The Impact of Frequent Shopper Programs in Grocery Retailing

41 Pages Posted: 6 Dec 2002

See all articles by David E. Bell

David E. Bell

Harvard Business School - Marketing Unit

Rajiv Lal

Harvard Business School

Date Written: July 12, 2002

Abstract

Frequent Shopper programs are becoming ubiquitous in retailing. Retailers seem unsure however about whether these programs are leading to higher loyalty, or to higher profits. In this paper we analyze data from a US supermarket chain that has used a number of frequent shopper rewards to improve sales and profitability. We find that while these programs are profitable, this is only because substantial incremental sales to casual shoppers (cherry pickers) oset subsidies to already loyal customers. In this way our findings are inconsistent with existing theories about how frequent shopper programs are supposed to work. We construct our own Hotelling - like model that explicitly models cherry picking behavior and show that its predictions match the data quite closely. We further test the predictions of our model by characterizing the impact of such programs on trip frequency and basket size. We then use the model to examine more complex scenarios. For example, our analysis suggests that frequent shopper programs may be unprofitable if they eliminate all cherry picking. This may explain why some retailers seem dissatisfied with their programs. We end by proposing a solution that retains the benefits of the frequent shopper programs and yet continues to let supermarkets benefit from price discrimination.

Suggested Citation

Bell, David E. and Lal, Rajiv, The Impact of Frequent Shopper Programs in Grocery Retailing (July 12, 2002). Review of Marketing Science (ROMs) Working Paper; HBS Marketing Research Paper. Available at SSRN: https://ssrn.com/abstract=357580 or http://dx.doi.org/10.2139/ssrn.357580

David E. Bell (Contact Author)

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6366 (Phone)

Rajiv Lal

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-1257 (Phone)
617-496-5637 (Fax)

HOME PAGE: http://dor.hbs.edu/fi_redirect.jhtml?facInfo=bio&facEmId=rlal

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