Why Loyalty Points Sit Unspent
Customers leave loyalty points unspent even where waiting earns nothing. Studies of one retailer's programme, a laboratory choice, gift-card deadlines and a Dutch coalition scheme suggest points are judged on their own scale, kept in a separate account and redeemed with effort.
Answer to the question
Why do people save loyalty points instead of spending them?
In one retailer's linear programme, only 3 per cent of purchases involved a redemption and 60 per cent of customers never redeemed. The authors found the behaviour driven mostly by cognitive and psychological motives, including keeping points in a separate mental account from cash, and other studies show points judged on their own scale and long deadlines delaying redemption.
Key takeaways
- Valeria Stourm and colleagues found in 2015 that in one retailer's linear programme only 3 per cent of purchases involved a redemption and 60 per cent of 346 customers never redeemed.
- The same study found the holding back driven mostly by cognitive and psychological motives, including keeping points in a separate mental account from cash, rather than by the value of the points forgone.
- Christopher Hsee's team showed in 2003 that attaching points to two tasks changed which one 96 students chose, without changing how much they liked the ice cream on offer.
- Suzanne Shu and Ayelet Gneezy found in 2010 that gift certificates and cards with long deadlines were redeemed later, and less often overall, than those with short ones.
- Matilda Dorotic's team found in 2014 that among 3,094 members of a Dutch coalition programme who had redeemed at least once, purchases rose before and after a redemption.
Sixty per cent of the customers in one retailer's loyalty programme never redeemed any of their loyalty points, though redeeming could have cut their basket price by nearly 30 per cent on average.
The usual question is why they do not spend their loyalty points. It assumes a point is money. Saving is not always a mistake, though: a card that makes the tenth coffee free rewards the customer who waits, and in a 2006 study Ran Kivetz and colleagues found that café customers bought coffee more often as the free one came closer. That holder is pursuing a goal. How a card pulls customers towards its reward is the subject of The Endowed Progress Effect at Work, and rewards that arrive at random are the subject of Why Loyalty Apps Use Random Rewards.
The customers above were in a linear programme, which has no such pull. Every purchase earns points at the same rate and nothing rewards the customer for holding loyalty points, so waiting earns nothing and costs the time value of the money. Customers wait anyway.
Why Do Points and Cash Sit in Separate Purses?
The 60 per cent comes from 346 customers who joined an international supercentre chain's linear programme in January 2008, followed by Valeria Stourm and two colleagues. Only 3 per cent of all their purchases involved a redemption. Of the 137 customers who did redeem, 69 redeemed once, 54 two to four times and only 14 five times or more. Those who redeemed at least once also had baskets about 25 per cent larger and visited the retailer 141 per cent more often over the 43 months, which describes who redeems, not what redeeming does.
Stockpiled points could be redeemed at any time to reduce up to half the basket price, sale items excluded, so the rules did not require a wait.
The authors modelled three motives for stockpiling, the name for holding on to loyalty points. The economic one is the value of the points forgone by redeeming. The cognitive one is the nonmonetary cost of redeeming. The psychological one is that customers book points and cash in separate mental accounts and value them differently, an idea that comes from Richard Thaler's work on mental accounting, which Daniel Kahneman, in Thinking, Fast and Slow, describes as a form of narrow framing. The authors capture that motive by letting the model book points and cash in separate accounts. The behaviour in the data was driven mostly by the cognitive and psychological motives.
The model forecast redemptions accurately over an 11-month holdout period, and the authors used it to test three changes against a baseline forecast. The forecasts take purchasing as given, so the authors note they cannot capture changes the policies themselves might cause.
| Policy tested | Motive it targets | Forecast redemption rate, per cent |
|---|---|---|
| Baseline | None | 3.5 |
| Automatic redemption | Cognitive, the effort of redeeming | 21.0 |
| No cap on the share of a basket points can pay for | Psychological, how points are valued against cash | 6.6 |
| Economic fix | Economic, the value of points forgone | 4.1 |
Why Is a Token Judged on Its Own Scale?
Six minutes of work for a gallon of vanilla ice cream, or seven minutes for a gallon of pistachio: Christopher Hsee and three colleagues put that choice to 96 students. Some were offered only that. For the others the tasks paid points first, 60 for the short task and 100 for the long one, and any total from 50 to 99 points bought vanilla while 100 bought pistachio. On the points scale, the long task paid two thirds more for one extra minute.
More students took the long task when points stood between them and the ice cream. Their liking for the two flavours did not differ from the other group's, so the points had not changed what anyone wanted.
The authors call this medium maximization. A medium, in their definition, is a token received as the immediate reward for effort, which has no value in itself and can be traded for something desired. Their examples include frequent-flyer miles, which can be redeemed for free travel, and loyalty points, which can be redeemed for gifts. Their account is that the medium gives an illusion of advantage to an option that is otherwise not so advantageous. That is how a balance comes to be judged on its own scale, in points, before anyone asks what it buys, though the experiment did not measure when anyone redeems.
What Closes a Window With No End Date?
A longer deadline made people slower to redeem a gift certificate, and less likely to redeem it at all. Suzanne Shu and Ayelet Gneezy reported this in 2010 as the commercial half of a study of postponed pleasure. The other half was a multicity field study in which people with no deadline for visiting desirable landmarks put the visit off, and a limited window reduced the delay. In the experiments, recipients with long deadlines redeemed later and, overall, less often than those with short ones. The result ran counter to what participants had predicted.
Time discounting is the way a reward loses pull as the date for it moves away. The logic is that a pleasant thing with no date attached can slide, because there is always a nearer thing to do, and that a closing date pulls it forward. That is the reasoning behind the landmark study, and the gift certificates are its commercial test.
Read across, a balance of loyalty points with no expiry date is a window with no end, and the pleasant thing it buys can always be done next month, though the authors tested gift cards, which are not loyalty points.
Do Members Buy More Around Even a Small Redemption?
Over 184 weeks, 3,094 members of a Dutch coalition loyalty programme left a record of what they bought and when they redeemed. Matilda Dorotic and three colleagues found that members who redeemed, even a small fraction of their balance, bought more in the weeks before and after. The authors call this redemption momentum. The programme was a coalition: members earned points at more than ten partners across sectors that included grocery, fuel, insurance and travel, so it differs from the single-retailer programme Stourm studied. Each member in the sample had made at least 30 purchases and had redeemed at least once.
About 70 per cent of redemption decisions were made before that week's purchase, and members redeemed about 26 per cent of their balance on average, which the authors read as leaving only a small share of the rise before redemption to the pull of a nearing reward. The effect faded over the weeks that followed. It was weaker among longer-standing and higher-income members and stronger among older ones.
The group that matters most to the question of why points sit unspent is the one that never redeems, and this sample, which held only members who had redeemed at least once, cannot speak for it. A firm that fears redemption costs it a customer still has the observation pointing the other way.
Whether redemption changes how many customers a brand holds is a separate question, taken up in Brand Loyalty Is Mostly Brand Size.
An unspent balance is a liability on its books, and in the authors' comparison the economic policy cut that liability at the lowest cost per unit while doing least to get balances spent, whereas automatic redemption removed the most. Each firm is choosing a liability without a measured return. Which scheme keeps buyers longer has not been tested.
The reading that survives is that in Stourm's retailer data the barrier was mostly not arithmetic. Points are judged on their own scale, kept in their own account and redeemed with effort, and a balance with no deadline never says when. Two kinds of programme follow, one that lets balances grow and one that moves customers to spend them, and no study read here put the same customers through both.
Common questions
Why do people save loyalty points instead of spending them?
In a 2015 study of one retailer's linear programme, only 3 per cent of purchases involved a redemption. The authors found the behaviour driven mostly by cognitive and psychological motives, including keeping points in a separate mental account from cash.
Do customers stop buying once they redeem points?
Not in the Dutch coalition programme Matilda Dorotic's team studied. Members who redeemed bought more in the weeks before and after, though the sample included only members who had redeemed at least once.
Do deadlines make people use rewards sooner?
For gift certificates and gift cards, yes. Suzanne Shu and Ayelet Gneezy found in 2010 that long deadlines led to later redemption and lower redemption overall than short ones.
Sources
Kivetz, R., Urminsky, O., & Zheng, Y. (2006). 'The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention.' Journal of Marketing Research, 43(1), 39-58. doi:10.1509/jmkr.43.1.39
Hsee, C. K., Yu, F., Zhang, J., & Zhang, Y. (2003). 'Medium Maximization.' Journal of Consumer Research, 30(1), 1-14. doi:10.1086/374702
Shu, S. B., & Gneezy, A. (2010). 'Procrastination of Enjoyable Experiences.' Journal of Marketing Research, 47(5), 933-944. doi:10.1509/jmkr.47.5.933
Dorotic, M., Verhoef, P. C., Fok, D., & Bijmolt, T. H. A. (2014). 'Reward redemption effects in a loyalty program when customers choose how much and when to redeem.' International Journal of Research in Marketing, 31(4), 339-355. doi:10.1016/j.ijresmar.2014.06.001
Stourm, V., Bradlow, E. T., & Fader, P. S. (2015). 'Stockpiling Points in Linear Loyalty Programs.' Journal of Marketing Research, 52(2), 253-267. doi:10.1509/jmr.12.0354
Thaler, R. (1985). 'Mental Accounting and Consumer Choice.' Marketing Science, 4(3), 199-214. doi:10.1287/mksc.4.3.199
Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux. Ch. 32, 'Keeping Score', pp. 342-343, with a reliability audit.