This paper investigates the effects of reward redemption hurdles in customer reward programs. Our research context is ``buy X, get one free'' (BXGO) reward programs, which incorporate two common redemption hurdles: a redemption threshold (X purchases are required for a free product) and an expiry policy (unused reward points are lost after T periods of inactivity). Our analysis leads to the following results. First, both redemption hurdles create ``points pressure,'' such that an incremental purchase becomes more valuable as a consumer's reward points approach the redemption threshold or the expiration date. Second, a BXGO program can create a win-win for the seller (higher profit) and the consumers (higher aggregate consumer welfare), compared with not offering a reward program. Third, if consumers derive transaction utility for the rewarded product, a BXGO program can be viable even when reward points never expire, which rationalizes why many BXGO programs choose not to stipulate an expiration date. We discuss the managerial implications of our results.
This is a joint work with Yacheng Sun from Tsinghua University and Dan Zhang from University of Colorado Boulder.