For several reasons I have spent a lot of time in the last few months thinking about loyalty points. There is one puzzle that has been noted by a number of scholars and practitioners. People often keep hold of their loyalty points; not using them when they could have used them to save money. A phenomenon which is called stockpiling in the loyalty programs.
Linear Loyalty Programs
Valeria Stourm (now at HEC Paris) has a paper with a couple of Wharton professors Eric Bradlow and Pete Fader that assessed a specific linear program. A linear program is one in which you get the same value of reward per point regardless of how many points you redeem. This is important because some programs can encourage you to stockpile. If redeeming 1,000 points are worth $10 (1 cent per point) but redeeming 2,000 points are worth $30 (1.5 cents per point) then it is easy to see why someone might hoard points to claim the more valuable prize. Linear programs give you the same amount, e.g., 1 cent per point. This makes linear programs ideal to study stockpiling ; why would a consumer not trade in the points as soon as they could? It is much better to use points and hold cash, than vice versa, given cash is much more flexible. We all can find things to spend cash on; points may be harder to get rid of at a later point.
Why Would Anyone Stockpile Loyalty Points In A Linear Program?
From a traditional economic view it is puzzling why anyone would stockpile. Stourm and her colleagues give reasons for stockpiling in their program. The authors tell us the reasons for stockpiling are manifold: “…economic (the value of forgone points), cognitive (non-monetary transaction costs), and psychological (customers value points differently than cash).” (Stourm, Bradlow, and Fader, 2015, page 253). In their specific program when consumers redeemed points they could never redeem the full value of the product. This meant they always had the hassle of redeeming points and also spending cash. This explains the cognitive costs; called additional ‘transaction costs’. The loyalty program member also did not get points on the cash they spent at the same time as they redeemed points. This generated the economic costs.
Loyalty programs are a fascinating topic with a variety of rules. As the authors say: “…we recognize that observed stockpiling behavior may be consistent with other alternatives” (Stourm, Bradlow, and Fader, 2015, page 266). There is room for more work on this topic given how economically important and psychologically interesting loyalty programs are.
For more on loyalty programs see here.
*** The forth edition of our Marketing Metrics book is now out.***
Read: Valeria Stourm, Eric T. Bradlow, and Peter S. Fader (2015) Stockpiling Points in Linear Loyalty Programs, Journal of Marketing Research, 52 (2), pages 253-267.