. Customers who fondly recall their experiences are more likely to return and continue their loyalty journey. 

Additionally, nostalgia can drive customers to share their positive experiences through word-of-mouth recommendations, online reviews, and social media, further benefiting the brand by attracting new customers and solidifying loyalty among existing ones.

Tips for creating a successful loyalty program

Designing and implementing a successful loyalty program requires careful planning and execution. 

Here are some essential tips to help businesses create loyalty programs that resonate with customers and drive long-term brand loyalty:

  1. Understand your audience: Before launching a loyalty program, it's crucial to have a deep understanding of your target audience. What are their preferences, behaviors, and pain points? What motivates them to engage with a brand? Collecting and analyzing customer data can provide valuable insights to tailor your program effectively. 
  2. Set clear objectives: Define clear and measurable objectives for your loyalty program. Are you aiming to increase customer retention, boost average transaction values, or drive customer referrals? Setting specific goals helps you measure the program's success and make necessary adjustments.
  3. Offer valuable rewards: The rewards you offer should provide real value to your customers. Whether it's discounts, free products, exclusive access, or unique experiences, the rewards should align with your customer's interests and preferences. Make sure the rewards are attainable and desirable.
  4. Keep It simple: Complexity can deter customers from participating in your loyalty program. Keep the program structure and rules straightforward. Customers should easily understand how to earn and redeem rewards without confusion.
  5. Personalize the experience: Leverage customer data to personalize the loyalty program experience. Tailor offers, recommendations, and rewards to individual customer preferences. Personalization enhances engagement and makes customers feel understood and appreciated.
  6. Encourage engagement: Engagement is key to a successful loyalty program. Implement gamification elements, challenges, and surprise rewards to keep customers actively participating. Create a sense of excitement and anticipation around earning and redeeming rewards.
  7. Promote across channels: Promote your loyalty program across various channels, including your website, social media, email marketing, and physical locations. Ensure customers are aware of the program and its benefits. Use targeted messaging to encourage enrollment.
  8. Measure and analyze performance: Regularly track and analyze the performance of your loyalty program. Monitor key metrics such as customer retention rates, customer lifetime value, and program engagement. Use this data to refine your program and make improvements.
  9. Foster emotional connections: Go beyond transactions and foster emotional connections with your customers. Show appreciation, create memorable experiences, and build trust. Emotional loyalty leads to long-term brand loyalty.
  10. Adapt and evolve: Consumer preferences and market dynamics change over time. Be prepared to adapt and evolve your loyalty program to stay relevant. Seek customer feedback and be open to making adjustments based on their changing needs.
  11.  Provide exceptional customer service: Excellent customer service is a fundamental component of a successful loyalty program. Respond promptly to customer inquiries, resolve issues, and provide a seamless experience. Exceptional service reinforces the positive associations with your brand.
  12. Test and iterate: Don't be afraid to test different program features, rewards, and strategies. Experimentation allows you to identify what resonates most with your audience and refine your program accordingly. Continuously iterate to improve the customer experience.

It’s all about the people

Whether you are a small local business or a global industry leader, the lessons learned from loyalty programs are universal. This industry is not solely about the points or discounts; it is actually about the people, the emotions, and the relationships that make loyalty schemes truly worthwhile for consumers.

As you embark on your loyalty program journey, remember the words of Maya Angelou: 

"People will forget what you said, people will forget what you did, but people will never forget how you made them feel."


So, remember to make your customers feel valued, appreciated, and loyal, and success will surely follow.