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

Posted: 24 Oct 2012

See all articles by Praveen K. Kopalle

Praveen K. Kopalle

Dartmouth College - Tuck School of Business

Yacheng Sun

Independent

Scott Neslin

Dartmouth College - Tuck School of Business

Baohong Sun

Cheung Kong Graduate School of Business (New York)

Vanitha Swaminathan

University of Pittsburgh

Date Written: 2012

Abstract

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.

Keywords: loyalty program, customer tier programs, frequency reward, database marketing, segmentation

Suggested Citation

Kopalle, Praveen K. and Sun, Yacheng and Neslin, Scott and Sun, Baohong and Swaminathan, Vanitha, The Joint Sales Impact of Frequency Reward and Customer Tier Components of Loyalty Programs (2012). Marketing Science, Vol. 31, No. 2, 2012; pp. 216-235; DOI: 10.1287/mksc.1110.0687, Tuck School of Business Working Paper No. 2013-111, Available at SSRN: https://ssrn.com/abstract=2161130

Praveen K. Kopalle (Contact Author)

Dartmouth College - Tuck School of Business ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-3612 (Phone)
603-646-1308 (Fax)

Yacheng Sun

Independent ( email )

Scott Neslin

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Baohong Sun

Cheung Kong Graduate School of Business (New York) ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/faculty/sun-baohong/

Vanitha Swaminathan

University of Pittsburgh ( email )

135 N Bellefield Ave
Pittsburgh, PA 15260
United States

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