Paying with Money or Paying with Points: How Variable Versus 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), variable exchange rates are observed frequently 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 United States). Such variable rates are particularly common in loyalty programs in the hospitality industry. In this research, the authors 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. This effect is demonstrated in a series of studies across contexts, including an incentive-compatible retail loyalty program and a hotel loyalty program. The findings 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. The authors conclude by discussing the implications for managers of loyalty programs and for consumers.

Note

This manuscript was submitted to JMR before Rebecca Hamilton’s appointment as Editor in Chief. The editor team that began the review process, Sachin Gupta and Vikas Mittal, finished the review process and final acceptance, per the AMA policy on submissions by journal editors.

Keywords

loyalty program loyalty points reward redemption optimism exchange rate

Many firms operate loyalty programs, in which members earn points by purchasing more or more often from the firm, with the hopes that these programs will foster greater loyalty. The popularity of such programs has grown in recent years, leading to a substantial increase in the number of loyalty points earned and redeemed annually. For instance, in 2019, Southwest Airlines reported that 14.1% of its flights were booked using points, a notable increase from a decade earlier (Southwest 2019). In 2021, the Hilton Honors loyalty program had 128 million members, reflecting 13% growth from 2020. That year, Hilton reported an outstanding loyalty program liability of $2,364 million associated with points earned by members and recognized $346 million in revenues from point redemption (Hilton Worldwide Holdings Inc. 2021).

The growing number of loyalty points held by consumers means that consumers often face a choice between paying with money and paying with points for a purchase, and this choice has significant implications for firms. Although firms administering loyalty programs incur lower costs in the short term when members do not redeem points, they miss out on the opportunity to generate greater engagement among members. Members who do not redeem points derive less value from their membership in the program (Dowling and Uncles 1997; O’Brien and Jones 1995), encouraging one analyst to comment: “Redemption rate is the best leading indicator of whether your loyalty program is healthy or not. That's because it measures how many points are actually being redeemed by your members. Put another way, your program's redemption rate helps you see whether your program is engaging enough to encourage members to return and shop more often” (McEachern 2019). Further, when members redeem points, firms enjoy a boost in subsequent sales and revenue due to the “rewarded behavior effect,” whereby members tend to increase their purchases after receiving a reward (Dorotic et al. 2014; Kopalle et al. 2012; Smith and Sparks 2009; Taylor and Neslin 2005). Finally, from a financial perspective, outstanding loyalty points are treated as a liability (deferred revenue), which has become a significant balance sheet item for many firms. Since the firm can recognize this liability as revenue when points are redeemed (Chun, Iancu, and Trichakis 2020), consumers’ point redemption decisions dramatically and directly impact firms’ earnings and profitability.¹ Thus, firms have a substantial interest in understanding members’ choices to redeem loyalty points.

Notably, while there exists abundant literature on loyalty programs in marketing and economics, most of this work has focused on points earning behavior and the effectiveness of loyalty programs in generating sales revenue (for reviews, see Berman 2006; Bijmolt, Dorotic, and Verhoef 2010; Breugelmans et al. 2015; Henderson, Beck, and Palmatier 2011). Much less is known about factors that influence consumers’ decisions to redeem points (Bijmolt, Dorotic, and Verhoef 2010). Moreover, the limited literature to date on point redemption (e.g., Drèze and Nunes 2004; Kwong, Soman, and Ho 2011; Stourm, Bradlow, and Fader 2015) has focused on cases in which the exchange rate between points and money is fixed (e.g., 100 points = $1 across redemptions) rather than variable (e.g., 25,000 points may be redeemed for rewards that vary in their monetary prices, as in Figure 1). This gap in the literature is critical because many loyalty programs in practice use variable exchange rates: for example, members of American Airlines’ AAdvantage program can use their points for award tickets on various flights between the United States and Europe, with redemptions starting at 25,000 points.

Figure 1.
Variable Exchange Rate.

When the exchange rate is variable, loyalty program members observe some exchange rates that are more favorable for redeeming points ($1 = 54.47 points, as on Day X in Figure 1), and others that are more favorable for spending money on a purchase ($1 = 78.37 points, as on Day Y in Figure 1). Indeed, numerous websites and blogs (e.g., https://thepointsguy.com/) provide advice to consumers on how to choose when to buy with points and when to buy with money (Figure 2), suggesting that consumers should consider the exchange rate when deciding whether to pay with money or redeem points.

Figure 2.
Websites and Blogs Providing Advice on When to Redeem Points.

Do members actually consider the exchange rate between money and points when they redeem points? To provide some real-world evidence, we examined a proprietary airline dataset containing more than 15,000 award ticket redemption records over a 156-week period.² Data for each redemption included the booking date, number of points paid for the ticket, monetary price of the award ticket that consumers would have paid if they had paid using dollars, origin and destination airport code, departure date, and flight number. We computed the exchange rate for each transaction as the price of the ticket (in dollars) divided by the number of loyalty points redeemed. Exchange rates between money and points varied significantly across transactions, and redemptions were highly correlated with the exchange rate. As shown in Figure 3, point redemptions were more frequent when the exchange rate was more favorable for points. The graph in Panel A shows the number of redemptions at each exchange rate in the dataset. Further, members were less likely to redeem and “lock in” a less favorable point exchange rate when there were more days before departure. The graph in Panel B shows the number of redemptions (each dot is one redemption) that occurred at each exchange rate by the number of days prior to the flight date when the points were redeemed. These data are consistent with members adjusting their redemption behavior to take advantage of more favorable exchange rates between money and points. In other words, members seem to take into account the exchange rate between money and points when redeeming points, rather than simply using points whenever it is possible to do so.

Figure 3.
Flight Ticket Redemptions by Exchange Rate and Booking Window.

If loyalty program members adjust their redemption behavior to take advantage of more favorable exchange rates between money and points when the exchange rate is variable, how might the stability of the exchange rate influence frequency of redeeming points? Holding constant the average exchange rate (the mean exchange rate across all offers observed), we propose that optimism about the future value of points will systematically reduce overall point redemption under variable exchange rates relative to fixed exchange rates. We are not aware of any prior research comparing redemption rates under fixed versus variable exchange rates. One challenge is that, for a given loyalty program, the exchange rate is typically either variable or fixed, making empirical comparisons difficult. For example, some loyalty programs consistently use a fixed exchange rate (such as Nordstrom Rewards) whereas others use a variable exchange rate (such as American's AAdvantage program).

To fill this gap in the literature, we conducted a series of experiments, including incentive-compatible choices and choices of both goods and services, to investigate how the stability of the exchange rate influences consumers’ choices to spend money or redeem points. Controlling for the average exchange rate, we found that participants were consistently more likely to spend money and less likely to redeem points under a variable exchange rate than under a fixed exchange rate. Our studies show that the effect of exchange rate stability on point redemption is mediated by optimism about the future value of points and moderated by factors that influence optimism about the future value of points, such as individual differences in trait optimism and the expiration date for points. High trait optimism and restrictive point expiration dates attenuate the effect of the exchange rate on point redemption, providing evidence that greater optimism about the future value of points under a variable exchange rate is the underlying mechanism for the effect. We conclude by discussing the implications for managers of loyalty programs and consumers.

How Does Stability of the Exchange Rate Influence Consumers’ Choices to Redeem Points or Spend Money?

Our analysis of loyalty point redemptions for airline tickets demonstrated that members were more (less) likely to redeem points when the exchange rate between money and points was more (less) favorable, aligning with the advice offered in many blogs and websites on when to use points and when to use money (Figure 2). This is consistent with members striving to maximize the value of their loyalty points. We propose that, in addition to this rational, value-maximizing behavior, consumers exhibit an optimistic bias, such that they are less likely to redeem points and use money instead under a variable exchange rate than under a fixed exchange rate, even when the average exchange rate (across a series of offers) is the same.

Effect of Uncertainty on Optimism and Redemption

Under a variable exchange rate, members face uncertainty about the exchange rate they will be offered for a particular redemption opportunity. On one hand, uncertainty about the exchange rate could reduce the perceived value of loyalty points. There is substantial evidence documenting a negative effect of uncertainty, such that consumers value uncertain prospects even less than their worst possible outcomes (e.g., Gneezy, List, and Wu 2006; Newman and Mochon 2012; Simonsohn 2009; Tversky and Fox 1995; Von Neumann and Morgenstern 1944). Thus, uncertainty introduced by variable exchange rates may have a negative impact on consumers’ valuation of loyalty points, which may increase their willingness to redeem points.

On the other hand, previous research also demonstrates a positive effect of uncertainty. Across a range of domains, consumers display an optimism bias, defined as an unjustified belief that their outcomes will be more favorable than the outcomes predicted by a quantitative objective standard, such as base-rate data (Sharot, Korn, and Dolan 2011; Shepperd et al. 2015; Weinstein 1980). For example, even after learning that 73% of homes in their immediate area showed elevated levels of radon, only 54% of homeowners estimated that their own home would have an elevated level of radon (Weinstein et al. 1998). Optimism tends to be more pronounced for judgments about oneself relative to those about others (Kuzmanovic, Jefferson, and Vogeley 2015) and is not easily eliminated by disconfirming evidence. Indeed, participants in an fMRI (functional magnetic resonance imaging) study updated their beliefs more in response to information that allowed them to develop more optimistic expectations than from information that should have made their beliefs more pessimistic (Sharot, Korn, and Dolan 2011). Optimism bias seems to prevail even among experts: financial analysts make overly optimistic earning forecasts (Calderon 1993), and forecasts of real growth rates made by official government agencies in 33 countries showed a positive optimism bias (Frankel 2011).

Notably, optimism bias seems to be particularly strong for uncertain positive events observed in a consumer context. Promotions involving uncertain incentives can be more effective than those involving certain incentives (Goldsmith and Amir 2010). For example, uncertain price promotions, in which savings depend on the outcome of a gamble, alleviate some of the negative effects of price promotions (Alavi, Bornemann, and Wieseke 2015).

Moreover, there is reason to predict that optimism bias may be particularly strong in the domain of loyalty points. Past research demonstrates that consumers develop positive emotional relationships with loyalty programs and points (e.g., Dick and Basu 1994; Lim, Chun, and Satopää, forthcoming; Reczek, Haws, and Summers 2014; Smith and Sparks 2009; Stourm, Bradlow, and Fader 2015; Yim, Tse, and Chan 2008), and this may translate into greater optimism. For example, we observe the “lucky loyalty effect,” in which customers who have relationship with a firm report a higher subjective probability of winning even if a promotion outcome is randomly determined (Reczek, Haws, and Summers 2014). To the extent that consumers make decisions differently about loyalty points versus money (Lim, Chun, and Satopää, forthcoming), we may observe a stronger optimism bias for points than for money when outcomes are uncertain. Specifically, decisions to spend loyalty points may be influenced by the psychological value of points in addition to their economic value (Stourm, Bradlow, and Fader 2015), and consumers perceive significant utility boosts from redeeming points at better exchange rates (Lim, Chun, and Satopää, forthcoming).

When consumers consider whether to redeem loyalty points, they may encounter multiple offers; if the exchange rate is variable, some offers will have more favorable (above the average) exchange rates and others less favorable (below the average) exchange rates than would be encountered under a fixed exchange rate (holding constant the average exchange rate). Research suggests that consumers display significant bias when integrating both positive and negative information into their beliefs under uncertainty. They tend to update their beliefs more strongly in response to positive information and signals (such as favorable exchange rates), compared with negative information and signals (such as unfavorable exchange rates). This asymmetric updating leads to an optimism bias (Eil and Rao 2011; Korn et al. 2014; Möbius et al. 2022; Sharot et al. 2012; Sharot, Korn, and Dolan 2011). We propose that if there is a stronger optimism bias for loyalty points than for money, then, with the average exchange rate held constant, encountering both more favorable and less favorable offers under a variable exchange rate (vs. a fixed exchange rate) will increase the degree to which consumers express optimism about the future value of points. This greater “state” optimism should reduce overall point redemption when the exchange rate is variable relative to when it is fixed, controlling for the average exchange rate. We predict:
H₁: When consumers choose between redeeming loyalty points or spending money for a purchase, they are less likely to redeem points under a variable exchange rate between points and money than under a fixed exchange rate, holding constant the average exchange rate.

H₂: State optimism mediates the effect of exchange rate stability on loyalty point redemption.

Moderation by Trait Optimism and Expiration Date

If greater state optimism about the future value of loyalty points is driving the effect of exchange rate on consumers’ willingness to redeem points, then we should expect mediation by state optimism to be moderated by other factors that influence state optimism, such as individual differences in trait optimism and the expiration date for points.

Past research suggests that consumers differ in their general expectations about uncertain events. Optimists “expect things to go their way, and generally believe that good rather than bad things will happen to them” (Scheier and Carver 1985, p. 219). Individual differences in optimism have been measured using the Life Orientation Test (LOT; Scheier and Carver 1985; Marshall et al. 1992). Prior research suggests that high trait optimism is associated with more optimism bias in updating one's beliefs about uncertain future events (Kuzmanovic, Jefferson, and Vogeley 2015). We propose that individual differences in optimism (i.e., trait optimism) will moderate the effect of a variable versus fixed exchange rate on willingness to redeem loyalty points (see Figure 4).
H₃: Trait optimism attenuates the mediating effect of state optimism on consumers’ willingness to redeem loyalty points.

Figure 4.
Moderated Mediation by Trait Optimism and Expiration Date.

Another factor that should moderate optimism about the future value of loyalty points is the expiration date of the points. Prior research has indicated that consumers demonstrate higher levels of optimism when considering distant future outcomes, compared with outcomes in the near future (Gilovich, Kerr, and Medvec 1993), and optimism bias decreases for shorter forecast horizons (Aromí 2019; Frankel 2011; Ho and Mauro 2016). Thus, we propose that a restrictive expiration date for loyalty points will moderate the mediating effect of state optimism on consumers’ willingness to redeem points. Specifically, we predict that a restrictive expiration date will attenuate the mediating effect of state optimism on point redemption (see Figure 4).
H₄: A restrictive expiration date attenuates the mediating effect of state optimism on consumers’ willingness to redeem loyalty points.

This moderator also holds practical relevance since there are substantial differences in point expiration dates across different loyalty programs: some loyalty points expire (e.g., Lufthansa points expire 36 months after earning and Hilton Honors points expire 24 months after last activity), but other program points never expire (e.g., in 2019, United Airlines and Southwest announced that their frequent flyer points would never expire, following similar announcements by JetBlue and Delta; Llaguno 2020).

Overview of Studies

In a series of experimental studies, we tested our predictions by asking participants to choose between paying with money and paying with points for specific purchases. These purchases included services and goods, incorporated incentive-compatible as well as hypothetical purchases, and ranged from hotel rooms to school spirit items. We compared participants’ point redemptions under a fixed versus variable exchange rate between money and points, holding constant the average exchange rate, which was explicitly provided to participants.

In Study 1, we examined incentive-compatible choices in the context of a retail loyalty program. Our primary goal was to compare point redemption across fixed and variable exchange rates (H₁). To pinpoint the exchange rate as the driver of the effect, we varied the observability of the exchange rate, so that participants either saw prices in both points and money before deciding how to pay (i.e., the exchange rate was observable) or chose the form of payment prior to seeing prices in either points or money (i.e., the exchange rate was not observable). We expected that point redemption would be lower when the exchange rate was variable (vs. fixed) and that the effect of exchange rate stability would be stronger when consumers could observe implicit exchange rates (by seeing both prices in points and money) than when they could not.

In Study 2, we tested the effect using a more realistic number of choices (H₁) and sought mediational evidence for the process driving the effect (H₂). We expected to observe greater optimism about the future value of points under a variable (vs. fixed) exchange rate (H₂). Next, in Studies 3 and 4, we demonstrated moderation of the effect by trait optimism (H₃) and expiration date (H₄). In Study 3, we demonstrated mediation of the effect of exchange rate stability on point redemption by state optimism (H₂) and moderation by trait optimism (H₃). To test the robustness of the effect, we examined whether the effect holds when point prices rather than money prices varied across offers, when there was more versus less variation in prices, and when the perceived effort of earning points was high versus low. In Study 4, we demonstrated moderation by both trait optimism (H₃) and point expiration dates (H₄). Across these studies, both mediation tests and moderator tests suggest an important role of optimism in driving the effect of exchange rate stability on loyalty point redemption.

Study 1: A Variable Exchange Rate Reduces Point Redemption

We conducted this study in a retail loyalty program context. We made participants’ choices incentive compatible by endowing them with money and points and allowing them to either purchase or not purchase Georgetown University Bookstore merchandise using either money or points. We expected participants to redeem fewer points (and spend more money) when they observed a variable exchange rate than when they observed a fixed exchange rate.

In practice, while some loyalty programs provide separate interfaces showing members offers only in points or only in dollars, other programs show members prices in both points and dollars and prompt them to choose between points and dollars for a specific purchase (as in Figure 1). To pinpoint the exchange rate as the driver of the effect, we manipulated the timing of the payment choices. If the effect is driven by uncertainty about the exchange rate, not by point or money prices, the stability of the exchange rate should influence participants’ redemption choices only when they can observe the implicit exchange rate between money and points.

Method

We recruited 453 student participants (59% male, 41% female; M_age = 20 years), who received course credit and a chance to win money and items from the university bookstore for participating, and we randomly assigned them to four between-subjects conditions. We varied the stability of the exchange rate (fixed vs. variable) and the observability of the exchange rate (not observable vs. observable) between subjects.

First, participants read an introduction to the study, “This study is designed to test how a loyalty program might work at the Georgetown University Bookstore here on campus,” and learned that they would consider six different products sold at the bookstore: a water bottle, a T-shirt, an umbrella, a hat, a mesh backpack, and a coffee mug. Participants were given the opportunity to purchase each of these products at five different prices, presented in random order (average prices across items ranged from $9.74 to $18.74; see Web Appendix A). To give students an incentive to purchase using either points or money during the study, the products were discounted 25% on average from the current bookstore price.

Participants were given a debit card preloaded with $25 and 2,500 loyalty points, and they chose whether to spend these dollars or points or not to purchase. Participants were advised to make their choices carefully because five randomly selected participants would actually receive one of the products they purchased and any dollars and loyalty points that were left on their card.

In the fixed exchange rate condition, participants read that the exchange rate was fixed at 1 point = $.01; in the variable exchange rate condition, they read that the exchange rate between dollars and points varied across the five offers from 1 point = $.008 to 1 point = $.012 with an average of 1 point = $.01. Participants in the exchange rate not observable condition chose whether they would like to use the dollars or points on their card before they saw the prices for each product. Participants in the observable exchange rate condition saw prices in both points and dollars for each product before choosing whether to purchase or how to pay.

As each product was presented, participants saw a picture of the product, and they were told the average price of the product in both dollars and points. In the exchange rate not observable condition, participants first chose whether they would pay in points or dollars for the product. If participants chose to pay in dollars (points), they were presented with a series of five offers that varied around the average price in dollars (points). They saw the offers one at a time (e.g., $10.19, $11.45, $12.74, $14.01, $15.28 for the water bottle), in random order, and for each offer, they chose whether to purchase the product. In the observable exchange rate condition, participants saw prices in both points and dollars for each offer, and they could choose to spend money or redeem points for the product, or not to purchase the product at all. In the fixed exchange rate condition, points and dollar prices varied together, so that the exchange rate remained constant. In the variable exchange rate condition, dollar prices varied while point prices remained fixed, meaning that the exchange rate varied across offers.³ Participants saw the same number of offers with exchange rates above and below the average exchange rate, and the average exchange rate was the same as in the fixed rate condition.

At the end of the study, participants responded to demographic measures as well as questions about their loyalty program membership and point redemptions. After data collection concluded, five participants were selected to receive one of the products they had purchased in the study, and they received both the product they purchased and the remaining balance of their gift card ($25 + 2,500 loyalty points − purchase price in the currency they chose). We converted remaining points to monetary value for ease of administering the payments; this balance was added to their student debit card.

Results

Participants were familiar with loyalty programs. A majority (59%) of participants reported that they were currently a member of a loyalty program, and 57% reported that they had redeemed loyalty program points at least once, with no differences across conditions (p > .17). Across the 30 offers they considered, participants purchased merchandise 38% of the time.

We examined choices to redeem points or spend money conditional on purchases, using a generalized estimating equation with logit, in which stability of the exchange rate (fixed = 1, variable = −1), observability of the exchange rate (observable = 1, not observable = −1), and their interaction were between-subjects factors, while product and order of products were nested within participants.

Point redemption was higher when the exchange rate was fixed (M = 67%) than when it was variable (M = 59%; β = −.63, p < .001). The main effect of observability was not significant, but, as expected, the effect of stability was moderated by the observability of the exchange rate (β = .55, p < .05). When the exchange rate was observable, pairwise comparisons show that participants were significantly more likely to redeem points when the exchange rate was fixed (M = 69%) than when it was variable (M = 54%; Wald = 14.44, p < .001), supporting H₁. In contrast, when the exchange rate was not observable, redemption did not differ based on whether the exchange rate was fixed (M = 65%) or variable (M = 63%; Wald = .19, p > .66).

Discussion

Our goals in this study were to test the effect of manipulating the stability of the exchange rate in an incentive-compatible setting and to isolate the effect by showing that it only happens when the exchange rate is observable. As expected, redemption rates were higher when the exchange rate was fixed rather than variable, and this effect was significant only when the exchange rate was observable, providing support for H₁.

We examine the underlying mechanism for the effect in Study 2 by testing whether participants are more optimistic about the future value of points when the exchange rate is variable than when it is fixed, as predicted by H₂.

Study 2: Why Are Consumers Less Likely to Redeem Points When the Exchange Rate Is Variable?

In the first study, each product was offered at several different price levels, potentially confusing participants. Further, participants’ budgets of both money and points allowed them to make all purchases with either money or points, whereas consumers in the real world often face budget constraints. In Study 2, we asked participants to make only five choices, and each item was presented with a single price in points and a single price in money. We also constrained either the participant's point budget or their money budget so that they could not make all purchases from the constrained budget.

Method

We recruited 419 participants (57.8% male, 42% female, .2% other categories; M_age = 37 years) via Amazon Mechanical Turk (MTurk), and we randomly assigned them to four between-subjects conditions, varying in both exchange rate stability (fixed vs. variable) and constraint (money vs. points). Participants were asked to imagine that they would be buying water bottles for several friends and family members at an online retailer called RefillWater. As in Study 1, participants imagined making all purchases with a debit card: “For the purpose of this study, we will add [points] and [dollars] to your RefillWater card. You will use your RefillWater card to make purchases in the study using either dollars or loyalty points. For each item, you will see a price in dollars and a price in points, and you will choose whether to spend dollars or points from your card for the item.”

In the fixed exchange rate condition, participants were told, “The exchange rate between dollars and points is fixed at 1 point = $1,” while in the variable exchange rate condition, they were told, “Across the deals, the exchange rate between dollars and loyalty points varies (e.g., it could be 1 point = $.80 or it could be 1 point = $1.20), but the average is 1 point = $1.” In the constrained money (points) condition, participants learned that they had a budget of $50 and 75 points ($75 and 50 points), which prevented them from using money (points) to make all their five purchases.

For each water bottle, participants clicked a radio button to indicate whether they preferred to spend money or points (see Web Appendix B). As they made each choice, they saw their budget of dollars decline when they spent dollars or saw their budget of points decline when they spent points. After they had made all five choices, participants were asked, “How optimistic are you about receiving an offer with a favorable exchange rate in the future?” (1 = “not at all optimistic,” and 7 = “very optimistic”) to measure optimism about the future value of points. Finally, participants responded to demographic measures and questions about their membership and their familiarity with point redemption.

Results

As in Study 1, participants were familiar with loyalty programs: 78% said they were currently a member of a loyalty program, and 83% said they had redeemed points from a loyalty program in the past. Membership and redemption did not vary across either of the manipulated factors or their interaction (p > .14).

Choices to redeem points

We examined choices to redeem points or spend money using a generalized estimating equation with logit, in which stability of the exchange rate, budget, and their interaction were between-subjects factors, and items were nested within participants. We observe significant effects of both stability of exchange rate (β = −.32, Wald = 6.15, p < .02) and budget (β = .67, Wald = 14.1, p < .001) with no significant interaction (p > .80) as expected. Point redemption was higher when the exchange rate was fixed (M = 67%) than when it was variable (M = 60%), supporting H₁. Although point redemption was higher when the point budget was unconstrained (M = 71%) than when it was constrained (M = 56%), redemption was higher when the exchange rate was fixed than when it was variable, irrespective of whether the point budget was constrained (M_fixed = 60% vs. M_variable = 52%; Wald = 6.29, p = .012) or money budget was constrained (M_fixed = 74% vs. M_variable = 68%; Wald = 2.87, p = .09).

Optimism

To test whether optimism is driving the effect of exchange rate stability on redemption choices, we tested mediation. Specifically, we conducted a bootstrap test of mediation using PROCESS (Hayes 2022, Model 4) to assess whether participants’ optimism about the future value of points mediates the effect of exchange rate stability on redemption choices. It showed that a fixed exchange rate significantly reduced state optimism compared with a variable exchange rate (β = −.17, t = −4.72, p < .001). As in Study 1, a fixed exchange rate predicted significantly higher redemption (β = .13, z = 2.94, p < .004) and state optimism predicted lower redemption (β = −.11, z = −3.63, p < .001). Results confirm a significant indirect effect of exchange rate stability on redemption through optimism about the future value of points (effect = .02, SE = .006, 95% CI: [.007, .03]).

Discussion

Consistent with H₁ and the results of Study 1, participants’ redemption choices are systematically influenced by the stability of exchange rate between points and money. This holds true regardless of whether participants’ budget of points is constrained or unconstrained. Further, Study 2 provides mediational evidence for optimism as the underlying mechanism for the effect.

Study 3: Trait Optimism Moderates Mediation by State Optimism

In this study, we measured participants’ trait optimism to test whether trait optimism would moderate mediation of the effect by state optimism (H₃). To be sure we were capturing optimism during the choice process with our state optimism variable, we measured state optimism before participants had completed their choices, when they still anticipated making more choices to redeem points or spend money. Additionally, to confirm the robustness of our results, we tested whether the effect of exchange rate stability was robust to varying point prices rather than money prices across offers, to more versus less variation in prices, and to high versus low perceived effort of earning points.

Method

We recruited 519 student participants (56% male, 44% female; M_age = 20 years) and randomly assigned them to the following between-subjects conditions: (1) fixed exchange rate, (2) variable exchange rate with money prices varying, (3) variable exchange rate with point prices varying, (4) fixed exchange rate with high price variance, (5) variable exchange rate with money prices varying and high price variance, (6) fixed exchange rate with low effort to earn points, and (7) variable exchange rate with money prices varying and low effort to earn points. Conditions 1 and 2 are consistent with our previous studies, and Conditions 3 through 7 allow us to test the robustness of our results (see Web Appendix C for more details).

Participants were asked to imagine that “you will be taking a road trip this summer, and you will be staying at a different hotel each night. In total, you will need to make reservations for 17 hotel night stays. You have both money and loyalty program points to use for your hotel stays on this trip.” To manipulate effort invested, participants in the low effort condition were told, “You have not stayed at the hotels within the Bienvenue loyalty program, but because of a company promotion, you have received Bienvenue loyalty program points,” and participants in the high effort condition were told, “Over the past several years, you have carefully chosen to stay at hotels within the Bienvenue loyalty program, allowing you to earn 270,000 loyalty program points.”

Across the 17 stays, dollar prices were distributed symmetrically around the average price of $150, with a range of $90 to $210. In the fixed exchange rate condition, point prices were a fixed ratio of the dollar price ($.01 per point). When the exchange rate was variable, it had a range of $.006 per point to $.014 per point in the low variation conditions and a range of $.004 per point to $.016 per point in the high variation conditions. In the variable exchange rate condition, participants in the varying money conditions learned that they could redeem 15,000 points for any stay while money prices varied, whereas participants in the varying points condition learned that they could spend $150 for any stay, while point prices varied.

As in Study 1 and Drèze and Nunes (2004), participants were given budgets that would allow them to make all purchases using money or all purchases using points. As they made choices, participants saw their budget of dollars decline when they spent dollars or saw their budget of points decline when they spent points.

To ensure that all participants saw offers with the same average exchange rate of $.01 per point across the first 11 offers, we randomized the order of the offers within blocks (first 11 offers and last 6 offers). After participants had made 11 choices, they rated their state optimism about the future opportunity to redeem (“How likely is it that one of the next 6 offers will be better opportunity to redeem points than any of the offers you have seen so far?”; 1 = “very unlikely,” and 7 = “very likely”). To test whether individual differences would moderate the effect of exchange rate stability on state optimism, we measured trait optimism (LOT; Scheier and Carver 1985). Following Marshall et al. (1992), we used LOT Items 1, 4, 5, and 11 to create an index of trait optimism. Finally, as in our other studies, participants responded to questions about loyalty program membership and past point redemption.

Results

As in our other studies, participants were familiar with loyalty programs: 60% were current members of a loyalty program, and 59% indicated that they had previously redeemed loyalty points, with no differences across conditions (p > .69).

Choices to redeem points

To account for repeated choices within subjects, we examined choices to redeem points or spend money using a generalized estimating equation with logit, in which stability of the exchange rate (fixed = 1, variable = −1), effort (high effort = 1, low effort = −1), price variance (large variability = 1, small variability = −1) and their interactions with stability were between-subjects factors, and choices were nested within participants. Only the effect of exchange rate stability was significant (β = −.57, Wald = 9.99, p < .005), and none of the other main effects or interactions were significant (ps > .65), confirming the robustness of our results. Replicating the results of our other studies, point redemption was higher when the exchange rate was fixed (M = 72%) than when it was variable (M = 60%), supporting H₁. We report more detailed comparisons across conditions in Web Appendix D.

Optimism

To test whether optimism drives the effect of exchange rate stability on redemption choices, we tested mediation. Specifically, we conducted a bootstrap test of mediation using PROCESS (Hayes 2022, Model 4) to assess whether participants’ state optimism about future offers mediates the effect of exchange rate stability on redemption choices. PROCESS Model 4 showed that a fixed exchange rate significantly reduced state optimism compared with a variable exchange rate (β = −.05, t = −2.85, p < .005). As in our previous studies, a fixed exchange rate predicted significantly higher redemption (β = .21, z = 9.53, p < .001) and state optimism predicted lower redemption (β = −.08, z = −5.37, p < .001). Results confirm a significant indirect effect of exchange rate stability on redemption through optimism about the future value of offers (effect = .004, SE = .002, 95% CI: [.001, .007]), supporting H₂. This provides additional evidence for optimism as the mechanism for the effect.

Moderated mediation

To test moderated mediation by trait optimism, we used PROCESS Model 7 (Hayes 2022) to test whether mediation by state optimism was moderated by trait optimism. Model 7 showed that a fixed exchange rate significantly reduced state optimism (β = −.49, t = −6.98, p < .001), trait optimism predicted significantly higher state optimism (β = .17, t = 10.92, p < .001), and the interaction was significant (β = .10, t = 6.39, p < .001). Mediation by state optimism was moderated by trait optimism (index of moderated mediation = −.01, SE = .002, 95% CI: [−.012, −.004]), supporting H₃. When trait optimism was low or medium, a variable exchange rate increased state optimism, but when trait optimism was high, the effect of exchange rate on state optimism was attenuated.

Discussion

By showing that the mediating effect of state optimism is moderated by trait optimism, this study provides additional evidence for optimism as a process underlying the effect of exchange rate stability on loyalty point redemption.

This study also demonstrates the robustness of the effect of exchange rate stability on point redemption. In addition to replicating our main effect under the same conditions we had tested in Studies 1 and 2, we replicated our main effect when participants perceived that they had invested low effort in obtaining their points, when there was more versus less variability in the exchange rate, and when varying points rather than varying money drives the variable exchange rate (see Web Appendix D for these comparisons). These replications increase our confidence that the stability of the exchange rate—rather than other factors—drives the effect.

To further test the robustness of the findings, in Web Appendix Study 1 (see Web Appendix E), we measured optimism without asking participants to make choices. To rule out self-generated validity (Feldman and Lynch 1988) as the mechanism for effect, we manipulated whether participants made redemption choices (as in previous studies) prior to reporting state optimism or whether they reported state optimism without making choices. If self-generated validity were driving the effect, we would not observe differences in optimism across fixed and variable exchange rate conditions when participants do not make choices. However, we observe results consistent with those of our previous studies.

Study 4: Trait Optimism and Restrictive Expiration Dates Moderate Mediation by State Optimism

In Study 4, our goal was to moderate the effect of optimism on point redemption via individual differences in optimism (H₃) and the restrictiveness of the expiration date (H₄). To do so, we measured trait optimism and varied the information provided to participants about when their loyalty points would expire.

Method

We recruited 605 participants from MTurk (55% male, 43% female, 1% other categories; mean age category 35–44 years) and randomly assigned them to six between-subjects conditions, varying in both exchange rate stability (fixed vs. variable) and expiration date (points never expire vs. expiration date not mentioned vs. close expiration date). In the points never expire condition, participants were explicitly told that their loyalty points would not expire, and in the close expiration date condition, they were told their points would expire at the end of the summer (which was expected to be before they would reserve another hotel stay).

Participants were asked to imagine that “you will be taking a road trip this summer, and you will be staying at a different hotel each night. In total, you will need to make reservations for 17 hotel night stays. You have both money and loyalty program points to use for your hotel stays on this trip. Over the past several years, you have carefully chosen to stay at hotels within the Bienvenue loyalty program, allowing you to earn 270,000 loyalty program points.”

Across the 17 stays, dollar prices were distributed symmetrically around the average price of $150, with a range of $90 to $210. In the fixed exchange rate condition, point prices were a fixed ratio of the dollar price ($.01 per point), and varied between 9,000 and 21,000 points. In the variable exchange rate condition, participants could redeem 15,000 points for any stay while money prices varied, meaning that the exchange rate varied between $.006 to $.014 points per dollar. Dollar and point prices for each of the 17 stays across conditions are presented in Web Appendix F.

As in Studies 1 and 3, and following Drèze and Nunes (2004), participants were given budgets that would allow them to make all of their purchases using money or all of their purchases using points. As they made choices, participants saw their budget of dollars (points) decline when they spent dollars (points). We randomized the order of the offers within blocks (first 11 offers and last 6 offers) to ensure that all participants saw offers with the same average exchange rate, $.01 per point, across the first 11 offers.

After participants had made 11 choices, they rated their state optimism using the same measure we used in Study 3. In addition, to test the effect of individual differences on redemption through optimism, we measured trait optimism (LOT; Scheier and Carver 1985), and following Marshall et al. (1992), we used LOT Items 1, 4, and 5, to create an index of trait optimism.

Results

As in the previous studies, participants were familiar with loyalty programs: 71% were current members of a loyalty program, and 69% indicated that they had previously redeemed loyalty points, with no differences across conditions (p > .47).

Choices to redeem points

To account for repeated choices within subjects, we examined choices to redeem points or spend money using a generalized estimating equation with logit, in which stability of the exchange rate (fixed = 1, variable = −1), expiration date (restrictive expiration = 1, not mentioned = 0, no expiration = −1) and their interaction were between-subjects factors, and choices were nested within participants.

Replicating the results of the previous studies, point redemption was higher when the exchange rate was fixed (M = 81%) than when it was variable (M = 71%; β = −.44, Wald = 5.20, p < .05). The difference between fixed and variable conditions was larger in the no expiration date (M_fixed = 80% vs. M_variable = 69%; Wald = 10.54, p = .001) and expiration date not mentioned (M_fixed = 79% vs. M_variable = 65%; Wald = 12.42, p < .001) conditions than in the restrictive expiration date condition (M_fixed = 84% vs. M_variable = 77%; Wald = 5.67, p = .017), but the interaction between exchange rate stability and expiration date on redemption was not significant.

Moderated mediation

As in Studies 2 and 3, participants’ state optimism mediated the effect of exchange rate stability on loyalty point redemption (PROCESS Model 4; index = .01, SE = .003, 95% CI: [.005, .02]). Additionally, we predicted that this mediating effect would be moderated by trait optimism (H₃) and a restrictive expiration date (H₄).

To test moderated mediation, we used PROCESS Model 9 (Hayes 2022) to test trait optimism (H₃) and a restrictive expiration date (H₄) as simultaneous moderators. A fixed exchange rate significantly reduced state optimism (β = −.31, t = −6.74, p < .001), trait optimism predicted higher state optimism (β = .31, t = 33.40, p < .001), the main effect of expiration date was not significant (p > .70), the interaction between exchange rate and trait optimism was significant (β = .05, t = 5.55, p < .001), and the interaction between exchange rate and expiration date was significant (β = .12, t = 6.63, p < .001). At low levels of trait optimism, state optimism mediated the effect of exchange rate stability on redemption when points did not expire (effect = .05, SE = .006, 95% CI: [.04, .06]) and when expiration was not mentioned (effect = .03, SE = .005, 95% CI: [.02, .04]), but was attenuated when the expiration date was restrictive (effect = .01, SE = .005, 95% 95% CI: [−.002, .02]). At high levels of trait optimism, mediation was attenuated but still significant when points did not expire (effect = .02, SE = .005, 95% CI: [.01, .03]) and became nonsignificant when expiration was not mentioned (effect = −.003, SE = .00, 95% CI: [−.01, .005]). The index of partial moderated mediation was −.02 (95% CI: [−.03, −.01]) for expiration date and −.01 (95% CI: [−.013, −.006]) for trait optimism.

Discussion

These results provide additional evidence that the stability of the exchange rate between money and loyalty points influences point redemption and suggest that the effect is driven by optimism. Consumers are more optimistic about the future value of loyalty points when the value of these points changes across redemption opportunities, reducing their willingness to redeem points. Additionally, supporting our predictions, both trait optimism and a restrictive expiration date for points moderated the mediating effect of optimism in the relationship between exchange rate stability and point redemption.

General Discussion

In many loyalty programs with wide membership (e.g., American Airlines’ AAdvantage, United MileagePlus, Marriott Bonvoy, Hilton Honors), the exchange rate between points and money varies across redemption opportunities. Yet, despite the frequency with which we observe variable exchange rates in practice, the limited literature to date on point redemption (e.g., Drèze and Nunes 2004; Kwong, Soman, and Ho 2011; Stourm, Bradlow, and Fader 2015) has focused on cases in which the exchange rate between points and money is fixed (e.g., 100 points = $1 across redemptions) rather than variable (e.g., 25,000 points may be redeemed for a domestic flight, although flights in this category vary in their monetary prices). Our research demonstrates that redemption rates are systematically lower when the exchange rate is variable (vs. fixed), generating significant theoretical and managerial implications. For example, this result suggests that the use of variable (vs. fixed) exchange rates by loyalty programs may be encouraging consumers to stockpile their points.

Theoretical Implications

We extend earlier research on the effects of uncertainty to show that variability in the exchange rate between money and loyalty points across offers tends to increase optimism about the future value of loyalty points. Research suggests that consumers tend to update their beliefs more strongly in response to favorable or positive information and signals, compared with unfavorable or negative information and signals, leading to an optimism bias (Eil and Rao 2011; Korn et al. 2014; Möbius et al. 2022; Sharot et al. 2012; Sharot, Korn, and Dolan 2011). Further, consumers tend to be particularly optimistic about the outcomes of probabilistic events when they have a relationship with a firm (Reczek, Haws, and Summers 2014), as loyalty program members often do. Thus, even when the average exchange rate is the same under a variable and a fixed exchange rate, as in our studies, stronger updating in response to positive relative to negative information and stronger updating for loyalty points relative to money leads to greater optimism about the future value of points under a variable exchange rate than under a fixed exchange rate. In turn, greater optimism about the future value of loyalty points induced by a variable exchange rate reduces redemption of points under a variable exchange rate relative to a fixed exchange rate.

Our research also contributes to the literature on consumers’ perceptions of different forms of payment. Consumers seem to feel less “pain of paying” and spend more when they use forms of payment such as credit cards and gift cards rather than cash (Thomas, Desai, and Seenivasan 2011), perhaps because these forms of payment feel less like money. Further, consumers seem to spend differently when they use forms of payment such as credit cards, increasing their purchases of vice products (Thomas, Desai, and Seenivasan 2011). With regard to loyalty points, past research suggests that consumers tend to feel positive affect and emotion toward loyalty programs (Dick and Basu 1994; Lim, Chun, and Satopää, forthcoming; Reczek, Haws, and Summers 2014; Smith and Sparks 2009; Stourm, Bradlow, and Fader 2015; Yim, Tse, and Chan 2008). Yet past work has only begun to examine when and why consumers may spend loyalty points and money differently. Consumers’ decisions to spend loyalty points may be influenced by the psychological value of points in addition to their economic value (Stourm, Bradlow, and Fader 2015). Further, if consumers perceive significant utility boosts from redeeming points at better exchange rates (Lim, Chun, and Satopää, forthcoming), this could motivate them to time their redemptions. We extend research examining differences in spending across forms of payment by demonstrating that a variable exchange rate between points and money tends to systematically reduce loyalty point redemption by increasing optimism about the future value of loyalty points. We identify a precise mechanism, state optimism, that systematically influences consumers to spend loyalty points and money differently.

Managerial Implications

From the perspective of the firm, varying the exchange rate between points and money offers more operational flexibility in influencing point redemption rates than fixing the exchange rate. Indeed, firms might see exchange rate variability as a tool to reduce members’ redemption of loyalty points. However, firms that take a long-term view of their relationships with loyalty program members may be concerned that if a variable exchange rate reduces point redemption, it may reduce the firm's benefits of subsequent sales and revenue from the rewarded behavior effect (Dorotic et al. 2014; Kopalle et al. 2012; Smith and Sparks 2009; Taylor and Neslin 2005) and member engagement with the loyalty program and brand (Dowling and Uncles 1997; O’Brien and Jones 1995).

On the consumer side, consumers may derive some emotional value from stockpiling points (e.g., savoring; Stourm, Bradlow, and Fader 2015), but they do not derive any economic value from points that they do not redeem. Given that loyalty program points may lose value over time, it is somewhat surprising that consumers are optimistic about the future value of loyalty program points. If consumers expect devaluation of points, they should prefer to redeem points instead of spending money and use up their points as soon as possible. In practice, terms and conditions of loyalty programs stipulate that point value and reward structure can change any time, and many loyalty programs have devalued their loyalty points in the past. For example, in 2017, Air Miles lowered the value of miles in the vacation or cruise category by about 20% (Harris 2017), and in 2019, United Airlines devalued its miles by raising the award costs of most partner awards by 10% (Schlappig 2020). Not surprisingly, given the possibility of devaluation, blogs and websites often urge consumers to redeem their points instead of spending money (for example, see Arghandewal 2021). Yet, consumers consistently acknowledge reluctance to spend loyalty points (Stourm, Bradlow, and Fader 2015), and our research suggests that this may be due to their optimism about the future value of points. Future research could explore the extent to which observed or experienced devaluations in loyalty programs affect this optimism as well as loyalty point hoarding and spending behaviors.

Although most loyalty programs use either a fixed exchange rate or a variable exchange rate, and loyalty programs do not usually shift between regimes, loyalty program managers still face important decisions regarding other factors such as point expiration dates. In practice, different loyalty programs have divergent policies on the expiration dates of points, and our research results are also instructive here. Consistent with research demonstrating higher levels of optimism when considering distant future outcomes compared with those in the near future (Aromí 2019; Frankel 2011; Gilovich, Kerr, and Medvec 1993; Ho and Mauro 2016), we observe that a restrictive expiration date for loyalty points moderates the effect of exchange rate stability on optimism bias.

Some loyalty programs allow points to expire, but other loyalty program promise that their points will never expire. Furthermore, within programs implementing specific expiration policies, managers have the option to either emphasize and actively remind customers of impending expirations or to refrain from doing so, as well as to offer varying terms to different consumer segments. Our research suggests that stricter expiration policies tend to increase immediate point redemption rates by mitigating optimism bias among consumers. We believe that examining the effect of different types of point expiration policies (e.g., time-based expiration vs. activity-based expiration) would be an interesting topic for future research. Moving forward, future research should further examine postexpiration effects among consumers who missed the deadline for redeeming points. How do consumers who are left with expired points change their attitude toward points and their purchase and redemption behavior with a firm?

More broadly, we look forward to seeing future research examine other characteristics of the exchange rate that may have a stronger or weaker effect on consumers’ point redemption decisions. Numerosity (scaling) of the exchange rate is one such example. Like other currencies, loyalty points can have different nominal exchange rates with money (local currency). Loyalty programs can be designed so that the value of one unit of the consumer's local currency is worth a large multiple of loyalty points (high numerosity, e.g., $1 = 100 points) or so that their unit values are more similar (low numerosity, e.g., $1 = 1 point). Prior research suggests that using a high numerosity medium tends to increase the value members ascribe to the points they earn and motivates consumers to join a program (Hsee et al. 2003). However, if greater (positive) bias in the value of points prevents consumers from redeeming points, as we observe in our studies, high numerosity loyalty programs may be encouraging consumers to stockpile their points, reducing opportunities to induce the rewarded behavior effect and increase member engagement. Hence, our work suggests that numerosity may have distinct effects at different stages of consumer engagement in a loyalty program: While it may increase the motivational value of points during points earning, it may reduce consumers’ propensity to redeem points, reducing the motivational value of the program during point redemption. Delving more deeply into the impact of high numerosity on consumers’ decisions to redeem loyalty points promises to yield valuable insights.

Finally, we look forward to future research investigating whether and how other point monetization strategies recently implemented by firms influence redemption behavior. For example, selling points directly to consumers, making point transfers easier, and allowing consumers to combine money and points for a purchase (Drèze and Nunes 2004) all might make points feel more like money to consumers. In so doing, these strategies may reduce consumers’ optimism about the future value of their loyalty points relative to money, potentially increasing redemption. Although competitive pressure might motivate firms to offer these options to their loyalty program members, we caution that strategies that “monetize” loyalty points may cause these points to lose their special meaning to consumers, which can make them particularly valuable for loyalty programs.

Supplemental Material

sj-pdf-1-mrj-10.1177_00222437241255650 - Supplemental material for Paying with Money or Paying with Points: How Variable Versus Fixed Exchange Rates Influence Loyalty Point Redemption

Supplemental material, sj-pdf-1-mrj-10.1177_00222437241255650 for Paying with Money or Paying with Points: How Variable Versus Fixed Exchange Rates Influence Loyalty Point Redemption by So Yeon Chun and Rebecca W. Hamilton in Journal of Marketing Research

Footnotes

Acknowledgments

The authors would like to thank their colleagues at American University, Cornell University, Dartmouth, Drexel University, INSEAD, Johns Hopkins University, National University of Singapore, the University of Chicago, the University of Toronto, Vienna University of Economics and Business, and the ACR and INFORMS academic conferences for their very helpful suggestions on this research.

Coeditor

Vikas Mittal

Associate Editor

Manoj Thomas

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors were supported by their universities, but received no external financial support for the research, authorship, and/or publication of this article.

Notes

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Kimmy Wa

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