The Impact of an Item-Based Loyalty Program on Consumer Purchase Behavior

Abstract

The authors conduct an empirical investigation of a new retail loyalty program (LP), called an item-based loyalty program (IBLP), in which price discounts are replaced by reward point promotions that need to be accumulated and redeemed later. The main objective is to examine its impact on various aspects of consumer purchase behavior and a retailer's sales revenue. They find that after a retailer switched from a conventional LP to the IBLP, consumers became more responsive to reward point promotions than to price discounts of the same monetary value, were no longer responsive to competitors' reward point promotions, and exhibited stronger cumulative reward point effects. In addition, the new LP had a significantly different impact on “current” LP members and nonmembers (defined by their status right before the switch), resulting in decreased (increased) total spending by the former (latter) group, under the retailer's current promotion practice. Furthermore, it is critically important for retailers to offer sufficient promotions under the new LP to achieve its full potential; otherwise, they risk alienating their loyal customers. Finally, the IBLP reduced attrition among existing customers and attracted more new customers, which contributed to most of the retailer's sales revenue gain after adopting the IBLP.