Separating customer heterogeneity, points pressure and rewarded behavior to assess a retail loyalty program

Abstract

Analyses of loyalty programs typically show collection spikes around redemptions. A spike might be caused by increased collector spending to facilitate a redemption (points pressure). The redemption might also encourage increased spending following it (rewarded behavior). These are the program’s incentive effects. Alternatively, the spike might be unrelated to the incentives, merely revealing pre-existing customer heterogeneity, e.g., in effortless collection, in bonus points collection, and reward timing selection. Understanding the cause of collection spikes is necessary to effectively assess and design programs. Our indirect inference approach isolates the incentive effects in a coalition program that has recurring modest value cash-type rewards. Most of the collection spike is not caused by incentives, yet 1.74% of sales are incentive driven. In contrast to prior findings, the incentive effects are driven by rewarded behavior, not points pressure. We attribute this to the program’s modest cash-type rewards that are unlikely to induce conscious pursuit.