Research Insight | When Do Consumers Decide to Redeem Rewards Points? The Role of Loyalty Program Design
Many companies offer loyalty programs in which members’ purchases earn them points they can later redeem for discounts, exclusive perks, and other benefits. But when do consumers decide to redeem the loyalty points they have earned rather than paying money for a purchase? In this Journal of Marketing Research study, the authors show that consumers are less likely to redeem loyalty points when the loyalty program’s exchange rate between money and points is variable (e.g., 25,000 points may be redeemed for a range of flights or hotel stays that vary in price) than when it is fixed (e.g., 100 points = $1 across redemptions), holding constant the average value of points. A variable point exchange rate induces more optimism than a fixed exchange rate, which in turn reduces point redemption.
Although firms administering loyalty programs incur lower costs in the short term when members do not redeem points, they miss opportunities to increase member engagement. Using a variable exchange rate reduces point redemption, which potentially reduces subsequent sales and revenue. Moreover, from a financial perspective, outstanding loyalty points are treated as a liability (deferred revenue), which has become a significant balance sheet item for many firms.
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What You Need to Know
- Consumers are less likely to redeem loyalty points when the loyalty program’s exchange rate between money and points is variable (as in American Airlines’ AAdvantage Program) than when it is fixed (as in Nordstrom Rewards).
- Consumer optimism plays a role in reward point redemption.
- Although using a variable exchange rate can lower short-term costs by reducing loyalty point redemption, it can reduce subsequent sales due to the “rewarded behavior effect” and can increase balance sheet liability due to outstanding loyalty points.
Abstract
Although research examining loyalty point redemption has focused almost exclusively on fixed exchange rates between points and money (e.g., 100 points = $1), variable exchange rates are observed frequently in practice (e.g., 100 points might equate to more or less than $1, depending on the monetary price and the required points for a flight redemption within the continental United States). Such variable rates are particularly common in loyalty programs in the hospitality industry. In this research, the authors show that the stability of the exchange rate—whether the exchange rate is fixed or variable across offers—systematically influences point redemption. Consumers are less likely to redeem loyalty points and instead spend money when they observe a variable exchange rate between money and points than when they observe a fixed exchange rate, even when the average value of points is the same. This effect is demonstrated in a series of studies across contexts, including an incentive-compatible retail loyalty program and a hotel loyalty program. The findings show that a variable point exchange rate induces more optimism than a fixed exchange rate, reducing point redemption. This effect is moderated by individual differences in optimism and by point expiration date. The authors conclude by discussing the implications for managers of loyalty programs and for consumers.
So Yeon Chun and Rebecca W. Hamilton, “Paying with Money or Paying with Points: How Variable Versus Fixed Exchange Rates Influence Loyalty Point Redemption,” Journal of Marketing Research. doi:10.1177/00222437241255650.