Strategic Consumers, Revenue Management, and the Design of Loyalty Programs
46 Pages Posted: 18 May 2015 Last revised: 24 Jun 2018
Date Written: June 3, 2018
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: Suggested Citation