AI and Analytics for Business


How Brands Can Build Better Loyalty Programs

Consumers today often belong to a host of retailer ‘loyalty programs,’ earning redeemable points when they spend. In many cases, there is no extra reward for building up a high balance of points in your account. So why do so many people stockpile their points? 

This is the question explored by Wharton doctoral student Valeria Stourm and marketing professors Eric T. Bradlow and Peter S. Fader in their paper, “Stockpiling Points in Linear Loyalty Programs,” recently published in the Journal of Marketing Research. In this interview with Knowledge@Wharton, Fader talks about what the trio learned, what it means for the businesses that use loyalty programs and how this peculiar hoarding behavior reflects a phenomenon at the heart of consumer psychology.

An edited transcript of the interview appears below.

More Points, Same Status

These days, everybody’s talking about loyalty programs. Whether you’re a consumer collecting points and then using them to buy things, or whether you’re a firm offering different kinds of programs, we want to have a really good understanding of different kinds of loyalty programs. For instance, in a lot of programs out there — like the airlines and many other companies — when you accumulate a certain number of points, your status changes or the value of your points is greater than it was before. But in many, many programs, there’s none of that. It’s just a “linear” program: You get a certain amount of points every time you spend a dollar, and you can turn those points back into dollars when you buy things.

But nothing really changes. You can accumulate points, but the rates don’t change, your status doesn’t change. So linear loyalty programs are kind of boring, but they’re really, really common, and there’s some really interesting phenomena that happen around them.

For instance, a few years ago, one of my MBA students came to me: His family runs a chain of retail stores in Central America, and they have a very standard linear loyalty program. And he noticed something really curious. In a linear loyalty program, customers should just be spending those points right away. There is no benefit to accumulating them. There’s nothing to be gained from stockpiling them. The only thing that can happen is you can lose them, or the company can go out of business.