IDEAS home Printed from https://ideas.repec.org/p/bep/rmswpp/2-1-1006.html
   My bibliography  Save this paper

The Impact of Frequent Shopper Programs in Grocery Retailing

Author

Listed:
  • David Bell

    (Harvard University)

  • Rajiv Lal

    (Harvard University)

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 US 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) oset 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.

Suggested Citation

  • David Bell & Rajiv Lal, 2002. "The Impact of Frequent Shopper Programs in Grocery Retailing," Review of Marketing Science Working Papers 2-1-1006, Berkeley Electronic Press.
    • Handle: RePEc:bep:rmswpp:2-1-1006
    Note: oai:bepress:roms-1006
    as

    Download full text from publisher

    File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1006&context=roms
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
    2. 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.
    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. Kopalle Praveen K & Neslin Scott A, 2003. "The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment," Review of Marketing Science, De Gruyter, vol. 1(1), pages 1-41, August.
    2. Leenheer, Jorna & Bijmolt, Tammo H.A., 2008. "Which retailers adopt a loyalty program? An empirical study," Journal of Retailing and Consumer Services, Elsevier, vol. 15(6), pages 429-442.

    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. Bakhtiari, Ali & Murthi, B.P.S. & Steffes, Erin, 2013. "Evaluating the Effect of Affinity Card Programs on Customer Profitability Using Propensity Score Matching," Journal of Interactive Marketing, Elsevier, vol. 27(2), pages 83-97.
    2. Jiwoong Shin & K. Sudhir, 2010. "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?," Marketing Science, INFORMS, vol. 29(4), pages 671-689, 07-08.
    3. 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.
    4. A. Yeşim Orhun & Tong Guo & Andreas Hagemann, 2022. "Reaching for Gold: Frequent-Flyer Status Incentives and Moral Hazard," Marketing Science, INFORMS, vol. 41(3), pages 548-574, May.
    5. de Jong, Gerben & Behrens, Christiaan & van Ommeren, Jos, 2019. "Airline loyalty (programs) across borders: A geographic discontinuity approach," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 251-272.
    6. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona School of Economics.
    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. Emil Temnyalov, 2019. "Points mechanisms and rewards programs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 436-457, June.
    9. Ramon Caminal, 2012. "The Design and Efficiency of Loyalty Rewards," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 339-371, June.
    10. J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
    11. Miguel Villas-Boas, J., 2015. "A short survey on switching costs and dynamic competition," International Journal of Research in Marketing, Elsevier, vol. 32(2), pages 219-222.
    12. Caminal, Ramon & Claici, Adina, 2007. "Are loyalty-rewarding pricing schemes anti-competitive?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 657-674, August.
    13. Bing Jing, 2016. "Customer Recognition in Experience vs. Inspection Good Markets," Management Science, INFORMS, vol. 62(1), pages 216-224, January.
    14. Luttmann, Alexander & Ladd, Daniel, 2023. "Loyalty rewards and redemption behavior: Stylized facts for the U.S. airline industry," MPRA Paper 119214, University Library of Munich, Germany.
    15. 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.
    16. 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.
    17. 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.
    18. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization 0511004, University Library of Munich, Germany.
    19. Son, Minhee & Hahn, Minhi & Kang, Hyunmo, 2006. "Why firms do co-promotions in mature markets?," Journal of Business Research, Elsevier, vol. 59(9), pages 1035-1042, September.
    20. Gandomi, A. & Zolfaghari, S., 2013. "Profitability of loyalty reward programs: An analytical investigation," Omega, Elsevier, vol. 41(4), pages 797-807.

    More about this item

    Statistics

    Access and download statistics

    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:bep:rmswpp:2-1-1006. 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: Christopher F. Baum (email available below). General contact details of provider: http://www.bepress.com .

    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.