A Deep Dive into Consumer Motivations: Loyalty Programs, Sunken Costs, and Behavioral Studies

A Deep Dive into Consumer Motivations: Loyalty Programs, Sunken Costs, and Behavioral Studies

Brian Russell, Managing Director | February 23 2024

For marketers and business owners, understanding the underlying motivations that drive purchasing decisions is one of the most important keys to unlocking a complex puzzle. Among the factors that influence consumer behavior, the concepts of loyalty and the sunk cost effect stand out as important pillars that shape how individuals interact with products and brands.

Our fast-paced world has given consumers unlimited choices, and fleeting attention spans have made consumer loyalty a top priority. Loyalty programs have emerged as an important business strategy, enticing customers with rewards, perks, and exclusive offers to encourage repeat business.

Ever wonder what makes these loyalty programs so powerful? At its core lies a deep understanding of human psychology and decision-making processes.

One behavioral science theory that is central to consumer loyalty is the idea of the Sunk Cost Effect. The Sunk Cost Effect states that we are more likely to move forward with investments (whether it’s monetary, emotional, or temporal) even in the face of diminishing returns. We tend to grapple with the dilemma of cutting our losses or forging ahead, often choosing to move forward, because of the time, effort, or money invested into something. We’re swayed by the illusion of progress and commitment.

In this article, we dive deep into consumer motivations, specifically looking at loyalty programs and the sunken cost-effect to see how it plays an important role in consumer behavior and our decision-making process.

The Sunk Cost Effect: Should We Keep Going?

Imagine this: You’re a busy professional and mom who signs up for a gym membership and is lured in by a “free month” and a hefty discount. You feel motivated for a few weeks and attend a few yoga classes, but the allure quickly fades. The gym is far from your office, work is demanding, you want to spend more time with your kids, the classes are overcrowded, and realistically you find yourself visiting the gym twice a month. Yet, canceling feels unthinkable. The annual membership fee, though heavily discounted, might be top-of-mind. You think, “well, I’ve already paid for it,” and reason “I should use it more.”

This internal struggle is a key example of the Sunk Cost Effect.

Here’s a breakdown of the situation:

  • Sunk Cost: You’ve already invested in the annual membership fee.
  • Unfavorable Outcome: The gym’s inconvenient and underutilized.
  • Rational Decision: Cancel the gym membership and find something closer to home or work.
  • Emotional Pull: The Sunk Cost makes you feel obligated to “get your money’s worth.”

If you’ve ever experienced anything like this, you’re not alone. Many consumers fall prey to the sunk cost fallacy, clinging to subscriptions like unused gym memberships or rarely-accesses streaming services. This clearly illustrates the consumer’s fear of “wasting” their investment, which can override the logical or rational decision of letting something go.

Similarly, many consumers remain loyal to programs simply because htey’ve already invested time and effort, even if the rewards are underwhelming or the program itself isn’t a good fit.

For example, perhaps you’ve collected airline miles, and even though your travel habits have changed, fearing “losing” the miles already accumulated.

Or consider Sephora’s loyalty program. Perhaps Ulta has a better deal on the makeup product, but you instead make a conscious decision to shop at Sephora so you can accumulate the points and redeem them for rewards. These are two great examples of how loyalty programs encourage repeat purchases.

Ran Kivetz Study: The Theory of Sunk Costs

Ran Kivetz, a leading researcher in decision-making, marketing, and consumer behavior, has investigated how sunk costs impact our choices. One of his key studies explored how sunk costs influence consumer behavior, particularly regarding loyalty programs and incentives.

In his study, "The Role of Effort and Enjoyment in Sunk Cost Effect," Kivetz examined how the perceived effort invested in a task affects our tendency to continue, even when the rewards diminish. He and his team used experiments to manipulate participants' perceptions of effort and enjoyment associated with a task. They then observed how willing participants were to keep investing resources despite negative outcomes.

The study revealed that people are more likely to stick with something they've invested effort and time in, regardless of the expected benefits. This tendency can be explained by the sunk cost fallacy, where we irrationally value past investments more than their future potential.

The Falk Study on Reciprocity: The Power of Giving and Receiving

Another important concept that influences consumer decision-making is the principle of reciprocity – a theory of give-and-take. This theory states that individuals often feel compelled to reciprocate acts of kindness or generosity. For example, if your neighbor gives you a bottle of wine for your birthday, you might feel obligated to return the favor and do something nice when it’s their birthday.

Armin Falk’s seminal study on reciprocity offers valuable insights into these reciprocal exchanges and how they shape decisions. Through a series of experimental trials and real-world observations, Falk found a profound impact on reciprocity and how it shapes social behaviors.

A key point in Falk’s research is that individuals are inherently predisposed to reciprocate small gestures extended to them by others. Whether in the form of a favor or gift, acts of reciprocity trigger a sense of obligation and indebtedness, and people feel compelled to respond accordingly.

Even small acts of kindness can trigger disproportionately positive responses from recipients, as found in Falk’s study. During an experiment conducted by Falk and his colleagues, participants were presented with scenarios involving reciprocal exchanges. Interestingly, the study found that when individuals were presented with something ahead of time, like a postcard before asking for a donation, the individuals were much more likely to respond favorably due to reciprocity.

Costco’s Magic Formula

Costco, one of the biggest and greatest companies in America, masterfully utilizes the sunk cost effect and reciprocity. The company has intelligently woven these concepts throughout the entire shopping experience – and it’s proven to be powerful.

Consider the initial hook of the brand’s membership. In order to shop at Costco, shoppers invest in an annual membership fee, which creates a significant sunk cost. This tactic encourages memberships to maximize their investment by making frequent purchases.

For example, when considering to grocery shop on the weekend or pick up supplies for a party, you might think, “hey, I should shop at CostCo to get the most out of my annual membership fee.”

Furthermore, the membership comes with the promise of unlocking exclusive discounts, special events, and product access, which reinforces the feeling of getting more for that initial investment.

If you’ve ever shopped at Costco, you know that the cashiers remind you about your upcoming renewal – and you can conveniently renew right while checking out. The cancellation process can be slightly more complex than other subscriptions, so it creates a minor barrier – plus, renewal is super easy – so you sign up quickly with the cashier.

As for reciprocity, Costco is well-known for offering free samples, and stations are scattered throughout the store. These positive interactions while shopping can trigger a feeling of obligation or desire to reciprocate by purchasing something in return. The membership perks like free tire rotations and travel discounts can further enhance the positive association with brand, which increases loyalty.

Overall, Costco has skillfully leveraged “sunk cost magic” and reciprocity to build brand loyalty and encourage shoppers to keep coming back due to their initial investment. When it comes to consumer behavior and decision-making processes, Costco is definitely a brand that marketers want to study.

Loyalty Programs, Sunk Costs, and Reciprocity: Why It’s Important

Understanding how consumers tick is crucial for businesses to encourage repeat purchases and build long-lasting relationships. At the foundation of this strategy are three key concepts: loyalty programs, sunk costs, and reciprocity.

These concepts are deeply intertwined, and when combined, can be extremely powerful. Just look at the example with Costco and how they’ve leveraged these concepts. Loyalty programs leverage the sunk cost effect to create a sense of “invested time” in the program, making customers feel obligated to continue participating. This, in turn, fuels the cycle of reciprocity, leading to increased brand loyalty and repeat purchases.

Get in Touch with the Behavioral Science Experts at Function Growth

 By harnessing the insights from this article, you can start to craft successful marketing strategies that resonate with your target audience, build deeper brand loyalty, and ultimately drive sustainable growth.

However, navigating the nuances of behavioral science and crafting effective loyalty programs requires specialized expertise. That's where Function Growth comes in.

Our team of behavioral science experts possesses a deep understanding of what motivates consumers and how to leverage that knowledge to create winning marketing campaigns.

Ready to unlock the true potential of your marketing efforts? Contact Function Growth today for conversation! Let's discuss your unique challenges and explore how we can help you achieve your business goals.