When points cover the next purchase

Rewards and consumer psychology

The reason this approach may be appealing lies not just in the fact that it provides more payment options to consumers. It also gets at what motivates people to buy. In consumer psychology, points are what’s known as a reinforcer, said Engage People CTO Len Covello.

“A reinforcer, when presented after a behavior, causes the probability of that behavior's occurrence to increase,” said Covello. “Rewards or reinforcement is an objective way to describe the positive value that an individual ascribes to an object, behavioral act or an internal physical state.”

In this case, the person would ascribe that positive value to the accumulation of points because it helps them achieve the secondary goal of redeeming the points for a reward.

“In loyalty programs, program members accumulate rewards because they have exhibited some action, such as shopping at a store, using their credit card, or some other behavior that the program owner desires,” Covello said. “In the case of paying with points, the reward is the greater ubiquity of the reward currency in achieving the desired consumer objective like redeeming for a trip, a product, fuel, or a service – really, the world of redemption in this model is infinite.”

The evolution of points

Points-based loyalty programs date back as far as the Betty Crocker catalog, and they are now ubiquitous across not just retail, but also the frequent flyer programs of airlines, the rewards programs of hotels and credit cards.

With more popularity, the way that consumers use points has also evolved.

“Rather than simply being redeemed for a specific purchase like a trip, points are now seen as any other payment method or currency that consumers want to use in the same way as cash, debit, or credit,” Covello said. “Consumers are using points to make more mundane purchases on sites like Amazon, while also using them on more aspirational products like electronics or jewelry.”

In North America, companies issue approximately $48 billion in loyalty points or miles annually to program members, Engage People found. The result is a new form of savings. There is an estimated $100 billion in points available to spend that members have banked.

Increasingly, Engage People is seeing an increase in transactions and points redeemed as more of the owners of these loyalty programs make PwP available. Program members who were a part of loyalty programs redeemed over 44 billion points.

With 40-year-high inflation driving up prices and interest rates rising as a result of rate hikes, loyalty points could become even more attractive to consumers. When consumers pay more for essentials like food, fuel and housing that they need, points can become a way to pay for things that they want.

“Consumers want to utilize points for discretionary or aspirational items because they think of this as ‘found’ money,” Covello said. “Accessing this pool of funds for purchases in inflationary times provides a real benefit to consumers, helping to increase the purchasing power for program members.”

Adding a payment option

For brands and retailers, adding PwP can become a payment option that gets added at checkout, just like buy now, pay later or cryptocurrency. Getting started with the program requires an existing loyalty program that issues points with an established value. Infrastructure must also be in place to help support program member communication and messaging.

“Since loyalty points are used to purchase products online or in-store like any other currency, it removes the need to manage returns or catalogs for the program owner,” Covello said.

In the end, PwP stands as a way to offer flexibility to consumers, and allow them to shop in the way that best works for them. When retailers provide that, customers remember it, and are more likely to keep coming back. That’s a reward for the retailers in its own right.