Profitability of loyalty reward programs: An analytical investigation
Loyalty programs, as a prevalent CRM strategy, aim to enhance customers’ loyalty and thereby increase a firm’s long-term profitability. Recent analytical and empirical studies demonstrate inconsistent findings on the efficacy of loyalty programs in fulfilling these goals. In this study, an analytical model is developed to analyze the effect of customers’ valuation and their post-purchase satisfaction level on a loyalty program’s profitability. The results reveal how customers’ satisfaction plays a significant role in profitability of loyalty programs. We consider a profit-maximizing firm selling a good or service through two periods. Valuation is modeled as a deterministic parameter, as well as a stochastic variable with two arbitrary distributions. Depending on the customers’ valuation distribution, the model results in either a linear or a nonlinear optimization problem. Optimization problems are solved analytically, in terms of the model parameters. The obtained solutions provide some useful insights into the effects of customers’ satisfaction on the profitability of loyalty programs. Specifically, it is shown that depending on the customers’ satisfaction level, it may be optimal not to offer a loyalty reward.
Volume (Year): 41 (2013)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/supportfaq.cws_home/regional|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
- von Weizsacker, C Christian, 1984. "The Costs of Substitution," Econometrica, Econometric Society, vol. 52(5), pages 1085-1116, September.
- Joseph Farrell & Carl Shapiro, 1988.
"Dynamic Competition with Switching Costs,"
RAND Journal of Economics,
The RAND Corporation, vol. 19(1), pages 123-137, Spring.
- Joseph Farrell and Carl Shapiro., 1988. "Dynamic Competition with Switching Costs," Economics Working Papers 8865, University of California at Berkeley.
- Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
- Buckinx, Wouter & Van den Poel, Dirk, 2005. "Customer base analysis: partial defection of behaviourally loyal clients in a non-contractual FMCG retail setting," European Journal of Operational Research, Elsevier, vol. 164(1), pages 252-268, July.
- W. Buckinx & D. Van Den Poel, 2003. "Customer Base Analysis: Partial Defection of Behaviorally-Loyal Clients in a Non-Contractual FMCG Retail Setting," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/178, Ghent University, Faculty of Economics and Business Administration.
- 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.
- S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
- Van den Poel, Dirk & Lariviere, Bart, 2004. "Customer attrition analysis for financial services using proportional hazard models," European Journal of Operational Research, Elsevier, vol. 157(1), pages 196-217, August.
- D. Van Den Poel & B. Larivière, 2003. "Customer Attrition Analysis For Financial Services Using Proportional Hazard Models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/164, Ghent University, Faculty of Economics and Business Administration.
- Smith, Andrew & Sparks, Leigh, 2009. ""It's nice to get a wee treat if you've had a bad week": Consumer motivations in retail loyalty scheme points redemption," Journal of Business Research, Elsevier, vol. 62(5), pages 542-547, May.
- 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.
- Premkumar, G. & Bhattacherjee, Anol, 2008. "Explaining information technology usage: A test of competing models," Omega, Elsevier, vol. 36(1), pages 64-75, February.
- Klemperer, Paul D, 1988. "Welfare Effects of Entry into Markets with Switching Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 159-165, December.
- Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
- Au, Norman & Ngai, Eric W. T. & Cheng, T. C. Edwin, 2002. "A critical review of end-user information system satisfaction research and a new research framework," Omega, Elsevier, vol. 30(6), pages 451-478, December.
- Pauler, Gabor & Dick, Alan, 2006. "Maximizing profit of a food retailing chain by targeting and promoting valuable customers using Loyalty Card and Scanner Data," European Journal of Operational Research, Elsevier, vol. 174(2), pages 1260-1280, October.
- 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.
- Nie, Winter, 2000. "Waiting: integrating social and psychological perspectives in operations management," Omega, Elsevier, vol. 28(6), pages 611-629, December.
- Chen, Li-Fei, 2012. "A novel approach to regression analysis for the classification of quality attributes in the Kano model: an empirical test in the food and beverage industry," Omega, Elsevier, vol. 40(5), pages 651-659.
- Li, Suhong & Ragu-Nathan, Bhanu & Ragu-Nathan, T.S. & Subba Rao, S., 2006. "The impact of supply chain management practices on competitive advantage and organizational performance," Omega, Elsevier, vol. 34(2), pages 107-124, April. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jomega:v:41:y:2013:i:4:p:797-807. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.