Coalition Loyalty Program Not Working? Perhaps You’re Doing It Wrong

41 Pages Posted: 10 Mar 2018

See all articles by Pedro Gardete

Pedro Gardete

Stanford Graduate School of Business

James Lattin

Stanford University - Graduate School of Business

Date Written: March 10, 2018

Abstract

In this paper we explore the determinants of profitability for coalition loyalty programs. We consider a setting in which each of two firms competing in one market may form a coalition loyalty program with one of two firms in a different market. Firms in the same program jointly set the reward to consumers who buy from both coalition partners, but they set their own prices independently. We find that these programs are profitable for all firms, even when no value is created by the mere existence of rewards (i.e., when firms and consumers value $1 worth of rewards equally). The intuition is that joint loyalty programs allow each participating firm to leverage its partner’s market power and charge higher prices. This result, however, depends crucially on several design elements of the program. First, rewards must be structured so that consumers earn more when they shop broadly across firms in the coalition than when they shop at only a single firm. Second, the reward program manager must be able to take into account the prices of individual firms when setting the value of rewards. Third, firms joining a coalition must be able to negotiate the share of program costs they will carry; firms must be charged according to their value added to the coalition (e.g., firms with greater market power will bear a lower share of program costs) and not taxed as a proportion of their revenues. Our theoretical findings provide insight into the forces underlying coalition loyalty programs in competitive settings and are suggestive of the impact of practical design decisions on program profitability.

Keywords: Loyalty Programs, Coalitions, Cross-Market Bundling

Suggested Citation

Gardete, Pedro and Lattin, James, Coalition Loyalty Program Not Working? Perhaps You’re Doing It Wrong (March 10, 2018). Stanford University Graduate School of Business Research Paper No. 18-13. Available at SSRN: https://ssrn.com/abstract=3137383 or http://dx.doi.org/10.2139/ssrn.3137383

Pedro Gardete (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

James Lattin

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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