Stockpiling Points in Linear Loyalty Programs

Abstract

Customers often stockpile reward points in linear loyalty programs (i.e., programs that do not reward stockpiling) despite several economic incentives against it (e.g., the time value of money). We develop a mathematical model of redemption choice that unites three explanations for why customers seem to be motivated to stockpile on their own, even though the retailer does not reward them whatsoever for doing so. These motivations are economic (the value of foregone points), cognitive (non-monetary transaction costs), and psychological (customers value points differently than cash). The psychological motivation is captured by allowing customers to book cash and point transactions in separate mental accounts.

The model is estimated on data from an international retailer using Markov Chain Monte Carlo methods and is shown to accurately forecast redemptions during an 11-month out-of-sample period. The results indicate substantial heterogeneity in how customers are motivated to redeem, and suggest that the behavior in our data is driven mostly by cognitive and psychological incentives.

Keywords: loyalty programs, mental accounting