The objective of this research was to demonstrate how the effectiveness of a loyalty program in spurring consumers to consolidate purchases depends directly on the number of rewards offered and the amount of an alternative currency required to redeem each reward, what we have labeled a program’s divisibility. We adopt a goal-based framework to describe how consumers respond to increasing and decreasing divisibility. We argue that salient rewards serve as goals, and each goal’s attainability (proximity) as measured by the reward level and the amount of the currency thus far accumulated helps determine whether a consumer is more or less inclined to continue working towards the goal (i.e., steering her purchases such that she
continues to accrue the alternative currency that takes her closer to her goal). Valuable and attainable rewards serve to increase the marginal value of the currency used to achieve that reward. While we demonstrate that increasing divisibility can allow for increased loyalty among those with low asset levels in the alternative currency, this research also reveals how too much divisibility can be de-motivating as it diminishes the effectiveness of rewards as goals. This last result is counter-intuitive, as one would expect a currency to be more highly valued as the exchange options available for that currency increase. This is the first research we know of to test the effects of increasing and decreasing the number of rewards available and the level of effort required on effort exerted.
This research is not without its limitations. While in our studies, divisibility was increased when the amount of an alternative currency required to redeem each reward was lowered, increasing divisibility alone does not necessarily imply easier attainability (i.e., a lower N implies easier attainability). Consider study 1, in which we doubled the exchange opportunities by offering a 10,000-mile upgrade as well as a 25,000-mile free ticket. We could just as easily have offered a second reward at 30,000 miles. While this would increase divisibility, it may not
make the program any more appealing. While we show that more rewards can be better than fewer rewards, and too many rewards can be a bad thing, the precise numbers and levels associated with two few and too many is likely to vary by product or service category, rewards offered, medium of exchange (miles, points, purchases) and a slew of other factors too numerous to integrate into our studies.
From a practical perspective, it is worthwhile to note that the divisibility of any
alternative currency may not be entirely within the control of the firm issuing that currency. For example, frequent flier miles, the most ubiquitous alternative currency, are becoming
interchangeable with several other alternative currencies and can now be redeemed at numerous second-party vendors. Some firms, such as Southwest Airlines, limit the divisibility of their alternative currency by issuing credits in non-divisible increments (flight segments).
Finally, we believe the notion of divisibility applies to marketers in many domains and is worthy of study outside of the realm of loyalty programs. For example, when people receive gift certificates denominated in specific amounts (e.g., $5) that are good only at the issuing vendor, they may encounter divisibility issues. Indeed, if they can not find an item they desire costing exactly $5, they may be forced to decide whether to make a larger purchase and spend their own money, or a smaller purchase and risk wasting a portion of the certificate. One only needs to recall the time spent in a foreign airport trying to spend the remainder of the local currency one held before departing a country they were unlikely to visit again to get a sense of the power of limited divisibility.
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TABLE 1
Study 1: Percentage Buying Vouchers and Willingness to Pay
Wealth Goal(s)
% Willing to Buy
2,500 voucher WTP
% Willing to Buy
5,000 voucher WTP/2
5,000 25k 65.0% $9.27 75.7% $8.89
5,000 25k & 10k 79.4% $17.07 93.8% $19.73
20,000 25k 93.8% $19.87 97.0% $23.75
20,000 25k & 10k 93.5% $20.15 96.8% $19.74
TABLE 2
Study 1: Percentage willing to make a connection
Wealth Goal(s)
% willing to make a connection
5,000 25k 32.5%
5,000 25k & 10k 60.0%
20,000 25k 90.0%
20,000 25k & 10k 85.0%
Figure 1