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these days everybody's talking about loyalty programs uh whether you're a
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consumer you're collecting points and then using to buy things or whether you're a firm offering different kinds
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of programs we want to have a really good understanding of different kinds of loyalty programs for instance a lot of
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programs out there like the Airlines and many other companies once you accumulate
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a certain number of points your status changes or the value of your points is greater than it was before but in many
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many programs there's none of that in many programs it's just what we call a
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linear program and you get a certain amount of points every time you spend a dollar and you can turn those points
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back into Dollars uh you know when you when you when you buy things but nothing really changes you can accumulate points
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but the rates don't change your status doesn't change so linear loyalty programs are kind of boring but they're
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really really common and there's some really interesting phenomena that happened around them so for instance a
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few years ago one of my MBA students came to me his family runs a chain of retail stores in Central America and
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they have a very standard linear loyalty programs again every time you buy something you get a small number of
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points for every dollar you spend and whenever you want he can turn those points into an an even smaller number of
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dollars and the and he noticed something really curious which is in a lar loyalty
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program you should just be spending those points right away there is no benefit to to accumulate the these
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things there's no nothing to be gained from stockpiling them the only thing that can happen is you can you can lose
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them or the company can go out of business but people stockpile points in a linear program uh and and it's weird
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it's it's not that they're never using the points occasionally they will use
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them but they pile them up and pile them up and pile them up and then use a few and then pile them up again so why is it
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that people pile up points in a linear loyalty program so so this former student posed this as a puzzle and it
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became a very interesting research problem and I was really happy to work with one my one of my PhD students
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Valeria storm and one of my colleagues Eric bradow to come up with a statistical model that will sort out
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lots of different explanations why is it that people pile up points in a line neology program so we considered lots of
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different factors some psychological some economic uh and tried to sort them all out to figure out what the what the
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the wining explanations were that's what the paper's all about so we looked at lots of different
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explanations so maybe it's the case that it's just it's so burdensome on you to
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to even think about Redeeming the points that you only do it once in a while uh or or or maybe uh you're afraid of using
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up the points because then you won't get points on that particular transaction
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but our the main explanation that we came up with is is something that honestly we didn't even think about in
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advance although there's very strong psychological theory underlying it it and that's the idea that in people's
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minds they have two separate accounts they have a cash account how much money do I have and how much money would I be
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losing if I buy this product but they also have a points account so how many points do I have and how many points
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would I gain or lose if I buy this product if I use points or if I don't use points so people have these mental
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accounts and they're different so it's not that points and and dollars are are
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equally interchangeable uh some some Theory tells us that people would be a little
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bit more sensitive to to kind of losing cash and other words spending money than
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they would be to losing points that is using them for redemptions so you have these two different accounts and
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different sensitivities about how you'd make tradeoffs between them so the basic
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idea is I'm looking at a purchase I'm thinking about how many points I have
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I'm thinking how much cash I have I'm thinking how many points I would lose or
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how much cash I would lose depending on how I buy it and I'm going to choose the
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account that that makes me happiest so it's this idea of mental accounting that
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that that explains why people will often pile up points and and not use them even
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though economically they should just be using them all the time so now that we know that people have these two accounts
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that has all kinds of important implications first of all it's just kind of interesting to know about how people
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operate and interesting to be able to predict who is likely to redeem how often and when it's very important for
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retailers to have some idea about what these redemptions are going to look like CU after all people are piling up all
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these points they're building up all these liabilities on their balance sheet
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you kind of want to know when when these redemptions are going to occur and you want to set up your program in a way so
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you have the just right number of redemptions you might not want people redeeming all the time because then they
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come to expect it but you don't want them to be redeeming too infrequently because then again you have these really
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big Point liabilities on your balance sheet so one of the big takeaway from the paper is that by having our multiple
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account story we can give retailers specific advice about how different kinds of parameters the Loyalty program
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how many points do we give you for each dollar that you spend how many dollars are the points worth when you redeem
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them we can help you come up with that just right combination in order to make sure that you're getting that just right
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blend of people redeeming their points but not too often so what makes this project unique
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first of all is that really clear tight focus on linear loyalty programs they're
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really really common if if you if you look around and think about the kinds of loyalty programs that you're involved in
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many of them have this this idea that you know you get points you use points but there is no special status or
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special thresholds that that you hit so it's it's surprising how little research
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has been done on linear loyalty programs Again part of it is that they're just
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not as as sexy and dramatic and interesting as programs where you have to hit certain thresholds and what are
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the psychological mechanisms that get people to to get to those thresholds so linear programs are boring but they're
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an important part of business and so we really want companies to to have just a better understanding about how they
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operate what are the economics associated with them and what are the underlying psychological drivers uh that
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that describe how people use them and how they would respond differently if companies were to to change certain
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aspects of the program another important aspect of This research is this idea of
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having these two mental accounts so very often when you look at loyalty program you tend to think that people are very
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rational and they're making these these very utilitarian tradeoffs between the
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points they have and the dollars that they have and they're always optimizing
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well that's not true and a lot of this mental accounting that we're leveraging
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a lot of this is is work that goes back to uh Daniel Conan and Amos derski two terrific worldclass psychologists Daniel
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Conan won the Nobel Prize for some of his work this idea of mental accounting occurs all the time even in situations
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where you might not expect to see it so it's I think important to to understand
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that the way that people approach something that that that should be economic is often much more
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psychological and I think that the the story that we tell about these two different accounts and how they differ
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from each other and how it leads to a very elegant solution to a very practical real world puzzle is a very
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nice contribution by itself as I mentioned the lead author on this is one of my PhD students Valaria
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storm and she's been just captivated by this idea of loyalty programs and the
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the psychological drivers underneath them and the economic implications that arise from them so this was just one
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paper that Valeria and Eric bradow and I did together Valeria is working on her dissertation now uh working on a
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different kind of loyalty program with a different company in a different part of
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the world uh in this case trying to understand the nature of a coalition loyalty program so very often instead of
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having just just one company having its own loyalty program you'll have a loyalty program that lots of different
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companies belong to so for instance American Express recently announced a program called plenty that's a coalition
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loyalty program because you can accumulate points from lots of different companies like AT&T for instance and
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many others and and use those points at variety of different firms not necessarily the firms that you got the
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points from so a coalition loyalty program is another emerging loyalty program idea not quite as common at
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least in the us as your standard Airline loyalty program but very big around the
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world and and and very important to understand how you develop one of these things how you set the parameters for it
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what are the exchange rates how should it vary and and under what conditions would a firm want to be part of the
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Coalition loyalty program or not so we're just scratching the surface to to try to really understand loyalty
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programs inside and out and as much as we keep expanding our research that involves them the number and the variety
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of loyalty programs are expanding even more so we we're going to have a hard
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time keeping up with the Loyalty program industry but we're having a real good
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time learning about uh the nature of these programs as we go along [Music]