When customers choose to redeem a reward, it significantly enhances purchase behavior before and after the redemption event, according to a new study compiled by researchers at the BI Norwegian Business School, the University of Groningen (The Netherlands), and Erasmus University Rotterdam.
The study titled, “Reward Redemption Effects in a Loyalty Program When Customers Choose How Much and When to Redeem,” shows that the redemption of loyalty program rewards has an important impact on members’ behavior. The study examined customer behavior of 3,094 members of a Dutch loyalty program.
Although the mere decision to redeem a reward significantly enhances purchase behavior before and after the redemption event, the study says, “little is known about the interplay between members’ purchase and redemption behavior when members are not pressured with points expiration and they choose for themselves when and how much to redeem. In this context, the effects of redemption are not straightforward, as little additional effort is required from an LP member to obtain the reward.”
Redemption momentum, the study notes, is an alternative and novel explanation of the existence of pre-reward effects that does not depend on points-pressure. In addition to the overall impact of redemption on purchases, prior purchase behavior also enhances redemption decisions.
“We find a number of moderating effects on purchase and redemption behavior that derive from the length of LP membership, age, income and direct mailings,” the study says. “Our study’s most important managerial implication is that firms can avoid imposing binding thresholds and/or points expiry and still enhance members’ purchase behavior.”
In recent years, loyalty programs (LPs) have become the dominant tool for loyalty marketing worldwide. In the United States alone, the number of LP memberships exceeded 2.65 billion in 2012, increasing by 26.7% since 2010. Loyalty programs aim to engage program members by rewarding their repeated purchases of a company’s product through (the redemption of) loyalty points that members collect on their purchases.
“Therefore, the benefits of a loyalty program for a member become the most salient when redeeming a reward,” the study notes. “Yet, as much as one-third of $48 billion worth of loyalty program currency issued in 2010 remained unredeemed; likewise, The Economist estimated that ‘the total stock of unredeemed miles was worth more than all the dollar bills in circulation’. To reduce liability, LPs introduced points expiration; however, this may undermine loyalty building efforts and engender customer frustration.”
For example, the study describes, point expiration is common in the airline industry where, due to restrictions on the availability of “award seats,” LP points often expire before members have an opportunity to cash in points. Conversely, loyalty programs are increasingly opting for a no-expiration (or long-term expiration) policy to avoid negative customer experiences.
According to the study, 96% of credit-card programs promote “no expiration” as their key sales feature. But, without the expiration pressure to redeem points, companies fear that members’ active engagement may decline and that their loyalty will fade in turn. Whether firms should encourage reward redemption and consider long-term expiration policies ranks among the least understood aspects of loyalty programs.
The study analyzed the purchase and redemption behavior of 3,094 members in a Dutch loyalty program.
“We find that in as much as 70% of redemptions, the decision to redeem is made a short time ahead of the redemption,” the study notes. “Having made the decision motivates customers within the LP, resulting in an increase in purchase behavior prior to the redemption event, even when customers subsequently redeem just a small fraction of their overall points balance. We label this effect redemption momentum and note that this effect complements the points pressure effect, which may occur for members who have an insufficient amount of points in the weeks before a redemption.”
In the post-reward period, the redemption enhances feelings of gratitude, importance, satisfaction or obliged reciprocity, which may in turn spur purchase behavior.
Empirical findings on the post-reward effects on members’ behavior are scarce, according to the study, and the results are mixed. In some cases, points pressure shifts purchases in time and creates post-redemption dips due to stockpiling. This is not expected to occur when members can choose timing and redemption amounts.
“Our study provides support for positive post-reward effects when customers do not face binding deadlines and can choose the redemption timing and amount,” the study says.
Redemption effects on purchase behavior may vary among loyalty program members. The effects may be moderated by members’ prior experience with the LP (length of LP membership) and various socio-demographic aspects (age, income, etc.), as well as the amount of direct mailing promotions that members obtain.
“To understand the interplay between redemption and purchase behavior in a continuous and linear rewarding context, it is important to enrich the existing explanations to account for diverse motivations and bi-directional relationships,” the study says. “Rewarding may affect purchase behavior, while purchases (i.e., points collection) may in turn affect redemption. We posit that the decision to redeem a reward may by itself act as a driver of pre-redemption effects. We coined the term redemption momentum to refer to the redemption decision’s impact on purchase behavior when members do not feel the points pressure. The redemption momentum is active from the point in time that redemption is planned until it occurs. The decision to redeem a reward may precede the actual redemption and induce excitement for and salience of the benefits of LP membership. This in turn may increase motivation and enhance purchase behavior before the actual redemption takes place.”