IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v299y2022i2p621-630.html
   My bibliography  Save this article

Impact of loyalty program investment on firm performance: Seasonal products with strategic customers

Author

Listed:
  • Gu, Wei
  • Luan, Xiaoting
  • Song, Yanan
  • Shang, Jennifer

Abstract

Customer loyalty programs are often used by retailers as an important marketing tool. As an essential element of loyalty programs (LPs), the reward amount invested by the retailer is often linked to retailer's profit and customer behavior. We consider a retailer who sells a type of product in two periods to strategic customers. The retailer makes inventory ordering and loyalty program investment decisions. Customers decide whether to purchase immediately (in period 1) to receive the product and reward, or to wait for a markdown discount but face the risk of stockout. We have focused on three main questions: (1) How does the loyalty reward investment decision impact strategic customers’ behavior? (2) What are the optimal decisions and profits for the retailer when investing in a loyalty program? (3) What are the factors influencing the reward investment decision? We find that investing in the loyalty program induces more customers to make an early purchase, leading to a higher inventory ordering decision and more profit for the retailer. The benefits from reward investments are significantly affected by the product's cost and customers’ valuation of the product. Our results shed light on the reward investment decision of LPs. For products with high profit margins and market-determined prices (valuation approximates price), the retailer should invest in a loyalty program to achieve better profits.

Suggested Citation

  • Gu, Wei & Luan, Xiaoting & Song, Yanan & Shang, Jennifer, 2022. "Impact of loyalty program investment on firm performance: Seasonal products with strategic customers," European Journal of Operational Research, Elsevier, vol. 299(2), pages 621-630.
    • Handle: RePEc:eee:ejores:v:299:y:2022:i:2:p:621-630
    DOI: 10.1016/j.ejor.2021.09.046
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221721008225
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2021.09.046?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gérard P. Cachon & Robert Swinney, 2009. "Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 55(3), pages 497-511, March.
    2. Qian Liu & Garrett J. van Ryzin, 2008. "Strategic Capacity Rationing to Induce Early Purchases," Management Science, INFORMS, vol. 54(6), pages 1115-1131, June.
    3. Yanan Song & Xiaobo Zhao & Wanshan Zhu & Yefen Chen, 2019. "Erratum for Decision Biases of Strategic Customers with Private Product‐value Information: An Experimental Study," Production and Operations Management, Production and Operations Management Society, vol. 28(11), pages 2919-2919, November.
    4. Mustafa O. Kabul & Ali K. Parlaktürk, 2019. "The Value of Commitments When Selling to Strategic Consumers: A Supply Chain Perspective," Management Science, INFORMS, vol. 65(10), pages 4754-4770, October.
    5. Kreis, Henning & Mafael, Alexander, 2014. "The influence of customer loyalty program design on the relationship between customer motives and value perception," Journal of Retailing and Consumer Services, Elsevier, vol. 21(4), pages 590-600.
    6. Wang, Sujuan & Hu, Qiying & Liu, Weiqi, 2017. "Price and quality-based competition and channel structure with consumer loyalty," European Journal of Operational Research, Elsevier, vol. 262(2), pages 563-574.
    7. Dasu, Sriram & Tong, Chunyang, 2010. "Dynamic pricing when consumers are strategic: Analysis of posted and contingent pricing schemes," European Journal of Operational Research, Elsevier, vol. 204(3), pages 662-671, August.
    8. Liu, Jingchen & Zhai, Xin & Chen, Lihua, 2019. "Optimal pricing strategy under trade-in program in the presence of strategic consumers," Omega, Elsevier, vol. 84(C), pages 1-17.
    9. Yiwei Chen & Cong Shi, 2019. "Joint Pricing and Inventory Management with Strategic Customers," Operations Research, INFORMS, vol. 67(6), pages 1610-1627, November.
    10. So Yeon Chun & Anton Ovchinnikov, 2019. "Strategic Consumers, Revenue Management, and the Design of Loyalty Programs," Management Science, INFORMS, vol. 65(9), pages 3969-3987, September.
    11. Yossi Aviv & Amit Pazgal, 2008. "Optimal Pricing of Seasonal Products in the Presence of Forward-Looking Consumers," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 339-359, December.
    12. Bazargan, Amirhossein & Karray, Salma & Zolfaghari, Saeed, 2018. "‘Buy n times, get one free’ loyalty cards: Are they profitable for competing firms? A game theoretic analysis," European Journal of Operational Research, Elsevier, vol. 265(2), pages 621-630.
    13. Yen-Ting Lin & Ali K. Parlaktürk & Jayashankar M. Swaminathan, 2018. "Are Strategic Customers Bad for a Supply Chain?," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 481-497, July.
    14. Amir Gandomi & Amirhossein Bazargan & Saeed Zolfaghari, 2019. "Designing competitive loyalty programs: a stochastic game-theoretic model to guide the choice of reward structure," Annals of Operations Research, Springer, vol. 280(1), pages 267-298, September.
    15. Benioudakis, Myron & Burnetas, Apostolos & Ioannou, George, 2021. "Lead-time quotations in unobservable make-to-order systems with strategic customers: Risk aversion, load control and profit maximization," European Journal of Operational Research, Elsevier, vol. 289(1), pages 165-176.
    16. Chen, Junlin & Zhao, Yingshuai, 2020. "High price or low price? An experimental study on a markdown pricing policy," European Journal of Operational Research, Elsevier, vol. 284(1), pages 240-254.
    17. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    18. Yanan Song & Xiaobo Zhao & Wanshan Zhu & Yefen Chen, 2019. "Decision Biases of Strategic Customers with Private Product‐Value Information: An Experimental Study," Production and Operations Management, Production and Operations Management Society, vol. 28(5), pages 1305-1319, May.
    19. José Correa & Ricardo Montoya & Charles Thraves, 2016. "Contingent Preannounced Pricing Policies with Strategic Consumers," Operations Research, INFORMS, vol. 64(1), pages 251-272, February.
    20. Xuanming Su & Fuqiang Zhang, 2008. "Strategic Customer Behavior, Commitment, and Supply Chain Performance," Management Science, INFORMS, vol. 54(10), pages 1759-1773, October.
    21. Yacheng Sun & Dan Zhang, 2019. "A Model of Customer Reward Programs with Finite Expiration Terms," Management Science, INFORMS, vol. 65(8), pages 3889-3903, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tang, Fei & Dai, Ying & Ma, Zu-Jun & Choi, Tsan-Ming, 2023. "Trade-in operations under retail competition: Effects of brand loyalty," European Journal of Operational Research, Elsevier, vol. 310(1), pages 397-414.
    2. Qiu, Ruozhen & Sun, Yue & Zhou, Hongcheng & Sun, Minghe, 2023. "Dynamic pricing and quick response of a retailer in the presence of strategic consumers: A distributionally robust optimization approach," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1270-1298.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Narayan Mishra & Sri Vanamalla Venkataraman, 2022. "Optimal order quantity in the presence of strategic customers," Annals of Operations Research, Springer, vol. 315(2), pages 1871-1894, August.
    2. Yanan Song & Xiaobo Zhao, 2017. "A newsvendor problem with boundedly rational strategic customers," International Journal of Production Research, Taylor & Francis Journals, vol. 55(1), pages 228-243, January.
    3. Huang, Zongsheng & Huang, Lingchen & Zhao, Yingxue & Meng, Xiaoge, 2021. "Money-back guarantee in the presence of strategic customer behavior," International Journal of Production Economics, Elsevier, vol. 239(C).
    4. Hou, Lihua & Nie, Tengfei & Zhang, Jianghua, 2024. "Pricing and inventory strategies for perishable products in a competitive market considering strategic consumers," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 184(C).
    5. Nicole Perez Becker & Benny Mantin & Joachim Arts, 2022. "Strategic Behavior in a Serial Newsvendor," DEM Discussion Paper Series 22-02, Department of Economics at the University of Luxembourg.
    6. Yiangos Papanastasiou & Nicos Savva, 2017. "Dynamic Pricing in the Presence of Social Learning and Strategic Consumers," Management Science, INFORMS, vol. 63(4), pages 919-939, April.
    7. Wu, Meng & Ran, Yun & Zhu, Stuart X., 2022. "Optimal pricing strategy: How to sell to strategic consumers?," International Journal of Production Economics, Elsevier, vol. 244(C).
    8. Mustafa O. Kabul & Ali K. Parlaktürk, 2019. "The Value of Commitments When Selling to Strategic Consumers: A Supply Chain Perspective," Management Science, INFORMS, vol. 65(10), pages 4754-4770, October.
    9. Hao, Zhaowei & Qi, Wei & Gong, Tianxiao & Chen, Lihua & Shen, Zuo-Jun Max, 2019. "Innovation uncertainty, new product press timing and strategic consumers," Omega, Elsevier, vol. 89(C), pages 122-135.
    10. Dong, Junfeng & Wu, Desheng Dash, 2019. "Two-period pricing and quick response with strategic customers," International Journal of Production Economics, Elsevier, vol. 215(C), pages 165-173.
    11. Yen-Ting Lin & Ali K. Parlaktürk & Jayashankar M. Swaminathan, 2018. "Are Strategic Customers Bad for a Supply Chain?," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 481-497, July.
    12. Song, Yanan & Zhao, Xiaobo, 2016. "Strategic customer behavior facing possible stockout: An experimental study," International Journal of Production Economics, Elsevier, vol. 180(C), pages 57-67.
    13. Arian Aflaki & Pnina Feldman & Robert Swinney, 2019. "Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing," Operations Research, INFORMS, vol. 68(4), pages 1116-1131, July.
    14. Chen, Junlin & Zhao, Yingshuai, 2020. "High price or low price? An experimental study on a markdown pricing policy," European Journal of Operational Research, Elsevier, vol. 284(1), pages 240-254.
    15. Zha, Yong & Wang, Yuting & Li, Quan & Yao, Wenying, 2022. "Credit offering strategy and dynamic pricing in the presence of consumer strategic behavior," European Journal of Operational Research, Elsevier, vol. 303(2), pages 753-766.
    16. Ye, Taofeng & Yang, Huiqiang, 2020. "Price and Quality Management with Strategic Consumers: Whether to Introduce a High or Low Product Variant," Applied Mathematics and Computation, Elsevier, vol. 386(C).
    17. Ken Moon & Kostas Bimpikis & Haim Mendelson, 2018. "Randomized Markdowns and Online Monitoring," Management Science, INFORMS, vol. 64(3), pages 1271-1290, March.
    18. Dror Hermel & Benny Mantin, 2018. "Selling to strategic consumers: on the benefits of consumers’ valuation uncertainty and abundant inventory," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(3), pages 146-165, June.
    19. Xu, Jian & Duan, Yongrui, 2020. "Pricing, ordering, and quick response for online sellers in the presence of consumer disappointment aversion," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 137(C).
    20. José Correa & Ricardo Montoya & Charles Thraves, 2016. "Contingent Preannounced Pricing Policies with Strategic Consumers," Operations Research, INFORMS, vol. 64(1), pages 251-272, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:299:y:2022:i:2:p:621-630. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.