Are points like money? An empirical investigation of reward promotion effectiveness for multicategory retailers

Abstract

Point-based frequency reward programs are widely used by retailers as a sales promotion strategy. To promote a specific product category, retailers offer more favorable reward ratios so that members can earn extra points. This paper examines the impact of reward ratio variations on sales in a multicategory setting and compares the effectiveness of the reward and price promotion strategies. We estimate a multivariate probit model using scanner data of member purchases in four categories, grouped into two category pairs. We found that increasing the reward ratio in a category positively affected its choice probability and that the presence of rewards promotions also had positive impact on the choice probability of nonpromoted but closely related category within the same category pair. As forms of sales promotion, price discounts and reward promotions were shown to substitute for each other. We constructed and computed a measure, the rate of substitution, to quantify the effects of substitution. The financial implications of holding reward promotions are computed and discussed.