Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Loyalty Card as a Free Pass to Overpay
Transcript
- Lucas: You know, I was at a coffee shop last week and the barista handed me a punch card. Buy ten coffees, get the eleventh free. And I found myself ordering a more expensive drink than I normally would have, because in my head that free coffee was already earned. Luna: Oh, I do that all the time. I have a loyalty app for a sandwich shop, and I swear I buy a cookie or a chips I don't need every time I'm about to earn a free sub. Lucas: Right. And that's exactly the psychological mechanism we're going to talk about today. It's called the licensing effect. The idea that earning a future reward gives you permission to indulge now. And it's not just anecdotal — there's really good data on this. Luna: I remember you mentioning a study from the University of Chicago. What did they find? Lucas: Yeah, this was a 2018 paper by Ran Kivetz and colleagues. They looked at a coffee chain, I think it was a national brand, and they compared customers who received a loyalty card at the start of their purchase — so they had a fresh card with ten slots — versus customers who didn't get a card at all. What they found was that the loyalty card holders spent twelve percent more per visit on average. Luna: Twelve percent? That's huge. And it's not like the card gave them a discount on that visit — it's a delayed reward. Lucas: Exactly. The reward is ten coffees away. But the mere fact that you've started earning toward something changes your spending behavior. The researchers called it the 'licensing effect' — you feel like you've already done something virtuous by signing up, so you allow yourself to splurge. Luna: It reminds me of that classic study where people who bought eco-friendly products were more likely to cheat on a task afterward. Like, 'I've been good, so now I can be bad.' Lucas: That's exactly the same mechanism. Moral licensing. And loyalty programs are a perfect vessel for it because they create this artificial sense of progress. You've already taken a step toward a reward, so you're ahead of where you were — even though you haven't actually gained anything yet. Luna: So does that mean loyalty cards actually make us spend more money over time, even accounting for the free reward? Lucas: That's the key question. The study's authors did the math. They calculated that the average customer needed to make about thirteen visits to earn a free coffee, but they spent so much extra per visit that the net effect was negative for the consumer. The free coffee they got was worth less than the additional money they spent getting there. Luna: So the loyalty card is basically a tax on loyal customers. You'd be better off just buying the coffee you want and ignoring the card. Lucas: In a perfectly rational world, yes. But the behavioral angle is that the card changes your perception of the transaction. Instead of thinking, 'I'm paying full price for this coffee,' you think, 'I'm earning a reward.' And that reframing makes the full price feel like an investment rather than a cost. Luna: It's like mental accounting. You put the spending in a different mental bucket — a 'rewards-earning' bucket instead of a 'consumption' bucket. Lucas: Exactly. And once the reward is earned, there's another effect. When you finally redeem that free coffee, you often feel like you got something for nothing — even though you effectively paid for it through the markups on the previous purchases. That feeling of getting a freebie reinforces the whole cycle. Luna: So companies are essentially training us to ignore the total cost. They separate the earning phase from the redemption phase so we don't connect the dots. Lucas: And they do it deliberately. Program designers know that people treat the card as a commitment device — 'I've started, so I must finish.' That's a classic sunk cost fallacy, but applied forward. It's not about the money already spent; it's about the progress you don't want to waste. Luna: I've seen those progress bars on apps, like 'You're only two purchases away from a reward!' — it's designed to trigger that completion instinct. Lucas: Yes. And there's a whole literature on goal gradient effect — the closer you get to a reward, the harder you work. So those apps are nudging you to buy more frequently as you near the finish line. That's why some programs offer a small early reward, like a free drink after five purchases, to keep you hooked. Luna: But what about subscription-based loyalty programs, like Amazon Prime or Walmart Plus? You pay upfront for the year, and then you get free shipping and other perks. Is that a different psychology? Lucas: It's related but slightly different. With Prime, the sunk cost of the annual fee creates a different license — you feel like you've already paid for the benefits, so you might as well use them. And that leads to more frequent purchases, often of things you didn't need. Luna: So it's like you're paying for the permission to spend more. Lucas: Exactly. One study found that Amazon Prime members spend about four times more than non-members on average. Part of that is selection — heavy shoppers self-select into Prime — but some of it is causal. The subscription fee changes your mental accounting. Free shipping feels like a saving, so you add extra items to qualify for it. Luna: So both the punch card and the subscription are leveraging this idea that you've already earned the right to spend. But one is pay as you go, the other is upfront. Lucas: Right. And the punch card might be more insidious because you don't feel the upfront cost. You just feel progress. But both exploit the same cognitive quirk: we're bad at tallying total costs when those costs are broken into small, separate transactions. Luna: So if you want to avoid the trap, what should you do? Just ignore loyalty programs altogether? Lucas: There's evidence that the best strategy is to treat the loyalty card as if it doesn't exist when you're making a purchase decision. Ask yourself: would I buy this latte if there were no reward? If the answer is no, skip it. Also, try to mentally aggregate your spending — look at how much you've spent at that store over a month, not just per visit. Luna: That's hard to do in the moment. The barista is handing you the card with a smile, and you feel like you're leaving money on the table if you don't take it. Lucas: And that's exactly the point. The program is designed to feel like a gift. But the data shows it's often the opposite. You might be better off just paying full price and not participating. Luna: You know, I've been thinking about this in terms of our own show. We have a listener support model — no ads, just people who chip in monthly. And I wonder if there's a similar psychology at play. Lucas: Interesting. How so? Luna: Well, when someone signs up to support the show, they might feel like they've 'paid' for the content, and that could make them more forgiving if we have an off episode, or more engaged. But it could also create a sense of ownership that changes how they consume the episodes. Lucas: That's a good parallel. On our end, the listener support model — a handful of folks chip in monthly through buy me a coffee dot com slash fexingo — that's what keeps the show ad-free. And it does create a different relationship. I think supporters feel like they're part of the show, not just passive consumers. Luna: Exactly. And it's not a loyalty program in the traditional sense — there's no punch card or free coffee — but it does create a sense of investment. And I think that's a healthier dynamic because there's no delayed reward that tempts you to overspend. Lucas: Right, it's a straight exchange. You value the show, you support it, and we keep making it. No gimmicks. But back to the licensing effect — there's another layer I want to mention. Some companies have started using tiered loyalty programs, where you get a higher status and better perks the more you spend. That amplifies the effect because the reward is not just a free item but also social status. Luna: Oh, like airline status. People spend thousands extra to get to gold or platinum, even if the actual benefits aren't worth the extra cost. Lucas: Exactly. The licensing effect there is even stronger. You feel like you're not just earning a reward — you're becoming a VIP. And that identity shift can justify even more spending. One study found that customers who were told they were 'preferred' members spent twenty percent more than those who were just 'regular' members, even though the benefits were identical. Luna: So the label itself becomes the license. 'I'm a preferred member, so I deserve to treat myself.' Lucas: Yes. And this is where behavioral economics gets really interesting. It's not just about the transaction — it's about identity and self-signaling. When you have a gold card, you signal to yourself that you're a savvy, loyal customer. And that self-perception drives more spending. Luna: So the best defense might be to recognize that the loyalty program is designed to make you feel special, and to ask yourself if that feeling is worth the extra cost. Lucas: Exactly. And to remember that the free reward is rarely free. The coffee shop study showed that the average customer effectively paid a premium of about fifteen percent over the course of earning that free coffee. So the next time you get a punch card, ask yourself: is the coffee worth fifteen percent more? Luna: Probably not. But it's a hard question to ask when you're staring at a menu and the barista is waiting. Lucas: That's why knowing the bias is only half the battle. The other half is creating habits that bypass the bias. Maybe leave the loyalty card at home, or use a different coffee shop without a program. Sometimes the easiest way to avoid a trap is to not walk near it. Luna: I think that's a good note to end on. Next episode, I want to talk about the 'decoy effect' — how menu pricing tricks us into picking a medium soda when we actually wanted a small. Lucas: That's a classic. And we've got a great study on movie popcorn sizes. I'm already looking forward to it.