The Points Illusion: How Loyalty Rewards Outsell Discounts

The problem with discounts

Ms. Chan: ...

Ms. Chan: ...

Ms. Chan: Welcome to Loyalty Unlocked, the podcast that lifts the lid on what really drives customer behavior—what works, what doesn’t, and what’s changing the game in loyalty.

Ms. Chan: Today we’re diving into an age old question: What’s more powerful—cash in the hand, or points in the pocket?

Ms. Chan: To help unlock the answer, I’m joined by my co-host, Mark Sage, who has been exploring this topic in his latest chapter from his forthcoming book on loyalty.

Ms. Chan: And for those who are joining us for the first time, let me remind you that this podcast is totally AI driven including both the script and the voice.

Ms. Chan: ...

Ms. Chan: Alright, so let’s start with something I think every shopper, like me, is super familiar with—discounts. I mean, who doesn’t love seeing a big 50% off tag at the store, right?

Mark Sage: It’s true, discounts are an almost reflexive move for many brands. They’re quick, easy to implement, and give an immediate boost to sales. Customers see the savings, and they act—it’s simple psychology.

Mark Sage: But here’s the thing, sometimes, relying too much on discounts can come with some serious hidden costs.

Ms. Chan: Hidden costs? What kind of costs are we talking about here?

Mark Sage: Well, for starters, discounts erode your margins. Every sale you make at a lower price is eating into your profit. But beyond that, they can actually harm how customers perceive your brand. When you overuse discounts, you’re essentially training people to wait for sales. They stop buying at full price because—why bother? They’ve learned to expect deals.

Ms. Chan: Oh, yeah, I’ve definitely done that. Like, why pay full price for my skincare stuff when I know it’s gonna go on sale in a month?

Mark Sage: Exactly. And it’s not just you; it’s a wider behavioral shift. The more you discount, the more transactional customer relationships become. People focus on squeezing the most value out of the deal rather than building any real loyalty to the brand.

Ms. Chan: Huh, I guess I never thought about it that way. So why do brands keep doing it? Isn’t there a smarter way?

Mark Sage: There definitely is, but discounts are just… convenient. They’re easy to fund because suppliers often chip in, and they’re product-focused, which makes the results easier to measure. “Push this product, see the immediate bump.” It’s simple, but that short-term fix usually overshadows long-term thinking.

Ms. Chan: Okay, so cutting discounts sounds great in theory, but I’m guessing customers aren’t just gonna start ignoring price. What’s the alternative?

Mark Sage: That’s where loyalty points come in. Points offer a completely different dynamic. They're future-focused, so instead of offering a one-time reward, they’re about building a longer-term relationship with the customer.

Mark Sage: By earning points, customers then feel like they’re working towards a goal, to something aspirational.

Ms. Chan: Oh, like those coffee stamp cards? I totally find excuses to grab another coffee when I’m close to a free one.

Mark Sage: Exactly. That’s the psychological principle of goal proximity—when you’re closer to a reward, you put in more effort to achieve it. Points tap into that motivation. And unlike discounts, they don’t erode the margin on your current sale because the reward happens later. It’s a powerful way to shift customer behavior without devaluing your products.

Ms. Chan: Hmm, that’s such a different mindset. I bet you’ve got some examples showing how this actually plays out in numbers, right?

Mark Sage: I do. One great example comes from the experiments we ran at yuu Rewards, where we tested points and discounts against each other. The results were, let’s say, surprising.

The points effect (case studies and behaviour)

Mark Sage: We ran an experiment to test a big question—when you put points head-to-head with traditional discounts, which one has the bigger impact? The answer might not be what you'd expect.

Ms. Chan: Wait—points actually won? Even over higher-value discounts?

Mark Sage: They did. It wasn’t just a one-off either. Across multiple waves and campaigns, points consistently outperformed discounts in terms of incremental spend per customer.

Mark Sage: Discounts drove slightly more conversions, sure, but the customers who actually responded spent less.

Mark Sage: Points didn’t just get shoppers to engage; they got them to spend more per visit.

Ms. Chan: Okay, so how much more are we talking here?

Mark Sage: Well, when we normalised the data based on the customers targeted and total incremental spend per targeted customer, points gave between 2 to 4 times the level of incrementality.

Ms Chan: Whooo... 4 times higher. Thats crazy! Was there anything else that surprised you?

Mark Sage: There was. The big surprise for me was how customers actually responded to the value offered.

Ms. Chan: How do you mean?

Mark Sage: Well, discounts seemed to focus the customer more on the actual target threshold and so the higher the discount, the more the customer looked to meet the target - actually spending less as the discount value increased.

Mark Sage: With points, we just didn't see this. Not only did the customers spend more overall with points, but their spend was consistent across all bonus point offers.

Mark Sage: People reacted differently to points—they saw them less as a transactional incentive and more as part of a bigger goal, something aspirational.

Ms. Chan: It’s like the psychology totally flipped between the two. So, why do points work so differently?

Mark Sage: It comes down to motivation. With points, it’s not just about saving money—it’s about earning, progressing.

Mark Sage: When shoppers see a points bonus, it feels like a long-term gain. Combine that with a goal, and you create momentum that keeps building with each visit.

Ms. Chan: And that momentum’s exactly what keeps bringing them back?

Mark Sage: Exactly. They’re not just chasing discounts; they’re moving toward a reward. And that changes the entire dynamic—how they shop, how much they spend—even how they feel about the brand. It becomes less about today’s bargain and more about the bigger picture.

Why points work (psychology and design)

Ms. Chan: Alright, Mark, this is fascinating—especially how points seem to tap into a sense of momentum. You touched on something earlier about goal proximity—how shoppers react differently when they’re near a reward. Can we unpack that a bit more?

Mark Sage: So goal proximity is this really fascinating principle: the closer we feel to a reward, the harder we push to reach it. As you mentioned earlier, it’s like those times you only have two coffee stamps left before a free drink—you suddenly find yourself, you know, buying way more coffee.

Ms. Chan: Oh, totally. That’s so me. But why does that happen? I mean, we’re still spending money, right?

Mark Sage: It’s all about psychology. When we're close to achieving a goal, it feels attainable. And that feeling triggers motivation. With loyalty points, every point you earn feels like progress. It’s less about how much money you’re spending and more about the satisfaction of moving closer to that free coffee—or whatever the reward might be.

Ms. Chan: So instead of focusing on spending, people focus on, like, earning?

Mark Sage: Exactly. Earning feels good because it doesn’t carry the same, uh, emotional weight as spending. It’s kind of linked to another concept—mental accounting.

Ms. Chan: Mental accounting? Okay, you’ve gotta unpack that for me.

Mark Sage: Alright, so mental accounting is how we, as humans, sort of create these imaginary budgets in our minds. We don’t think of points as money—even though, technically, they have a value. Instead, we see them as something extra, separate from our actual cash. So when you’re earning points, there’s no “pain of paying,” you know?

Ms. Chan: Ah, I get it! So, like, spending money feels like a loss, but earning points feels like a gain?

Mark Sage: Exactly. And because of that emotional framing, customers often feel more positive about points promotions—they’re earning toward something, not just saving a few dollars in the moment.

Ms. Chan: Wow, that’s actually really smart. But wait, how do those big numbers you see in points—like one thousand points or whatever—play into all this?

Mark Sage: Oh, that’s where numerosity comes in. It’s another psychological concept that says we see bigger numbers as more valuable, even if they’re actually worth less. Like, take the Nectar program and the Tesco Clubcard in the UK. Both give one point per pound spent, but Nectar points are actually worth half the value of Tesco’s. Yet customers still see it as equally rewarding because the numbers feel the same.

Ms. Chan: Wait, but it’s literally worth less? Like, on paper?

Mark Sage: It is, but because of the way it’s framed, people don’t calculate the actual value. They just see “1 point per pound” and think, “Oh, that’s great!”

Mark Sage: Essentially, the size of the number kind of distracts from the underlying math.

Ms. Chan: That’s wild. So, brands are basically using psychology to, like, make points feel more valuable than they really are?

Mark Sage: Pretty much. But it’s not in a manipulative way; it’s just about presenting value in a way that resonates with customers. Points reframe spending as part of a positive journey—earning, progressing, feeling rewarded—rather than just, you know, spending money. That’s a huge part of why they work so well.

Strategies and Takeaways

Ms. Chan: Okay, Mark, so with all this talk about how points tap into psychology and reframe the way we think about spending, it makes me wonder—when should someone actually use points, and when are discounts the better choice? Like, what’s the main takeaway for brands here?

Mark Sage: It really depends on your objective. If you’re looking to bring in new customers—especially those who aren’t familiar with your brand—discounts can work better because they create an immediate pull.

Mark Sage: They essentially lower the psychological barrier, by giving people instant savings.

Ms. Chan: Got it. So like fast results, quick wins?

Mark Sage: Exactly. But if your goal is to drive bigger baskets or build loyalty—long-term relationships—points are a much better tool. They shift the focus from immediate transactions to something more aspirational, something that adds value over time.

Ms. Chan: Right, like getting people to think less about what they’re spending today and more about building towards a reward?

Mark Sage: Yes. And that’s where loyalty programs completely change the pricing psychology. With discounts, customers are trained to think transactionally—“What’s the most I can save right now?” But with points, it’s about earning, progressing, and feeling like they’re part of something bigger. It reframes spending as a positive action, which changes the dynamic completely.

Ms. Chan: That’s such a cool shift. It’s like you’re subtly moving people from, “How much can I save?” to “How far can I go?”

Mark Sage: Very true. And it’s not just shifting perspective—it’s tapping into how we as humans are wired. Stuff like goal proximity, mental accounting, even the numerosity effect... it all combines to make points feel emotionally satisfying in a way discounts just can’t.

Ms. Chan: And I guess that’s where emotions totally beat out logic, right? Like, the numbers might not add up, but it doesn’t matter because it feels good.

Mark Sage: You’ve got it. At the end of the day, consumer decisions aren’t purely rational—they’re emotional. Points help brands tap into that emotional connection. They’re not just giving value; they’re creating an experience, something people want to come back to. That’s the real secret.

Ms. Chan: Wow, okay. So, discounts for urgency, points for loyalty, and psychology for the win?

Mark Sage: Couldn’t have said it better myself. Loyalty is about more than just sales or promotions—it’s about understanding your customer’s psyche and creating a relationship that lasts.

Ms. Chan: And on that note, I think my biggest takeaway is that numbers might drive decisions, but it’s that emotional pull that keeps people coming back. This was such an eye-opener, Mark.

Mark Sage: Glad to hear it! And I'm sure your coffee stamp card will make a lot more sense now too.

Ms. Chan: Oh, absolutely. I’m gonna earn those stamps with pride.

Mark Sage: Love it. And that’s really the key—earning, over saving, keeps people coming back. And that’s what makes loyalty programs so powerful.

Ms. Chan: Well, on that note, thanks so much, Mark, and thank you to everyone who tuned in today. This was such a fun ride—loyalty points are officially my new obsession!

Mark Sage: It’s been a pleasure, and thanks to everyone for listening.

Ms Chan: Remember, you can read further on this topic, just look for the chapter linked in the show notes. And if you enjoyed this podcast, please subscribe - we'd love to see you again!

Ms Chan: Until next time!