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Research Note--Customer Loyalty Programs: Are They Profitable?

Author

Listed:
  • Siddharth S. Singh

    (Jesse H. Jones Graduate School of Management, Rice University, Houston, Texas 77005)

  • Dipak C. Jain

    (J. L. Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • Trichy V. Krishnan

    (Department of Marketing, NUS Business School, National University of Singapore, Singapore 117592)

Abstract

Loyalty programs are very common in practice. Many researchers have worked at understanding the impact of loyalty programs on market competition and the mechanism behind it. Interestingly, almost all of the studies have explored a symmetric equilibrium where both of the competing firms offer a loyalty program. To our knowledge, the extant literature has not investigated in-depth whether asymmetric equilibrium can exist where only one firm chooses to offer a loyalty program and the other firm chooses to compete via lowering prices. Such a question is important because some markets do support such asymmetric equilibriums with respect to loyalty programs. Also, the existence of asymmetric equilibrium shows that a loyalty program need not be profitable for some firms. In this paper, we use a game-theoretic framework to investigate specific types of customer loyalty programs that provide benefit to loyal customers in the form of discount over market prices. The model considers consumer switching and includes two types of consumer heterogeneity. The first type of heterogeneity concerns the differences between customers with respect to their liking for loyalty programs, and the second type concerns the differences among the loyalty program members with respect to their ability to collect enough loyalty points to redeem loyalty rewards. By analyzing a duopoly market, we find that both symmetric equilibrium (i.e., where both competing firms offer the loyalty program) and asymmetric equilibrium (i.e., where one firm alone offers the loyalty program) can be sustained. The paper explores conditions for the existence of these two equilibriums.

Suggested Citation

  • Siddharth S. Singh & Dipak C. Jain & Trichy V. Krishnan, 2008. "Research Note--Customer Loyalty Programs: Are They Profitable?," Management Science, INFORMS, vol. 54(6), pages 1205-1211, June.
    • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:6:p:1205-1211
    DOI: 10.1287/mnsc.1070.0847
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yang, Hai & Shao, Chaoyi & Wang, Hai & Ye, Jieping, 2020. "Integrated reward scheme and surge pricing in a ridesourcing market," Transportation Research Part B: Methodological, Elsevier, vol. 134(C), pages 126-142.
    2. Tang, Wei & Xie, Ningke & Mo, Dong & Cai, Zeen & Lee, Der-Horng & Chen, Xiqun (Michael), 2023. "Optimizing subsidy strategies of the ride-sourcing platform under government regulation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 173(C).
    3. 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.
    4. Thomas Reutterer & Kurt Hornik & Nicolas March & Kathrin Gruber, 2017. "A data mining framework for targeted category promotions," Journal of Business Economics, Springer, vol. 87(3), pages 337-358, April.
    5. Wang, Hai & Yang, Hai, 2019. "Ridesourcing systems: A framework and review," Transportation Research Part B: Methodological, Elsevier, vol. 129(C), pages 122-155.
    6. Gandomi, Amir & Zolfaghari, Saeed, 2018. "To tier or not to tier: An analysis of multitier loyalty programs׳ optimality conditions," Omega, Elsevier, vol. 74(C), pages 20-36.
    7. Mengze Shi, 2013. "A theoretical analysis of endogenous and exogenous switching costs," Quantitative Marketing and Economics (QME), Springer, vol. 11(2), pages 205-230, June.
    8. 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.
    9. Bazargan, Amirhossein & Karray, Salma & Zolfaghari, Saeed, 2017. "Modeling reward expiry for loyalty programs in a competitive market," International Journal of Production Economics, Elsevier, vol. 193(C), pages 352-364.
    10. Gandomi, A. & Zolfaghari, S., 2013. "Profitability of loyalty reward programs: An analytical investigation," Omega, Elsevier, vol. 41(4), pages 797-807.
    11. Danaher, Peter J. & Sajtos, Laszlo & Danaher, Tracey S., 2016. "Does the reward match the effort for loyalty program members?," Journal of Retailing and Consumer Services, Elsevier, vol. 32(C), pages 23-31.
    12. Bing Jing, 2016. "Customer Recognition in Experience vs. Inspection Good Markets," Management Science, INFORMS, vol. 62(1), pages 216-224, January.
    13. 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.
    14. Krista J. Li, 2021. "Behavior-Based Quality Discrimination," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 425-436, March.
    15. Aaron Luntala Nsakanda & Moustapha Diaby & Yuheng Cao, 2011. "An aggregate inventory-based model for predicting redemption and liability in loyalty reward programs industry," Information Systems Frontiers, Springer, vol. 13(5), pages 707-719, November.
    16. Amirhossein Bazargan & Salma Karray & Saeed Zolfaghari, 2021. "Can restrictions on redemption timing boost profitability of loyalty programs in competitive environments?," Computational Management Science, Springer, vol. 18(1), pages 99-124, January.
    17. Rehnen, Lena Marie, 2016. "Exit strategies of loyalty programs," jbm - Journal of Business Market Management, Free University Berlin, Marketing Department, vol. 9(1), pages 564-596.
    18. Emil Temnyalov, 2019. "Points mechanisms and rewards programs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 436-457, June.

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