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Both approaches I'd say. Most first time offenders are deterred by a caution, some young men do grow out of crime, rehab works for some addicts so I'd say there's nowt wrong with a soft approach for 1st timers who show willing or any who have really made an effort to reform.
It's the perpetual reooffenders who show no intent or ability to change their ways we should be harsh on. Those cost an enormous amount every year and influence others into crime. They say prison doesn't work but if other approaches don't work either, prison is the only option that protects other people. I think people greatly underestimate the effect of crime on the victims and the way it affects their lives, sometimes permanently.