Too Close to Quit: The Effect of Reward Fungibility on Consumer Behavior

The ubiquity of loyalty programs has given rise to a multitude of new currencies (e.g., frequent flier miles, Hilton HHonors points, Diner’s Club “Club Rewards”) that people accrue, save and spend much like traditional paper money. Unlike cash, these alternative currencies are not perfectly fungible. In other words, they are neither universally accepted, nor can they be spent in any increment, thereby restricting the ways in which consumers can utilize these assets. This research demonstrates how firms can take advantage of this lack of fungibility to influence the marginal value consumers ascribe to these currencies by strategically setting reward levels at which these currencies acquire redemption value. By using rewards as goals, marketing managers can impact consumer decision-making and in turn loyalty. However, we show that too many rewards (too much fungibility) can weaken loyalty as spending becomes too easy and the rewards no longer serve as meaningful goals.