Credit Cards

How our love of loyalty programs is causing us to spend more

By: Dominic Licorish on June 22, 2017
Article image

Canadians love loyalty rewards programs. The scale of the country’s loyalty points market is mind-boggling — according to a 2015 study from Colloquy Loyalty Census Canada, there are 130 million loyalty memberships in Canada. That averages out to more than four memberships per person.

And we use those memberships a lot. Bond Brand Loyalty estimates Canadians are currently hoarding $16 billion worth of points, or an average of $629 per person. The agency estimates that the number of loyalty memberships per Canadian has grown 25% since 2013.

Everywhere you look, from clothing stores to fast food chains, new loyalty programs are cropping up every year. And we’re more than eager to sign up and reap the benefits.

Well, the perceived benefits. In a country that has one of the highest debt-to-income ratios in the world — debt constitutes 168% of disposable income for the average Canadian — rewards programs might be an insidious part of the problem.

“Customers should know that when they sign up with these kind of rewards program — even if they self-control, don’t overspend, and take advantage of bonus promotions and stuff in a responsible way, they’re not getting all this stuff free,” said Andrew Ching, professor at the University of Toronto's Rotman School of Management.

How points can make you do stupid things

While there are a lot of great parts to loyalty programs — helping to pay for travel, offering discounts on your purchases — the programs themselves are designed in a way that promotes overspending.

Our managing editor, John Shmuel, recalls being at Shoppers Drug Mart a few weeks ago during a 20 times the points event. He bought about $15 worth of merchandise and had enough points to get $10 off his purchase.

But, when he stepped up to the register and was confronted with the chance to earn 20 times the points he normally would, he took it and skipped the discount.

In the end, his decision earned him a mere $4 back in points.

“That really opened my eyes,” he says. “I had a choice to choose immediate savings or immediate rewards, and I chose rewards without hesitation.”

Why do loyalty programs work so well?

People like to get good deals. There’s clearly an evolutionary component — anyone who can get more for less is clearly someone who will be able to stay ahead.

And that’s what loyalty programs take advantage of. They’re tapping into your innate desire to get a good deal. You may not be getting a product on sale, but at least you’re getting points, which can be redeemed in the future for a discount or free goods.

But Ching points out that at the end of the day, the rewards offered can be relatively miniscule. And there’s something else to keep in mind. If you’re obsessing on maximizing points, you’re doing two things: you’re thinking about buying more products, and you’re devoting a lot of mental bandwidth to doing it.

The trick is in the language used. One thousand points per dollar sounds like a lot more than getting, say, 1% cash back. Combine this with enticing reward imagery like tropical vacations and it doesn’t matter about the actual dollar value of the rewards. People are going to go with the prize that seems the most satisfying.

“So that makes it look like — psychologically — like you’re earning a lot more points, and the number effect seems to have quite a bit of impact,” Ching says.

Another thing that gets people into points is the game show-like atmosphere surrounding it. With cash back, you get some money back and that’s it. With a points program, they’re quick to advertise just how much free stuff you could earn with their points. Point programs can get you merchandise, vacations, gift cards, and more perks if you’re a higher tier member of some programs.

The act of getting points (language which suggests playing sports or video games) to gain prizes gamifies your shopping, making you feel accomplished for spending.

The danger of being obsessed with points

More often than not, if I’m getting take out, I’ll get something using my ritual app so that I’ll either get a discount or earn points towards one. If I’m buying lunch already, why not make sure I get something extra out of it right? But I have to be careful. Just because I’m earning points doesn’t mean I should buy more food.

On a societal level, points programs can also be dangerous because they give people a reason to take on more debt. Part of being a smart shopper means having a budget, but when you add in a promotion or rewards points, then you’re more likely to justify going over budget. You’re getting points, after all.

You can still be responsible with points, of course

That being said, there are millions of people who don’t get sucked in the points rabbit hole and manage to use them responsibly.

Marjean Wilmot of Ajax, Ont. says she was able to get two-and-a-half trips (to New York City and Calgary) with nothing but her Air Miles.

“It’s not that you shop more, but you shop with a strategy,” she says.

She would never describe herself as “obsessed”, but she definitely goes out of her way occasionally to maximize her points, like signing up for newspapers she didn’t want because they had promos for bonus Air Miles.

Either way, loyalty programs are here to stay

Given their success, loyalty points aren’t going anywhere.

As Ching points out, it’s important for consumers to be aware of the risks as well as the benefits. Loyalty programs are not inherently a bad financial choice, as long as you remember that points are not free — especially if they’re causing you to spend more.

Next time you use your loyalty card, look at what you just bought. Then think about what you might have bought if you didn’t get the points. If there’s a disconnect between the two, it might be time to retire your rewards card.