Leveling Up Loyalty

When most people talk about “brand loyalty,” what they’re really talking about is retention — creating habits and getting people to return to an experience more often.

Many loyalty programs take the form of mobile apps, and some of the world’s most successful and popular mobile apps operate and monetize just like video games – they’re fun, engaging, and create an experience that keeps users coming back.

If we want to increase customer retention and monetization, there’s a lot we could learn from some of the world’s most successful mobile games.

Maslow’s Hierarchy of Needs and Impact on Consumer Behavior

Maslow’s Hierarchy of Needs

Understanding customer spending behavior requires a glimpse into the psychology behind consumer choices. Many of us are probably familiar with Maslow’s Hierarchy of Needs – a model for understanding human behavior that states that our actions are motivated by certain physiological and psychological needs that progress from basic (i.e. thirst or hunger) to complex (i.e. love & belonging, self actualization).

As customers progress up Maslow’s hierarchy of needs, their willingness to spend becomes increasingly flexible. We refer to this flexibility as a consumer’s “elasticity of spend.”

Basic needs, such as buying a bottle of water or a sandwich, don’t warrant spending a lot of money – no matter how good the sandwich might be, most of us would never spend $100 on a sandwich. However, many of us often spend thousands of dollars on luxury items that signal status or some sense of self-actualization, like a fancy watch or handbag.

Elasticity of spend rises as we move higher up the hierarchy of needs.

The same concept applies to games. As games cater to higher-level needs, like belonging and self-expression, players become more willing to invest in cosmetic purchases – purchases that transcend mere gameplay advantages. Past a certain proficiency of play, a player is more likely to spend money on an avatar skin than something that will make them run faster.

How do Mobile Games Monetize if They’re Free?

The curious thing about some of the most successful mobile games is that many of them are free (or at least have a free option). Free-to-play gaming, as it’s often referred to, has two primary mechanisms of monetization: the “freemium” model and the cosmetic model.

Monetization in Free-to-Play Games: Freemium Model

The freemium model was the original monetization model for free-to-play games. However, it’s worth mentioning that the idea of free-to-play games broadly is quite new. The old model of gaming was based on one-time cartridge & console purchases, while free-to-play games opened the door to further monetization opportunities.

The concept of freemium is simple: the core game is free, but it gets progressively harder for players to improve over time unless they pay. Players can pay to save time or to make things easier in the game.

A prime example of this approach is Clash of Clans, a wildly popular free-to-play mobile strategy game released in 2012. In Clash of Clans, progressing through the game is technically possible without ever spending money, but the top players only reach that point by spending money on “gems,” which accelerate the speed at which you can complete quests, level up, and otherwise improve at the game.

The issue with the freemium model in free-to-play gaming is the “pay-to-win” dilemma. In the beginning of the game, it feels meritocratic or based on purely skill. However, as players advance through the game, they become increasingly disenfranchised unless they pay. The game starts to feel futile. Similar to the game of Monopoly, almost no one plays until the end of the game.

The pay-to-win dilemma causes a negative impact on player motivation, and thus less people play to completion, and retention rates drop.

The same is true of most traditional loyalty programs. Typically, the only way to progress in the “game” that is the loyalty program is to spend more money so that you can eventually unlock some sort of fixed reward. The rewards are linear and predictable – for example, I buy coffee 9 times and get the 10th one free.

But modern consumers want more than just transactional exchanges, and the brands with the strongest customer loyalty offer more than just discounts.

Monetization in Free-to-Play Games: Cosmetic Model

Cosmetics are one of the most powerful business model innovations in gaming over the past few decades. Under the cosmetic model, games monetize by players purchasing customized attributes, such as skins, pieces of equipment, or other items that affect a player’s character’s appearance. Cosmetics do not change gameplay – they only change how in-game assets are visually represented.

For example, in the popular game Fortnite, different players can have their own characters with different outfits, colors, accessories, and more. Different “skins,” as they are called, functionally serve the same purpose – skins do not change a player’s attributes or ability to succeed in the game – but they say different things about us.

Cosmetics are a sort of self-expressive choices. They encroach upon higher tiers of Maslow’s Hierarchy of Needs, like self-actualization. The beauty in the cosmetic model of monetization is that there is no difference in the experience that someone gets in the game, whether they pay or don’t pay.

The competitive arena is preserved, bolstering strong player retention, while still allowing for great monetization and economics.

Brand Loyalty Program Monetization

While brands aren’t entirely the same as games, we can still learn a lot from gaming monetization strategies.

When we think about building brand loyalty programs, the optimal model of monetization is likely some combination of freemium and cosmetic.

• Freemium in the sense that anyone can join and participate in the program. Any customer should be able to earn points and level up without spending money, through in-program minigames, quests, and other forms of non-monetary engagement. However, the more you spend (through purchases or premium memberships), the faster you progress through the program and unlock better and more valuable rewards.
• Cosmetic in the sense that many of the rewards you unlock as you progress no longer become purely monetary. What fun would a game be if you could buy your way through to completion? In this way, “cosmetics” or non-monetary rewards ascend on Maslow’s Hierarchy of Needs toward social acceptance and self-actualization – it’s no longer just what the reward immediately does for you, but also what the reward says about you. Maybe it’s access to an exclusive event than only the top 50 most engaged customers of a brand are invited to. Or it could be a limited edition exclusive product that only a fixed number will ever be created, which signals that if you own one, you are unique in some way. As we move up the hierarchy, a consumer’s elasticity of spend increases – being uniquely different in some way (closer to self-actualization) is more valuable than merely earning another discount or marginal consumable.

Traditional loyalty programs are really just pay-to-play, earn-and-burn – where you accumulate rewards that are the same for everyone and not unique to you as a player. Similarly, there is no element of progression through the “game,” so retention and engagement are both low. See: less than 15% of brand loyalty program rewards are redeemed today (a sign that incentives are broken).

The next generation of loyalty programs will feel more like games than spam.

How Personalized Rewards Reduce Waste

When we think about “waste” in a loyalty program, we mean the value of rewards that are created but go unredeemed because the customer either deems them to be 1) not valuable enough, or 2) not relevant. And of the rewards that are redeemed, the cost that the brand needed to pay in excess of the minimum they could have paid while still having the customer redeem the reward is also waste.

So to reduce waste on the consumer side and the brand side, we want to maximize the customer’s perceived value of their rewards, while minimizing the cost to the brand.

In traditional loyalty programs, brands gave the same rewards to all customers (which typically have taken the form of discounts and free products). But the issue with all customers getting the same rewards is that not everyone values rewards in the same way.

At Hang, we think about rewards delivery differently. Our platform optimizes reward delivery to maximize the customer’s perceived value of the reward, while minimizing the cost of the reward to the brand (i.e. COGS).

Perceived Value is greater at the same level of cost, in aggregate.

Waste = Aggregate Cost to Brand - Aggregate Customer’s Perceived Value

By minimizing the area under the curve (waste), we increase the likelihood that desired actions are taken, which means greater engagement and better outcomes for both parties.

Tying it all together, personalized rewards bring us closer to the frontier of self-actualization (higher up on the hierarchy of needs) than the “mass market rewards” of loyalty programs of the past.

As the lines between gaming and business continue to blur, it’s evident that brands stand to gain from integrating gaming principles into their loyalty programs.

Instead of the outdated, one-size-fits-all approach of traditional loyalty systems, personalized reward systems address individual consumer needs & desires.

The result? Better alignment with Maslow’s Hierarchy of Needs, and a program that not only boosts customer engagement, but reduces waste & inefficiencies — benefiting everyone involved.

Modern loyalty isn’t just about offering rewards; it’s about crafting a unique journey for each consumer, making them feel valued, and giving them a reason to actively engage with a brand’s community.

At Hang, we’re working with leading brands to implement next-gen game design strategies into their loyalty programs. Learn more here.