00:00:05
these days everybody's talking about
00:00:06
loyalty programs uh whether you're a
00:00:08
consumer you're collecting points and
00:00:10
then using to buy things or whether
00:00:12
you're a firm offering different kinds
00:00:13
of programs we want to have a really
00:00:15
good understanding of different kinds of
00:00:17
loyalty programs for instance a lot of
00:00:19
programs out there like the Airlines and
00:00:21
many other companies once you accumulate
00:00:23
a certain number of points your status
00:00:25
changes or the value of your points is
00:00:27
greater than it was before but in many
00:00:29
many programs there's none of that in
00:00:32
many programs it's just what we call a
00:00:34
linear program and you get a certain
00:00:37
amount of points every time you spend a
00:00:38
dollar and you can turn those points
00:00:41
back into Dollars uh you know when you
00:00:43
when you when you buy things but nothing
00:00:46
really changes you can accumulate points
00:00:48
but the rates don't change your status
00:00:49
doesn't change so linear loyalty
00:00:51
programs are kind of boring but they're
00:00:54
really really common and there's some
00:00:56
really interesting phenomena that
00:00:58
happened around them so for instance a
00:01:00
few years ago one of my MBA students
00:01:02
came to me his family runs a chain of
00:01:04
retail stores in Central America and
00:01:06
they have a very standard linear loyalty
00:01:09
programs again every time you buy
00:01:11
something you get a small number of
00:01:12
points for every dollar you spend and
00:01:15
whenever you want he can turn those
00:01:17
points into an an even smaller number of
00:01:19
dollars and the and he noticed something
00:01:21
really curious which is in a lar loyalty
00:01:24
program you should just be spending
00:01:26
those points right away there is no
00:01:28
benefit to to accumulate the these
00:01:30
things there's no nothing to be gained
00:01:32
from stockpiling them the only thing
00:01:33
that can happen is you can you can lose
00:01:35
them or the company can go out of
00:01:36
business but people stockpile points in
00:01:39
a linear program uh and and it's weird
00:01:42
it's it's not that they're never using
00:01:43
the points occasionally they will use
00:01:45
them but they pile them up and pile them
00:01:47
up and pile them up and then use a few
00:01:49
and then pile them up again so why is it
00:01:51
that people pile up points in a linear
00:01:54
loyalty program so so this former
00:01:56
student posed this as a puzzle and it
00:01:58
became a very interesting research
00:02:00
problem and I was really happy to work
00:02:02
with one my one of my PhD students
00:02:04
Valeria storm and one of my colleagues
00:02:05
Eric bradow to come up with a
00:02:07
statistical model that will sort out
00:02:10
lots of different explanations why is it
00:02:13
that people pile up points in a line
00:02:15
neology program so we considered lots of
00:02:17
different factors some psychological
00:02:19
some economic uh and tried to sort them
00:02:21
all out to figure out what the what the
00:02:23
the wining explanations were that's what
00:02:25
the paper's all about
00:02:31
so we looked at lots of different
00:02:33
explanations so maybe it's the case that
00:02:35
it's just it's so burdensome on you to
00:02:38
to even think about Redeeming the points
00:02:40
that you only do it once in a while uh
00:02:43
or or or maybe uh you're afraid of using
00:02:45
up the points because then you won't get
00:02:47
points on that particular transaction
00:02:50
but our the main explanation that we
00:02:52
came up with is is something that
00:02:54
honestly we didn't even think about in
00:02:55
advance although there's very strong
00:02:58
psychological theory underlying it it
00:03:00
and that's the idea that in people's
00:03:02
minds they have two separate accounts
00:03:04
they have a cash account how much money
00:03:06
do I have and how much money would I be
00:03:08
losing if I buy this product but they
00:03:11
also have a points account so how many
00:03:13
points do I have and how many points
00:03:14
would I gain or lose if I buy this
00:03:17
product if I use points or if I don't
00:03:19
use points so people have these mental
00:03:21
accounts and they're different so it's
00:03:23
not that points and and dollars are are
00:03:25
equally
00:03:26
interchangeable uh some some Theory
00:03:28
tells us that people would be a little
00:03:30
bit more sensitive to to kind of losing
00:03:33
cash and other words spending money than
00:03:35
they would be to losing points that is
00:03:37
using them for redemptions so you have
00:03:39
these two different accounts and
00:03:41
different sensitivities about how you'd
00:03:43
make tradeoffs between them so the basic
00:03:45
idea is I'm looking at a purchase I'm
00:03:47
thinking about how many points I have
00:03:49
I'm thinking how much cash I have I'm
00:03:50
thinking how many points I would lose or
00:03:52
how much cash I would lose depending on
00:03:53
how I buy it and I'm going to choose the
00:03:56
account that that makes me happiest so
00:03:58
it's this idea of mental accounting that
00:04:01
that that explains why people will often
00:04:04
pile up points and and not use them even
00:04:06
though economically they should just be
00:04:08
using them all the time so now that we
00:04:10
know that people have these two accounts
00:04:13
that has all kinds of important
00:04:15
implications first of all it's just kind
00:04:16
of interesting to know about how people
00:04:18
operate and interesting to be able to
00:04:20
predict who is likely to redeem how
00:04:23
often and when it's very important for
00:04:25
retailers to have some idea about what
00:04:27
these redemptions are going to look like
00:04:29
CU after all people are piling up all
00:04:30
these points they're building up all
00:04:32
these liabilities on their balance sheet
00:04:34
you kind of want to know when when these
00:04:35
redemptions are going to occur and you
00:04:37
want to set up your program in a way so
00:04:39
you have the just right number of
00:04:41
redemptions you might not want people
00:04:43
redeeming all the time because then they
00:04:44
come to expect it but you don't want
00:04:46
them to be redeeming too infrequently
00:04:48
because then again you have these really
00:04:50
big Point liabilities on your balance
00:04:52
sheet so one of the big takeaway from
00:04:54
the paper is that by having our multiple
00:04:56
account story we can give retailers
00:04:58
specific advice about how different
00:05:01
kinds of parameters the Loyalty program
00:05:04
how many points do we give you for each
00:05:05
dollar that you spend how many dollars
00:05:08
are the points worth when you redeem
00:05:09
them we can help you come up with that
00:05:11
just right combination in order to make
00:05:13
sure that you're getting that just right
00:05:15
blend of people redeeming their points
00:05:18
but not too
00:05:23
often so what makes this project unique
00:05:25
first of all is that really clear tight
00:05:28
focus on linear loyalty programs they're
00:05:30
really really common if if you if you
00:05:32
look around and think about the kinds of
00:05:33
loyalty programs that you're involved in
00:05:35
many of them have this this idea that
00:05:37
you know you get points you use points
00:05:39
but there is no special status or
00:05:41
special thresholds that that you hit so
00:05:43
it's it's surprising how little research
00:05:46
has been done on linear loyalty programs
00:05:48
Again part of it is that they're just
00:05:49
not as as sexy and dramatic and
00:05:52
interesting as programs where you have
00:05:54
to hit certain thresholds and what are
00:05:56
the psychological mechanisms that get
00:05:58
people to to get to those thresholds so
00:06:00
linear programs are boring but they're
00:06:02
an important part of business and so we
00:06:04
really want companies to to have just a
00:06:06
better understanding about how they
00:06:08
operate what are the economics
00:06:10
associated with them and what are the
00:06:11
underlying psychological drivers uh that
00:06:14
that describe how people use them and
00:06:17
how they would respond differently if
00:06:19
companies were to to change certain
00:06:21
aspects of the program another important
00:06:23
aspect of This research is this idea of
00:06:25
having these two mental accounts so very
00:06:28
often when you look at loyalty program
00:06:29
you tend to think that people are very
00:06:31
rational and they're making these these
00:06:32
very utilitarian tradeoffs between the
00:06:35
points they have and the dollars that
00:06:36
they have and they're always optimizing
00:06:38
well that's not true and a lot of this
00:06:41
mental accounting that we're leveraging
00:06:43
a lot of this is is work that goes back
00:06:44
to uh Daniel Conan and Amos derski two
00:06:48
terrific worldclass psychologists Daniel
00:06:50
Conan won the Nobel Prize for some of
00:06:52
his work this idea of mental accounting
00:06:54
occurs all the time even in situations
00:06:57
where you might not expect to see it so
00:06:59
it's I think important to to understand
00:07:02
that the way that people approach
00:07:03
something that that that should be
00:07:05
economic is often much more
00:07:06
psychological and I think that the the
00:07:09
story that we tell about these two
00:07:10
different accounts and how they differ
00:07:12
from each other and how it leads to a
00:07:14
very elegant solution to a very
00:07:17
practical real world puzzle is a very
00:07:19
nice contribution by
00:07:24
itself as I mentioned the lead author on
00:07:27
this is one of my PhD students Valaria
00:07:29
storm and she's been just captivated by
00:07:31
this idea of loyalty programs and the
00:07:34
the psychological drivers underneath
00:07:36
them and the economic implications that
00:07:38
arise from them so this was just one
00:07:40
paper that Valeria and Eric bradow and I
00:07:42
did together Valeria is working on her
00:07:44
dissertation now uh working on a
00:07:46
different kind of loyalty program with a
00:07:48
different company in a different part of
00:07:49
the world uh in this case trying to
00:07:51
understand the nature of a coalition
00:07:54
loyalty program so very often instead of
00:07:57
having just just one company having its
00:07:58
own loyalty program you'll have a
00:08:00
loyalty program that lots of different
00:08:02
companies belong to so for instance
00:08:04
American Express recently announced a
00:08:05
program called plenty that's a coalition
00:08:07
loyalty program because you can
00:08:09
accumulate points from lots of different
00:08:11
companies like AT&T for instance and
00:08:13
many others and and use those points at
00:08:16
variety of different firms not
00:08:17
necessarily the firms that you got the
00:08:19
points from so a coalition loyalty
00:08:21
program is another emerging loyalty
00:08:23
program idea not quite as common at
00:08:26
least in the us as your standard Airline
00:08:29
loyalty program but very big around the
00:08:31
world and and and very important to
00:08:34
understand how you develop one of these
00:08:35
things how you set the parameters for it
00:08:38
what are the exchange rates how should
00:08:39
it vary and and under what conditions
00:08:41
would a firm want to be part of the
00:08:43
Coalition loyalty program or not so
00:08:45
we're just scratching the surface to to
00:08:48
try to really understand loyalty
00:08:49
programs inside and out and as much as
00:08:52
we keep expanding our research that
00:08:54
involves them the number and the variety
00:08:56
of loyalty programs are expanding even
00:08:58
more so we we're going to have a hard
00:09:00
time keeping up with the Loyalty program
00:09:01
industry but we're having a real good
00:09:03
time learning about uh the nature of
00:09:05
these programs as we go along
00:09:13
[Music]
