The psychology of loyalty programs

American Airlines logo

As a professor, I end up traveling a fair amount. I go to conferences, give talks at other universities, and consult for businesses that are interested in learning more about the way people think. The travel market is competitive, and many companies in the travel industry compete for my loyalty using programs designed to give me rewards--the more that I use that company. The most familiar of these kinds of programs are the frequent flyer programs where you can earn miles that can translate into free flights, upgrades to first-class, and early boarding of flights.

Effective loyalty programs are a big win for companies. I am sure that I have paid more for some flights I have taken just to stick with one airline rather than spreading my travel dollars around to a variety of airlines.

From a consumer standpoint, it is less clear whether these programs are a benefit. There are many bases for making a choice about something like air travel. Many consumers go to discount travel sites like Orbitz and select the cheapest flight from one location to another. The loyalty programs focus consumers on the prospect of free flights and creature comforts.

Because you may pay more for some flights on that airline in order to stick with the particular carrier, you may pay more for those simple comforts than you might be willing to pay if they were just offered to you directly. That is, you might not pay $40 for the opportunity to board early if it were offered to you at check-in, but you might pay $40 more for a flight on an airline where your loyalty club membership allows you to board early.

What makes you likely to think a loyalty program is worth pursuing? Obviously, some of it has to do with what is being offered. If the rewards are not that appealing, then few people will stick with one company just to get them.

Hilton Hotels logo

It turns out, though, that the way the points are given to you in the program also matters. An interesting study was done by Rajesh Bagchi and Xingbo Li in a paper slated for the February, 2011 issue of the Journal of Consumer Research. As they point out, many loyalty programs give you some number of points for each purchase. For example, some hotels give you 10 points for every dollar you spend. You may then need 7500 points to get a free night in a room. Another hotel chain might give you 1 point for every dollar and require you to get 750 points to earn a free stay.

Which is better?

To explore this issue, the authors had people in a lab situation order a number of meals from a restaurant over the course of a study. The restaurant either paid about 10 points per dollar or about 1 point per dollar. If they were given 10 points per dollar, then a reward required 1000 points, and if they were given 1 point per dollar, then a reward required 100 points. So, the programs were set up the same way.

They found that when people had just started to use the program (after only 2 meals where they were 20% of the way toward their goal), the number of points given for the meals did not matter. However, when they were 80% of the way toward the meal, people were more pleased with the loyalty program and were more likely to want to recommend it to other people when they were given a large number of points (and so they had built up 800 points toward the 1000 needed for a reward) than when they were given a small number of points (and so they had built up 80 points toward the 100 needed for a reward).

The authors of this study did find some advantages for programs that use small point values, but those advantages do not seem relevant for the way most loyalty programs are constructed, so I won't describe those conditions here.

It is important to remember that companies want you to develop habits that include them. In travel, airlines want you to be in the habit of flying that airline. Hotel chains want you to develop a habit to use that hotel. If the rewards are worth the possibility that you might pay extra for them sometimes, then loyalty programs can be good for you too. But, if your habit will cause you to pay more for those benefits than you would otherwise, then they are not such a good deal.

Finally, just because you have picked up a large number of points in a program does not mean that you are necessarily that close to getting a reward. If you are going to use a loyalty program, focus on how much more you have to spend to get a reward and not on the total number of points that you have accumulated so far.

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