Points Stockpiling

What it is

In a linear programme, points are earned at a steady rate and have a fixed cash value when spent. Nothing in the design pays a customer for waiting, and waiting has a cost in the time value of money. In principle that should push customers to redeem. Stourm and her co-authors start from the observation that many do not.

They build a mathematical model of the redemption choice that joins three explanations. The economic motive is the value of the points forgone by redeeming. The cognitive motive is the nonmonetary cost of redeeming, the time and effort of checking a balance and deciding to use it. The psychological motive 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.

The model was estimated on data from an international retailer and forecast redemptions accurately over an eleven-month period that was held back from the estimation. The authors found a good deal of difference between customers in what motivated them, and found that the behaviour in the data was driven mostly by the cognitive and psychological motives.

The term describes a behaviour and a research programme. It does not name a single mechanism, and the paper's contribution is to show the three can be separated and weighed.

In effect

In the retailer's data, the customers were three hundred and forty-six people who joined in January 2008. Only three per cent of their purchases involved a redemption, and sixty per cent never redeemed at all, although redeeming could have cut the basket price by nearly thirty per cent on average.

The authors then used the model to ask what would change redemption. Automatic redemption, which targets the cognitive motive, lifted the forecast redemption rate from about three and a half per cent to twenty-one per cent. Removing the cap on how much of a basket points could pay for, which targets the psychological motive, lifted it to about six and a half per cent. Rewarding all purchases, which targets the economic motive, lifted it to about four per cent. The authors also caution that the policies which lead to the most redemptions are not necessarily the cheapest way to reduce a firm's outstanding points.

For a firm, the lesson in the forecasts is where the friction sits. For a customer, the everyday version is a card balance that is never quite large enough to bother with, a plain illustration and not a documented case.

What it does not say

The forecasts are the authors' model, not a field test. The model takes purchasing as given, so the authors note it cannot capture changes that the policies themselves might cause, and they suggest forecast redemption rates could be underestimates if redeeming raises satisfaction and purchase frequency.

The data come from one chain, in one programme, with three hundred and forty-six customers. The finding that cognitive and psychological motives dominate describes that dataset.

It also does not say that stockpiling is irrational for every customer. The authors found substantial differences between customers, and a person saving toward a larger reward in a programme with thresholds is in a different position from a customer in a linear programme.

The figures behind the behaviour

The paper's descriptive numbers show how thin redemption was. Of the 346 customers who joined in January 2008, 137 redeemed at least once. Of those, 69 redeemed once, 54 redeemed two to four times and 14 redeemed five times or more. Those who redeemed at least once had baskets about 25 per cent larger and visited the retailer 141 per cent more often over the 43 months, a pattern that describes who redeems and not what redeeming does.

The programme's rules did not demand a wait. Stockpiled points could be redeemed at any time to reduce up to half of the basket price, with sale items excluded. That is why the paper can treat holding on as a choice and ask what drives it.

A threshold programme is a different case. A card that makes the tenth coffee free gives the holder a reason to wait, and in Ran Kivetz and colleagues' 2006 study café customers bought coffee more often as the free one came closer. Stockpiling in the sense used here describes a linear programme, where waiting earns nothing.

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