Valuing New Currencies: A Framework for Future Research

Prices are typically expressed in terms of legal tender (e.g., US$). Research in the last two decades has examined how payment modes, such as cash, credit cards, debit cards, and gift certificates, affect consequences such as the likelihood of purchase, the amount spent, and the variety of items purchased. The purpose of this chapter is to suggest that these conclusions may be contingent on the price of the item/service being expressed in legal tender. When prices are expressed in alternative currencies (e.g., airline miles), then there could be a variety of follow-up consequences that would lead to limiting boundary conditions on previous findings in the domains of behavioral pricing research. The new currency that I focus on is airline miles. This new currency is becoming ubiquitous with the growth of airline loyalty programs. It is unclear how consumers who are endowed with them value them and how they relate them to legal tender. It is equally unclear how managers of loyalty programs should price products/services in these currencies and what array of products they should make available, so as to encourage/discourage consumers to use their unspent balances or let them lapse. This chapter starts off with examples from popular airline loyalty programs that demonstrate their heterogeneity across time, across offerings, and across programs. From this discussion, I summarize some of the dimensions of money and ways in which the new currency of airline miles differs from the traditional legal tender (e.g., US$). I then build on a series of testable propositions regarding how miles are valued, with implications for how they will be spent depending on different types of communication appeals. I end with implications for managers as to how to design loyalty programs with a specific focus on how to price products using miles. Theoretical implications for behavioral pricing are discussed as are managerial implications for loyalty programs…