Cross-Merchant Spillovers in Coalition Loyalty Programs

Abstract

Loyalty programs are a widely used marketing tool for firms seeking to improve outcomes ranging from customer retention to data collection. In coalition loyalty programs, consumers can earn and spend points at any merchant within a network. Merchants in a coalition loyalty program must anticipate the effects on their performance of further merchant entry into the coalition. We analyze data from a large coalition loyalty program to identify and measure spillovers to pre-existing members from the entry of a new merchant into the network. Through difference-in-differences as well as Bayesian structural time series approaches, we find convergent evidence of significant positive spillovers. Pre-existing merchants benefit from the entry of a new merchant by gaining more transactions, larger basket sizes, and higher aggregate sales. These spillovers are highest from customers who spend points at the new merchant and from stores that are nearest to stores of the new merchant.

Keywords: loyalty program, coalition loyalty program, rewards