The Influence of Loyalty Programs and Short-Term Promotions on Customer Retention

Abstract

Despite the proliferation of loyalty programs in a wide range of categories, there is little empirical research that focuses on the measurement of such programs. The key to measuring the influence of loyalty programs is that they operate as dynamic incentive schemes by providing benefits based on cumulative purchasing over time. As such, loyalty programs encourage consumers to shift from myopic or single-period decision making to dynamic or multiple-period decision making. In this study, the author models customers' response to a loyalty program under the assumption that purchases represent the sequential choices of customers who are solving a dynamic optimization problem. The author estimates the theoretical model using a discrete-choice dynamic programming formulation. The author evaluates a specific loyalty program with data from an online merchant that specializes in grocery and drugstore items. Through simulation and policy experiments, it is possible to evaluate and compare the long-term effects of the loyalty program and other marketing instruments (e.g., e-mail coupons, fulfillment rates, shipping fees) on customer retention. Empirical results and policy experiments suggest that the loyalty program under study is successful in increasing annual purchasing for a substantial proportion of customers.

The Small-Area Hypothesis: Effects of Progress Monitoring on Goal Adherence

“…Feedback on goal progress is a key to successful customer-relationship management in general and reward programs in particular (Deighton 2000;Lewis 2004;Taylor and Neslin 2005). Marketers should design or structure feedback interventions that emphasize small areas and thus increase the perceived impact of the next action.…”

“…The current research explores the small-area hypothesis in the context of reward programs (Bagchi and Li 2011;Deighton 2000;Lewis 2004;Taylor and Neslin 2005), in which higher motivation translates into a temporal dimension, including shorter interpurchase/visit times, and a quantity dimension, including more units of purchase and a higher participation rate. The manifestation of motivation depends on the type of program.…”

Perceived benefits of loyalty programs: Scale development and implications for relational strategies

“…However, empirical research tends to focus on the benefits of loyalty programs from a firm perspective (Bolton, Kannan, and Bramlett, 2000;Lewis, 2004), leaving open the issue of how members perceive loyalty programs and which advantages they may derive from their participation Simonson, 2002, 2003;O'Malley and Prothero, 2004). So far, research suggests that customers value loyalty programs mainly because of the economic gains these programs provide (e.g., Peterson, 1995).…”

A cross-cultural study of the perceived benefits of a retailer loyalty scheme in Asia

“…However, there are still no clear indications as to whether these initiatives are successful with some research supporting the value of loyalty cards to retailers (Lewis, 2004;Taylor and Neslin, 2005;Meyer-Waarden, 2007;Lal and Bell, 2003) while others are not as supportive of its value (Sharp and Sharp, 1997;Passingham, 1998;Liebermann, 1999;Mauri, 2003;Mägi, 2003;Ergin et al, 2007).…”