The Impact of Item-Based Loyalty Programs on Consumer Purchase Behavior

Research by Jie Zhang

In an attempt to attract and retain loyal customers, more and more retailers are offering loyalty programs, and marketing researchers continue to study their effectiveness.

Jie Zhang, associate professor of marketing and the Harvey Sanders Fellow of Retail Management, and co-author Els Breugelmans, assistant professor of marketing at the Lessius University College in Belgium, looked at a new kind of loyalty program introduced by a European online grocer. Previously, the retailer had a conventional loyalty program in place, where members received reward points based on their total spending at the store and could earn merchandise credit once the reward points reached a certain threshold. Under the new program which was implemented in 2005, instead of offering traditional price discounts on specific items, the retailer offered customers reward points, which needed to be accumulated and redeemed later. For example, rather than receiving 20 cents off for a container of yogurt, a shopper might receive 20 bonus reward points for purchasing the yogurt. This new program was called an item-based loyalty program.

Zhang and Breugelmans wanted to find out how the new item-based loyalty program impacted consumers’ purchase behavior and the grocer’s sales revenue. They culled through purchasing data from the online retailer’s customers and utilized advanced statistical models to tease apart the puzzle.

The researchers found that the new program paid off for the grocer. It attracted more new shoppers to the store and increased the grocer’s customer retention. It also raised shoppers’ responsiveness to promotions, now in the form of reward points, compared with price discounts of the same monetary value. Overall, the new program boosted the grocer’s total revenue by nearly 4 percent, a significant increase in a retail sector with razor-thin margins. But the new program had the surprising effect of alienating some existing customers that had been enrolled in the previous store-spending-based loyalty program where they could get conventional price discounts.

“I actually thought the current members would have reacted more positively — turns out it’s the other way around,” Zhang said.

The negative reactions by many existing loyalty program members were mainly due to the drop in promotion activities in the store after switching to the new program. In the grocery retailing industry, most promotions are subsidized by national brand manufacturers. The retailer may have had trouble convincing some manufacturers to support the new program, and the number of promotions in the store decreased by about 20 percent. This didn’t sit well with some shoppers who had been members of the grocer’s previous loyalty program. They took their grocery dollars elsewhere, decreasing spending by more than 7.5 percent. “A key takeaway of this study,” Zhang said, “is that increased promotion responsiveness resulting from the new program is a double-edged sword. A retailer will lose sales if customers become more eager to get discount deals yet the store drops its promotional offerings.”

Even with the loss of some previously loyal customers, the retailer still had non-trivial revenue gains. The researchers saw the potential for even greater revenue gains if the retailer could offer the same level of promotions it had under the old system. They ran the numbers based on this scenario and figured the store would have gained more than 6 percent in revenue.

“Our results offer a nuanced picture of the impact of this new loyalty program. Retailers have the potential to gain big, but they have to convince manufacturers to support them in order to maintain their levels of promotion activities,” Zhang said.

Right now, Zhang says most U.S. supermarket retailers don’t offer much incentive for customer loyalty yet. Cherry-picking consumers simply shop around to get better deals. But, she says as retailers become more sophisticated with their loyalty program designs, such as using the program they studied here, consumers stand to win by being loyal to a particular retailer of a kind.

“If more retailers implement this kind of program, eliminating temporary price discounts and offer promotion points to accumulate and redeem later, it would pay off to be a loyal shopper to one retailer rather than spreading your spending across several stores.”

“The Impact of an Item-Based Loyalty Programs on Consumer Purchase Behavior,” was published in the February 2012 issue of the Journal of Marketing Research.