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The Impact of Frequent Shopper Programs in Grocery Retailing

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  • Rajiv Lal
  • David Bell

Abstract

Frequent shopper programs are becoming ubiquitous in retailing. Retailers seem unsure however about whether these programs are leading to higher loyalty, or to higher profits. In this paper we analyze data from a U.S. supermarket chain that has used a number of frequent shopper rewards to improve sales and profitability. We find that while these programs are profitable, this is only because substantial incremental sales to casual shoppers (cherry pickers) offset subsidies to already loyal customers. In this way our findings are inconsistent with existing theories about how frequent shopper programs are supposed to work. We construct our own Hotelling-like model that explicitly models cherry picking behavior and show that its predictions match the data quite closely. We further test the predictions of our model by characterizing the impact of such programs on trip frequency and basket size. We then use the model to examine more complex scenarios. For example, our analysis suggests that frequent shopper programs may be unprofitable if they eliminate all cherry picking. This may explain why some retailers seem dissatisfied with their programs. We end by proposing a solution that retains the benefits of the frequent shopper programs and yet continues to let supermarkets benefit from price discrimination. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Rajiv Lal & David Bell, 2003. "The Impact of Frequent Shopper Programs in Grocery Retailing," Quantitative Marketing and Economics (QME), Springer, vol. 1(2), pages 179-202, June.
    • Handle: RePEc:kap:qmktec:v:1:y:2003:i:2:p:179-202
    DOI: 10.1023/A:1024682529912
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    References listed on IDEAS

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    1. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
    2. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2004. "Managing Capacity Through Reward Programs," Management Science, INFORMS, vol. 50(4), pages 503-520, April.
    3. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
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