Our recent paper in Psychology and Marketing looked at whether people prefer to use loyalty points or cash for various types of purchases. How does what the consumers are buying influence them when choosing between spending points and cash?
The central questions answered in this research are, “For what, and when, do consumers prefer to spend loyalty points over money?”
Bagga et al., 2024, abstract
Loyalty Points And Cash
Whether to use loyalty points or cash for a purchase is a decision that strikes many consumers with regularity. In many ways the standard economic advice one might give is often simple — use the points. Cash is fungible (it can be used for anything) and loyalty points aren’t (they have significant limitations on their usage). As such, it is generally best to use the points and keep the cash. After all, cash gives more flexibility going forward. Yet consumers don’t do this. They tend to use points for certain things and cash for others. The prior literature wasn’t that helpful in explaining why. This was partially because much of the research had been done in situations when points could give a discount but not pay for the entire thing. Using points for only a part of the purchase and cash for the other bit was more of a hassle than just using cash for it all. It isn’t too surprising if consumers are a little lazy a lot of the time.
Choosing Between Spending Points And Cash
We examined situations where the consumers could choose to pay in cash or points. (Here by cash I mean money, e.g., dollars rather than air miles, so cash includes debits and credit cards.) As you can imagine setting up such decisions in a controlled way was quite a challenge. To have an experiment you must control what is going on. You can’t just watch people spending, as there are all sorts of additional things happening (confounds) to confuse the results. We did manage to control the choices and found some results.
(That we found results shouldn’t come as a surprise given the paper was published. There are compelling scientific arguments for publishing papers where people didn’t find any results. Still, a journal that did this would be pretty boring which probably is why it is yet to become popular with editors and publishers).
The results showed that consumers chose to spend their loyalty points (rather than cash) on really desirable items that were not, in the terminology of this field, feasible. Here feasible means easy, so a feasible product might be easy to use. This means that if consumers are buying a fancy, hard-to-use coffee maker this seems like something to spend loyalty points on, whereas a boring but functional coffee maker was something that they preferred to spend cash on. Similarly, consumers preferred spending points (versus cash) when they had to wait for the item. (Note we are not saying people prefer to wait for anything; only that, if they had to wait for an item, this made it preferable to buy it with points).
What Does This Mean?
This matters for managers. They can structure their offers to persuade consumers to use their points. It might seem that not using points is good for a firm, after all this costs them nothing. This is somewhat true, but a loyalty program isn’t much point if consumers never see any benefits. The consumers must get something from the program to feel happy about being in the program and hence be given a reason to want to continue the relationship with firm running the loyalty program. Structuring the offers right can help consumers to see the benefits they are getting and hence engender the loyalty the program is supposed to be about.
Consumer behavior is interesting. Generally, as a consumer, you should get rid of your loyalty points but if keeping them for fancy purchases makes you happy I can imagine worse mistakes you might make.
For more on loyalty points see here, here, and here.
Read: Charan Bagga, Alina Nastasoiu, Neil Bendle, and Mark Vandenbosch (2024) Psychology and Marketing