For many loyalty program providers, program financial liability is a serious concern. Since members can redeem their points for rewards anytime, the business carries liabilities toward these potential future obligations. Such liabilities can be quite large. For example, American Airlines’ 2017 10-K filing reports $420 million worth of loyalty program liability. For Hilton Hotels, the guest loyalty program liabilities are valued at $889 million, according to the company’s form 10-K. With new accounting guidelines for loyalty programs about to take effect, liabilities will become an even more salient issue for loyalty program providers.
One common way of limiting liabilities is to set a point expiration policy so that points automatically expire after a set period of time (or a set period of inactivity). If your program points do not expire or expire after a longer period of time than you’d like, you may want to consider tightening up the expiration policy. But how will that affect your customers? Should you make the switch? Let’s look at the pros and cons for such a policy shift.
Pros of a Shorter Loyalty Program Expiration Policy
- A shorter expiration time reduces the number of redeemable points in the long run and decreases program liabilities.
- Because of the time pressure, a shorter expiration policy discourages your customers from shopping elsewhere. If they want to earn enough points for rewards before the points expire, they may need to put all their eggs in one basket.
- According to motivation research, cutting the expiration time may motivate members to work harder, either because of the increased challenge level or because of their desire to regain control.
Cons of a Shorter Loyalty Program Expiration Policy
- The move to cut the expiration time obviously benefits the firm without any benefit to customers. This may damage customer goodwill.
- Since the shorter expiration policy places tighter restrictions on members, they may revolt against the controlling action. In extreme cases, they may leave the program or the business altogether.
- For consumers who do not have a lot of need for your product (e.g., not traveling that much), the program may become irrelevant to them. Even if these consumers buy only from your business, they may still have trouble earning enough points before they expire.
Consumer Flexibility is the Key
Will the pros dominate or will the cons triumph? A research paper I published last year offers some answers to the question. In the project, my coauthor and I analyzed the before- and after-data from a convenience store chain’s program expiration policy change. We found that the key is consumer flexibility. If consumers have the flexibility to adapt to the new policy, the effect may be surprisingly positive for the firm. What contributes to consumer flexibility? Our analyses of the real-world data together with a lab experiment show that at least two things can contribute to flexibility: usage level and multi-store shopping behavior.
Usage Level and Flexibility
Since people who already buy a lot are likely to be reaching the ceiling of their demand, they are not very flexible in adjusting to the change. In our real-world case, these heavy buyers reacted negatively to the expiration policy change. But for light buyers, who accounted for about 70% of our sample, actually reacted positively to the policy change.
It’s important to know however that convenience store is a category with a fairly flexible demand. People can buy very little or a lot from a convenience store instead of other food and retail outlets. This makes it easier for light buyers to increase their demand when rushed. For your business, you need to think about if your product demand is more fixed or flexible. If it’s a fairly fixed demand product, even light buyers may not be able to really increase their demand. As a result, they may not be very flexible either.
Multi-Store Shopping and Flexibility
Another contributor to flexibility is how much consumers buy from multiple brands/stores. When consumers routinely buy from multiple sources, they can pull their purchases from those other places if they really want to earn points in your loyalty program. This gives them the flexibility to deal with the policy change. But if they already put all of their eggs in your basket, there is very little they can do to try to earn points faster before points expire. This means that if you already have a very high share of wallet from your customers (awesome news for you of course), shortening the expiration policy may be tricky and may cause more backlash. But if your share of wallet is moderate to low, you may gain more from the shorter expiration time instead.
Putting it Together
To summarize, you are more likely to see a positive outcome from shortening your expiration policy if:
- The demand for your product tends to be flexible rather than fixed.
- You have a large portion of light buyers.
- Your customers routinely buy from multiple brands or stores besides your business.
Based on our research, here are a couple of things you can do if you intend to shorten your expiration policy:
- If you have a multi-tiered program, consider imposing different expiration times for different tiers. Give higher tier members a more lenient expiration policy. This solves the problem for both light and heavy buyers.
- When introducing the shorter expiration policy, simultaneously introduce more opportunities for point earning by introducing more product lines, cross-selling, or forging loyalty program partnerships.
- For high-flexibility consumers I described earlier, emphasize their flexibility and how it is possible to earn rewards even with the shorter expiration policy so that the task seems doable.
If you want to read full details of our research, you can download the full paper “The Effect of Loyalty Program Expiration Policy on Consumer Behavior“. Happy reading! 🙂