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The Psychology Behind Customer Retention and Loyalty

When working to grow their business and revenue, companies often focus most (if not all) of their resources on attracting new customers. The problem, however, is those efforts are wasted if the new connections don’t stick.

Customers expect (and deserve!) personalized, convenient, and fulfilling experiences. If a customer tries a new brand that fails to deliver on their needs—especially during the earliest interactions—they have little reason to support it. And this is about more than just customer service.

That’s why the most successful companies prioritize customer retention and loyalty alongside acquisition.

There’s a common belief that it can cost 5 to 25 times more to acquire a new customer than retain one (with the exact cost depending on the industry and how the cost is calculated). But there are additional reasons to retain customers. When customers are loyal to a brand, they:

  • Mostly buy from or use that brand
  • Recommend it to their friends and family
  • Spend 31% more than new customers

It’s hard to deny those advantages! Retention is a smart investment for your budget that can cement your customer loyalty and boost their lifetime value. But now comes the big question:

What does it take for customer experience teams to build loyalty and retention?

The answer and best strategies are backed by science and decades of social behavior. Let’s explore the ideas you should know to build loyalty, increase referrals, and deliver a win-win for your customers and your organization!

How To Build Customer Loyalty

Brand leaders often associate “customer loyalty” with a customer’s likelihood of making repeat purchases. That’s certainly a benefit of customer loyalty, but there are deeper forces at work.

Loyalty as an emotion spans several areas, including trust, competency, reliability, transparency, and value. Customers need to gain a clear value from your product or service, believe your brand is an authority in your space, and trust you with their time, money, and data. They also need consistent experiences that prove they can count on your team.

Every interaction at every stage of the customer’s journey can affect loyalty. But first and foremost: even the best customer retention strategy won’t save a bad product.

Half of customers say their loyalty is won or lost based on the quality of the product or service they purchase. Simply put, the quality of what a customer buys is table stakes and one of the first areas to improve if you’re experiencing customer churn.

Ask yourself the following questions to assess if you have a product or service quality issue:

  • Do you know who your ideal customers are and what they look for in a solution like yours?
  • Are there customer feedback insights or reviews that express product quality concerns? What about customer call transcripts or support emails?
  • Is your product easy to use and navigate? Are there user experience issues you can address?
  • How does your service or product compare to that of competitors?

If your core offering delivers on what your customers need, you can now focus on nurturing the relationship and earning loyalty in calculated ways. This involves understanding the emotions your customers have when engaging with your company, whether in-person or online.

The Psychological Factors at Play When Shopping

We like to think we’re in full control of our actions. However, there are psychological factors that we often don’t realize influence our behavior.

By understanding how human brains work, brand leaders can better engage customers in ways that address their subconscious needs and deliver experiences that promote positive emotions.

To start, there are a few chemicals and neurotransmitters that have a strong impact as customers interact with your brand and organization:

  • Dopamine: Dopamine is the “feel-good” hormone, and it’s triggered by activities that bring pleasure. This neurotransmitter plays an important role in our reward system, meaning dopamine can encourage people to continually seek feel-good activities or those with an anticipated reward. Trying new things, earning a discount, or simply placing an order can trigger dopamine.
  • Oxytocin: Oxytocin is released after positive social interactions, and it can increase trust and generosity. Oxytocin is believed to be one of the most important chemicals for building loyalty and trust. Engaging with friendly store staff or support agents, chatting with other shoppers, and an overall positive atmosphere will trigger oxytocin. A friendly bot or smart speaker can do this, too! (Alexa, tell me a joke!) 🙂
  • Serotonin: Serotonin helps regulate mood and overall happiness. Exercise, stress management, and eating specific foods can boost our serotonin. Levels of this chemical impact how a customer assesses the pros and cons of a decision. Serotonin is a reminder that brands need to reinforce customer purchases and provide information or incentives that make the purchase more justifiable. Reassurance is an often overlooked step to help customers feel confident in their decisions.

The three are complemented by a few behavioral science concepts that also sway customer behavior.

Cognitive Dissonance and Post-Purchase Rationalization

Humans have a constant need to justify their choices and feel good about them. Cognitive dissonance is the tension we feel when we hold two conflicting feelings at the same time.

“I know I deserve this new sweater and I love its premium quality, but the price is high—I could afford two of a lower quality.”

Support positive post-purchase rationalization by reinforcing the value propositions at all stages of the journey. Importantly, your team must understand what your customers value most to promote these details on pre- or post-purchase materials. AND this has to come from a place of integrity. If you believe your customer will get value, then focus on the value they will receive.

Endowment Effect

When people own something, they place a higher value on it than they otherwise would. This is why it can be incredibly difficult to pull customers away from a competitor.

Free trials are often a smart way to attract customers and get them to realize the value of your product. In an ideal scenario, the customer will see an immediate benefit of your solution and start to feel as though they already own it (or should, at least!). Once they feel this sense of ownership, they are more likely to move past the trial phase and become an official customer.

Personalization can help customers feel ownership, too. Consider how YOUR Netflix playlist or Amazon recommendations help you move forward with your next decision.

Social Proof and Community Building

The herd mentality is powerful in guiding customer shopping behaviors. When people see their friends, family, and those they admire using a product or service, they want it, too! This is why many brands invest in influencer marketing and employee brand advocacy.

Constantly listen for and promote customer testimonials, and ask happy customers to leave reviews. Encourage customers to tag your brand on social media or use specific hashtags to connect with other customers and your brand’s larger community. And don’t be afraid to recognize the community at large. Lady Gaga has her Little Monsters and Taylor Swift has her Swifties. There’s a reason they named them—calling out to all of them helps each person feel individually connected as a community.

Loyalty Strategies Leveraging Psychological Principles

By bringing all of the brain science together, your customer experience team can find new ways to engage customers and strengthen your connection with them. The following are just a few ideas to help you get started:

  • Align with your customer values: One of the best ways to help customers feel good about their purchases (serotonin and post-purchase rationalization!) is to show them their money is well-placed. Customers increasingly prefer products with ESG-related claims, for example, so it could be beneficial to introduce climate-friendly packaging or enter partnerships with charitable organizations.
  • Implement a loyalty program: Reward loyal customers with discounts, free products, or upgrades to gamify the brand experience (and trigger dopamine!). Loyalty programs give customers a perceived return on their investment and reward them for their loyalty. But be careful with these programs. Recently, many of the airlines that pioneered loyalty programs have disappointed loyal customers by changing the rules.
  • Incentivize customer referrals: Your customers can be your best brand advocates, and they’ll eagerly promote you if you make it easy for them! Offer an incentive to customers that refer their network to you, like $10 off to the existing and new customer for using a referral code. Many subscription services take advantage of this with “one month free” rewards.
  • Proactively resolve issues: Customers want reliable access to your product or service. If it goes down or something goes wrong, they need to trust your team will make it right. Give customers multiple channels to seek support or report issues, and quickly address any identified problems. This shows you are dependable and competent (some of the bases of loyalty). And follow up after the repair or correction to ensure they feel reassured that all is well.
  • Provide occasional surprises: Occasional surprises can rejuvenate the customer-brand relationship and trigger more dopamine. Leave budget for surprises or fun, outside-the-box campaigns that spark joy for your customers (and may make waves on social media). Chewy, for example, is known for sending fun surprises and unexpected freebies, like custom portraits of a customer’s pet!
  • Seek feedback and learn: Every great relationship thrives on two-way communication. Actively seek feedback from your customers and listen to their untold feedback to learn how to improve their experience. Then, act on this insight! And better yet, reach back out to the customer to let them know you heard them and are acting on their feedback.

Consistent Experiences Inspire Loyalty

There is immense value in understanding the psychological drivers behind customer retention and loyalty. Providing reliable and valuable customer interactions will gradually earn their trust, and activating your brand community can generate even more momentum behind your business.

Incorporate these insights into your retention strategies for more meaningful and lasting customer relationships. These psychological drivers also reinforce the need for your team to show up for your customers consistently, at every stage of their journey.

By consistently showing up for your customers, you can reinforce their loyalty and satisfaction, ultimately driving business success. And loyalty is a driver for the best relationships!

 

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