Strategic Consumers, Revenue Management, and the Design of Loyalty Programs

46 Pages Posted: 18 May 2015 Last revised: 24 Jun 2018

See all articles by So Yeon Chun

So Yeon Chun

Georgetown University - Robert Emmett McDonough School of Business

Anton Ovchinnikov

Smith School of Business - Queen's University

Date Written: June 3, 2018

Abstract

We study the interaction between the design of a premium-status loyalty program, revenue management, and strategic consumer behavior. Specifically, we consider a contemporaneous change where firms across several industries switch their loyalty programs from quantity-based to spending-based designs. This change has been met with fierce opposition from the media and consumers. We present a model for strategic, forward-looking, and status-seeking consumers' decisions on how much to purchase over a certain time period, and endogenously derive strategic consumer demand as a function of the firm's prices and loyalty program decisions. We then incorporate such demand into the firm's pricing and loyalty program design problem and compare different loyalty program designs. We identify the conditions under which, by coordinating pricing and loyalty decisions, the firm can benefit from strategic consumer behavior, and show that by switching to a spending-based design, the firm can benefit from strategic behavior even more, under broader conditions, and in a Pareto-improving way. We also analyze combined designs, which utilize quantity and/or spending requirements, and provide additional insights on how the firm can better manage the transition toward spending-based designs, possibly minimizing negative consumer reactions.

Keywords: marketing-operations interface, strategic consumer behavior, loyalty (reward) programs, premium status, revenue management

JEL Classification: M31, C5

Suggested Citation

Chun, So Yeon and Ovchinnikov, Anton, Strategic Consumers, Revenue Management, and the Design of Loyalty Programs (June 3, 2018). Georgetown McDonough School of Business Research Paper No. 2606791. Available at SSRN: https://ssrn.com/abstract=2606791 or http://dx.doi.org/10.2139/ssrn.2606791

So Yeon Chun (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Anton Ovchinnikov

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

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