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
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
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
“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.