Can Non-Tiered Customer Loyalty Programs Be Profitable?

Abstract

We study the impact of launching a non-tiered customer loyalty program on consumers’ spending per visit, frequency of visits and attrition rates, as well as the overall customer value. We demonstrate these results both through descriptive difference-in-difference estimations as well as through an HMM-style we develop. We find the program increases customer value by almost 19% over a five-year horizon, which is considerably larger than has been previously found for non-tiered loyalty programs. Most of the impact of the loyalty program comes through attrition: We show that the program’s reduction in attrition accounts for over 70% of the program’s total lift, while increased frequency accounts for approximately 20% of the program’s lift. The impact of the loyalty program on spending per visit is negligible. Further, the program effects are heterogeneous across consumers of varying pre-program involvement: The relative lift in customer value is highest for the low- and high-frequency segments and much smaller for the moderate-frequency segment. This finding is driven by a similar pattern in the effect of the program on attrition. Frequency effects, however, are higher for customers who were already high-frequency visitors compared to lower frequency prior to program introduction.

Keywords: Loyalty Program, CRM

JEL Classification: M31