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

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  • 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
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    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.

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