The Joint Impact of Revenue-based Loyalty Program and Promotions on Consumer Purchase Behavior

Abstract

We empirically investigate consumer dynamics within a revenue-based loyalty program in which members are rewarded based on their accumulated spending. We study the impact of four program design features on member purchase behavior, including membership requirements, nonlinear point redemption thresholds, timing of rewards, and point expiration policy. We also study how the effect of these programs features depends upon the firm's promotion activities. We find evidence of a point/time pressure effects for membership renewal and obtaining a reward. We also find that as the value per point increases across nonlinear thresholds, members exert greater effort for larger rewards. We also find that both delayed rewards and membership renewal requirements can create a lock-in effect because members continue purchasing more, even after accomplishing the goal. Lastly, we find that members are less promotion sensitive when facing larger point and/or time pressure. Accordingly, we run simulations to compare different personalized promotion strategies that leverage a member's status in the program and her promotion sensitivity. Our research provides important implications for firms about loyalty program design and personalized marketing.

Keywords: Loyalty Programs, Personalized Promotions, Goal Achievement and Failure, Nonlinear Point Thresholds, Timing of Reward

JEL Classification: M00