Decomposing the Promotional Revenue Bump for Loyalty Program Members Versus Nonmembers
Published 11/1/2005
Author: Harald J. van Heerde and Tammo H.A. Bijmolt
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Executive Summary
Loyalty programs in retailing lead to a natural split of a store’s customer base into members and nonmembers. To differentiate between both groups effectively, a store manager needs to know how marketing activities, such as sales promotions, affect both groups’ contributions to daily revenues. For a proper understanding of the promotional revenue bump, the authors model the number of buyers and average expenditures for each group as a function of current, pre-, and posteffects of promotions. These effects are moderated by the communication mode (mail directed to members and flyers distributed door-to-door) and by the percentage price discount. They also model the daily number of nonbuyers because such people they may return as customers at a later date, they may influence the expenditures of other customers by crowding effects, and they cost money in terms of personnel time.
In the empirical study, the authors apply their decomposition model to daily data from six stores of a clothing retail chain in the Netherlands. Infrared traffic counters, electronic checkouts, and the loyalty card system yield data required for decomposing total revenue into its constituent parts. They find that the loyalty program can help implement price discrimination because it leads to identifiable, substantial, accessible, and actionable segments consisting of loyalty program members and nonmembers. The results show that the number of nonmembers who buy is much more sensitive to price discounts than the number of members who buy. Members pay price premiums at the beginning of the season to purchase fashionable items and spend more on average than nonmembers. Offering members small discounts (10% for direct mail and 20% for door-to-door flyers) increases both their numbers and their expenditures. In contrast, at the end of the season, nonloyalty program members purchase less fashionable items, and their revenue contribution exceeds that of members. This enables retailers to sell the ultimate items of the old assortment. Thus, both members and nonmembers are instrumental from a store manager’s point of view. The third group of store visitors are nonbuyers. The results indicate that more nonbuyers today lead to a small increase in the number of buyers tomorrow. The authors do not find evidence for crowding effects (i.e., more traffic does not lead to lower average expenditures).
The authors also find significant prepromotion dips, indicating that customers anticipate promotions and postpone their purchases. Notably, even without being informed about discounts beforehand, members seem to be able to anticipate deep discounts better than nonmembers. Nonmembers may just have a general sense of the discount season. After the promotion, positive effects dominate, possibly as the result of the advertising function of direct mail and door-to-door flyers.
Biography
Harald J. van Heerde is Professor of Marketing at Tilburg University. He holds a master’s degree in Econometrics and a doctoral degree (cum laude) from the University of Groningen. His work has appeared in Journal of Marketing Research, Marketing Science, and Quantitative Marketing and Economics. He received the Paul Green Award in 2004, and in 2001 and 2005, his other Journal of Marketing Research articles were Paul Green Award finalists; he was also an O’Dell Award finalist in 2005. His research examines building econometric models in various substantive domains, such as sales promotions, pricing, and new product introductions, and it is branching out into new areas, such as building brands, assortments, loyalty programs, product crises, and price wars.
Tammo H.A. Bijmolt is Professor of Marketing Research at the University of Groningen. He received his master’s degree and doctoral degree in Economics (cum laude) from the University of Groningen, and he was a professor at Tilburg University after that. His research interests include retailing, perceptual mapping, and meta-analysis. His work has appeared in Journal of Marketing Research, Journal of Consumer Research, International Journal of Research in Marketing, and Journal of Classification, among others. He is currently working on the effects of loyalty programs on consumer behavior and on meta-analytic generalizations in marketing.
J Marketing Research, Volume 42, Number 4, November 2005
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