The Joint Sales Impact of Frequency Reward and Customer Tier Components of Loyalty Programs

We estimate the joint impact of the frequency reward and customer tier components of a loyalty program on customer behavior and resultant sales. We provide an integrated analysis of a loyalty program incorporating customers’ purchase and cash-in decisions, points pressure and rewarded behavior effects, heterogeneity, and forward-looking behavior. We focus on four key research questions: (1) How important is it to combine both components in one model, (2) Does points pressure exist in the context of a two-component loyalty program, (3) How is the market segmented in its response to the combined program, and (4) Do the programs complement each other in terms of the incremental sales they produce?

Our most basic message is that the frequency reward and customer tier components of loyalty programs should be modeled jointly rather than in separate models. We find strong evidence for points pressure, for both the customer tier and frequency reward components, using both model-based and model-free evidence. We find a two-segment solution revealing a “service-oriented” segment that highly values cash-ins for room upgrades and staying in “luxury” hotels, and a “price-oriented” segment that is more price sensitive and highly values the frequency reward aspects of the loyalty program. Further, we find that both components generate incremental sales. Also, there was slight synergy between the programs but not a huge amount. Overall, each component contributes to increased revenues and doesn’t interfere with the other.