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

58 Pages Posted: 14 Dec 2021 Last revised: 23 May 2023

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: May 22, 2023

Abstract

Problem definition: Loyalty programs have greatly expanded in scale and scope, and loyalty points issued by firms serve as a new form of currency alongside the traditional currency of money. In this paper, we study how consumers decide to pay with points or money for a purchase and how these decisions are affected by consumers' points earning characteristics.

Methodology/results: We develop a model of consumers' payment choices and estimate it on proprietary loyalty program data from a major U.S. airline company using a hierarchical Bayesian framework. 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, while those who earn few points or mostly through a co-branded credit card tend to value money more than points. To better understand heterogeneity in consumers' attitudes toward points, we propose a probabilistic segmentation of consumers and identify four behavioral segments with distinctive characteristics. Through counterfactual analysis, we demonstrate how a firm can implement money and point pricing policies to optimally target and influence consumers' payment choices.

Managerial implications: It is important for firms to understand how consumers think about points and decide to pay with points or money as it affects firms' cash flows, profitability, and consumer loyalty and engagement. We demonstrate that firms can design optimal price targeting policies by utilizing the significant level of heterogeneity in consumers' attitudes toward points. Furthermore, our results indicate that firms that are expanding their partnership networks and offering more points earning sources should consider the impact that this would have on consumers' mental accounting of money and points, and consequently their payment choices.

Keywords: payment choice, 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? (May 22, 2023). 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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