EXPRESS: Paying with Money or Paying with Points: How Variable vs. Fixed Exchange Rates Influence Loyalty Point Redemption

Abstract

Although research examining loyalty point redemption has focused almost exclusively on fixed exchange rates between points and money (e.g., 100 points = $1), we frequently observe variable exchange rates in practice (e.g., 100 points might equate to more or less than $1, depending on the monetary price and the required points for a flight redemption within the continental U.S.). Such variable rates are particularly common in loyalty programs in the hospitality industry. In this research, we show that the stability of the exchange rate – whether the exchange rate is fixed or variable across offers – systematically influences point redemption. Consumers are less likely to redeem loyalty points and instead spend money when they observe a variable exchange rate between money and points than when they observe a fixed exchange rate, even when the average value of points is the same. We demonstrate this effect in a series of studies across contexts, including an incentive compatible retail loyalty program and a hotel loyalty program. We show that a variable point exchange rate induces more optimism than a fixed exchange rate, reducing point redemption. This effect is moderated by individual differences in optimism and by point expiration date. We conclude by discussing the implications for managers of loyalty programs and consumers.