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 regressions as well as through a duration-dependent Hidden Markov Model we develop. We find the program increases customer value by almost 30% 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 80% of the program’s total lift, while increased frequency accounts for less than 20% of the program’s lift. The program’s lift is highest for least- and most- frequent automatic members, who experience reductions in attrition rates after joining the program. The impact of the loyalty program on spending per visit is negligible.

Keywords: Loyalty Program, CRM

JEL Classification: M31