How do habit-forming products drive customer loyalty?
15 February 2022 • 8 min read
According to Peter Drucker, widely recognised as the father of management thinking, ‘The true purpose of a business is to create and keep customers’.
So, based on this definition, if you’ve built a loyal customer base that uses your product or service habitually, your business is successful. But how do customers develop habitual loyalty? And what does loyalty look like in terms of customer habits?
For a detailed exploration of customer loyalty as a concept, and to learn more about building positive digital experiences into your loyalty scheme, download our whitepaper “Exploring customer loyalty in the ecommerce era” which gives practical tips and useful insights into customer loyalty and how to formalise your loyalty offering.
How habit-forming is your product?
To understand the habit-forming nature of your product, you can start by using a framework such as the Hook Model, created by Nir Eyal. According to this model, users pass through four key phases as they interact with your product: trigger, action, reward and investment. To determine these phases for your product, ask yourself the following questions:
- What internal or external triggers cause the user to start using your product? (An external trigger could be a marketing email, while an internal example could be hunger triggering the use of a food app.)
- What action does the user take after receiving the trigger?
- How is the customer rewarded for completing the action?
- Does the action/reward cycle encourage customers to make a greater investment in the product, thereby increasing its perceived value?
In this cycle, the investment phase may be surprising to many – but the concept itself isn’t new. Evidence shows that the more a user invests or labours to use a product or service, the higher they perceive its value – not the other way around.
This idea is backed by research conducted by Ariely, Norton and Mochon (2011) in what they call the ‘IKEA effect’:
In a series of studies, consumers assembled IKEA furniture, folded origami and built sets of Legos. The participants who successfully completed a self-made product viewed their products as of similar value as the creations of experts, and expected others to share their view.
You can apply this behavioural theory to your own products and services. By increasing the perceived value of your products in a consumer’s mind and delighting them every time they interact with your brand, you can increase user engagement and boost the habit-formation of your products. We’ve seen this concept in action with Sephora’s customer loyalty programme. As members make purchases, they climb the loyalty ladder to reach higher tiers and access more exclusive rewards. Members have to earn their way to the top tier, increasing the perceived value of the highest rewards and motivating members to spend more.
Habit-forming theory can be highly effective, but it should only be applied to high-frequency usage products – such as communication tools, social media and meditation apps – which are designed to be used daily, or at least every couple of weeks. Encouraging consumers to form habits around annual purchases, such as insurance products, could result in negative habits and cause damage to both your brand and customers.
What are the habits of loyal customers?
Not all customers experience the same journey with your brand. Some customers develop a pattern of habitual loyalty, while others interact with your products and services on an ad-hoc basis. To understand the varying loyalty of your customer base, and determine the habits of your most loyal customers, ask yourself the following questions:
- What does it mean to be a loyal customer?
- How often should someone use your products or services?
- What actions are taken by your most-loyal customers?
- What user journey did they take to form a habit?
When you have this data, you can compare a cohort of infrequent users to a group of high-loyalty customers. You’re looking for any major behavioural differences or patterns to help inform your loyalty strategy.
How do habit-forming products impact customer loyalty?
Building habit-forming products is a key strategy adopted by many companies as part of their customer loyalty schemes. By increasing the perceived value of your products and services, and rewarding customers for their actions, they’ll establish habitual behaviour and transactional loyalty with your brand. If you also work to enhance the customer experience (CX), customers will forge emotional ties with your brand too, resulting in increased emotional loyalty. When done right, pairing positive CX with habit-forming products is an effective recipe for loyalty success.
Some customers develop a pattern of habitual behaviour, returning to your site daily or weekly to make purchases or access content. These customers display high levels of transactional loyalty, and, depending on their experience and emotional attachment to your brand, may demonstrate attitudinal loyalty too. Other customers interact with your products and services on an ad-hoc basis, displaying lower levels of behavioural loyalty.
By comparing a cohort of infrequent users to a group of highly engaged consumers, you can determine the habits of your most loyal customers and identify behavioural patterns to help inform your loyalty strategy.
If you are seriously thinking about customer loyalty, why not download our free whitepaper “Exploring customer loyalty in the ecommerce era” which explore the origins of loyalty, the metrics for success and some tips on how to implement a successful customer loyalty program based on our work with ASDA and Avios.
How do habits impact customer loyalty?
Customers that interact with your brand habitually are likely to form your most loyal customer base. They return to your brand time and again, displaying transactional loyalty through their purchase history or user behaviour. But just because a customer has formed a habit around your products or services, doesn’t necessarily mean the consequences are positive.
Positive habits are mutually beneficial. The customer establishes behaviour that impacts their life in a positive way, while you experience increased loyalty and other business benefits.
One example of a positive habit is a customer logging into an online grocery app to do their weekly shop. This is a positive habit for the consumer as it streamlines an element of their household chores, and they can access personalised shopping lists and offers in the app. When a group of loyal customers establish this habit, the positive impact for the business is also clear: the supermarket gets regular weekly orders and can predict stock, buy in bulk and gain insights, helping them optimise deals and discounts to reward customers.
In comparison, negative habits aren’t always mutually destructive. They may only have negative consequences for the loyal consumer, while the business benefits from repeat orders and increased customer retention.
Some products have been designed to encourage negative habit-forming, such as payday loans. Loan providers reduce the barriers to entry on their payday loans, making it easy for consumers to take out loans beyond their means with extremely high interest rates. Customers can get stuck in a habitual cycle of borrowing money every month, just to pay off the previous month’s loan. These repeat customers are incredibly loyal to their loan provider due to negative habit forming, and suffer the consequences while providers reap the rewards.
Countering negative habits
It is possible for businesses or teams to unintentionally drive negative habits for loyal customers. One of the most common culprits is metric surrogation – confusing what’s being measured with the metric being used.
An example of this is Bing.com. The UX team at Bing.com measured their performance according to the total number of search queries completed on the site. They assumed that if the number went up, more users were interacting with their product more often – they had made positive changes that improved the customer experience and increased loyalty. In actuality, the opposite had happened. Because the team measured user queries, they began to implement features that forced users to submit more searches to find the same result, and penalised changes that answered the question in fewer queries. This drove an overall UI change that made the product harder to use, drove negative habits and reduced customer retention.
Experimentation is an important part of product development and optimisation, but you should think carefully about which metrics you use and how they impact behaviour.
Creating positive experiences with positive consequences
To create the best loyalty driving experiences – and avoid metric surrogration – make sure you use multiple metrics to measure different loyalty indicators. As loyalty is typically measured using behavioural and attitudinal metrics, it’s best to choose a mixture of these. Incentivise your product teams to experiment until they find the right combination to drive greater loyalty.
Gathering first-hand feedback from real users is crucial to ensure any changes you make have a positive impact on customers. Depending on your chosen metrics, either quantitative and qualitative data will be most valuable to your strategy – but gathering a mixture of both from a wide customer base is ideal where possible.
For product creators, speaking directly to customers provides valuable insight into user motivations and perceptions. Customers will tell you if your product makes them feel frustrated or forces them to develop negative habits. Conduct user testing, focus forums, interviews, diary studies and research with a small user group to hone in on the most valuable feedback direct from the source.
During your experimentation phase, use quantitative testing to measure the effectiveness of your potential habit-forming user journeys. You can set up A/B tests on new features in a beta environment or controlled rollout, measuring the large-scale impact while minimising the potential risk for your brand.
By gathering feedback from real users, you’ll design a product that optimises positive habits, delivers a positive experience and improves customer loyalty.
If you found this article helpful, why not take a look at our whitepaper “Exploring customer loyalty in the ecommerce era” which gives insights into modern customer loyalty programs and how to ensure you are keeping your customer at the heart of your offering.