Loyalty Currency and Mental Accounting: Do Consumers Treat Points Like Money?

35 Pages Posted: 14 Dec 2021

See all articles by Freddy Lim

Freddy Lim

INSEAD - Decision Sciences

So Yeon Chun

INSEAD - Technology and Operations Management

Ville Satopää

INSEAD - Technology and Operations Management

Date Written: November 30, 2021

Abstract

Loyalty points have been called one of the world’s most valuable currencies. Yet, despite the high economic and financial value of loyalty currency and redemptions, it is not well understood how consumers make choices to pay with points or money and whether they treat points like money. In this paper, we study how consumers decide to pay with points or money and how these decisions are affected by consumers’ points earning characteristics. Specifically, we develop a model of consumers’ payment choices and estimate it on proprietary loyalty program data from a major U.S. airline company. Our results demonstrate that mental accounting, the subjective perceived value of points, and the reference exchange rate play important roles in consumers’ payment choices. Moreover, the primary points earning source and the total earning level are jointly associated with consumers’ attitudes toward points and money: Consumers who earn many points and mostly with the focal firm tend to value points more than money. In contrast, consumers who earn few points or mostly through the use of a co-branded credit card tend to value money more than points. In between these extremes, consumers who either earn many points from diversified sources or earn an average number of points almost entirely with the focal firm treat points more like money. To better understand heterogeneity in consumers’ attitudes toward points, we propose a probabilistic segmentation of the consumers and identify four behavioral segments of consumers with distinctive characteristics. Through counterfactual analysis, we demonstrate how a firm can implement policies to efficiently target and influence consumers’ payment choices.

Keywords: payment choice, pricing in money or points, mental accounting, the reference effect, point currency, loyalty program

Suggested Citation

Lim, Freddy and Chun, So Yeon and Satopää, Ville, Loyalty Currency and Mental Accounting: Do Consumers Treat Points Like Money? (November 30, 2021). Available at SSRN: https://ssrn.com/abstract=3974642 or http://dx.doi.org/10.2139/ssrn.3974642

Freddy Lim (Contact Author)

INSEAD - Decision Sciences ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

So Yeon Chun

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Ville Satopää

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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