Leveraging Loyalty Programs Using Competitor Based Targeting

56 Pages Posted: 22 Apr 2019 Last revised: 7 May 2021

See all articles by Wayne Taylor

Wayne Taylor

Southern Methodist University (SMU) - Marketing Department

Brett Hollenbeck

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: November 30, 2020

Abstract

Loyalty programs (LPs) are widely used by firms but not well understood. These programs provide discounts and perks to loyal customers and are costly to administer, but produce uncertain changes in spending patterns. We use a large and detailed dataset on customer shopping behavior at one of the largest U.S. retailers before and after joining a loyalty program to evaluate how behavior changes. We combine this with detailed spatial data on customer and store locations, including the locations of competing firms. We find significant changes in behavior associated with joining the LP with a large amount of heterogeneity across customers. We find that location relative to competitors is the factor most strongly associated with increases in spending following joining the LP, suggesting that the LP's quantity discounts work primarily through business stealing and not through other demand expansion. We next estimate a model of what variables determine how spending will change after joining the LP. We use high-dimensional data on spatial relationships between customers, the focal firm's stores, and competing stores as well as customers' historical spending patterns. This model is used to test whether past sales data reflecting customer's vertical value to the firm or spatial data reflecting customer's horizontal vulnerability are more important determinants of post-LP spending increases. We show how LASSO regularization estimated on complex spatial relationships are more effective than are models using past sales data or simpler spatial models. Finally, we show how firms can use customer and competitor location data to substantially increase LP performance through spatially driven segmentation.

Keywords: loyalty programs, predictive analytics, spatial models, retail competition, LASSO estimation, price discrimination

Suggested Citation

Taylor, Wayne and Hollenbeck, Brett, Leveraging Loyalty Programs Using Competitor Based Targeting (November 30, 2020). Wharton Customer Analytics Research Paper, SMU Cox School of Business Research Paper No. 19-10, Available at SSRN: https://ssrn.com/abstract=3353432 or http://dx.doi.org/10.2139/ssrn.3353432

Wayne Taylor

Southern Methodist University (SMU) - Marketing Department

United States

Brett Hollenbeck (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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