Journal Article

The Joint Sales Impact of Frequency Reward and Customer Tier Components of Loyalty Programs

Neslin, Scott A., Sun, Yacheng, Sun, Baohong, Kopalle, Praveen K., Swaminathan, Vanitha

2012

Overview

We estimate the joint impact of the frequency reward and customer tier components of a loyalty program on customer behavior and resultant sales. We provide an integrated analysis of a loyalty program incorporating customers' purchase and cash-in decisions, points pressure and rewarded behavior effects, heterogeneity, and forward-looking behavior. We focus on four key research questions: (1) How important is it to combine both components in one model? (2) Does points pressure exist in the context of a two-component loyalty program? (3) How is the market segmented in its response to the combined program? (4) Do the programs complement each other in terms of the incremental sales they produce? Our most basic message is that the frequency reward and customer tier components of loyalty programs should be modeled jointly rather than in separate models. We find strong evidence for points pressure for both the customer tier and frequency reward components using both model-based and model-free evidence. We find a two-segment solution revealing a \"service-oriented\" segment that highly values cash-ins for room upgrades and staying in \"luxury\" hotels, and a \"price-oriented\" segment that is more price sensitive and highly values the frequency reward aspects of the loyalty program. Furthermore, we find that both components generate incremental sales. Also, there was slight synergy between the programs but not a huge amount. Overall, each component contributes to increased revenues and does not interfere with the other.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences (INFORMS),Institute for Operations Research and the Management Sciences
• Subject: Analysis / Brand loyalty / Competition / Consumer behavior / Consumer behaviour / Customer loyalty programs / customer tier programs / Customers / Data base marketing / Database marketing / Decision making / Dynamic modeling / Estimation / Evaluation / frequency reward / Hotels / Hotels & motels / Impact analysis / loyalty program / Loyalty programs / Loyalty programs (Marketing) / Market segments / Marketing / Marketing strategies / Modeling / Platinum / Pressure effects / Sales / segmentation / Studies / U.S.A