Stockpiling Points in Linear Loyalty Programs

Customers often stockpile reward points in linear loyalty programs (i.e., programs that do not explicitly reward stockpiling) despite several economic incentives against it (e.g., the time value of money). The authors 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 for doing so. These motivations are economic (the value of forgone points), cognitive (nonmonetary transaction costs), and psychological (customers value points differently than cash). The authors capture the psychological motivation by allowing customers to book cash and point transactions in separate mental accounts. They estimate the model on data from an international retailer using Markov chain Monte Carlo methods and 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 the data is driven mostly by cognitive and psychological incentives.