Dynamic Management of Loyalty Program Strategies

Abstract

Loyalty programs are a major strategy used in firm CRM efforts, with resources in excess of $48 billion spent in 2013 on loyalty programs in the U.S. alone (Berry 2013). Yet inconsistent returns still result in costly adjustments to loyalty program initiatives in hopes of improving program performance (Allison 2010). However, limited research exists that examines the impact of these adjustments. In two studies, this research thus aims to 1) examine how and when adjustments in loyalty programs (e.g. expansions and contractions of benefits) impact firm value, and 2) understand how customer feelings of gratitude and unfairness help explain the consequences of adjustments to loyalty programs. To investigate the first goal, Study 1 utilizes and event study that estimates the impact of adjustments to loyalty programs on abnormal stock returns using a Fama-French three factor model. To investigate the second goal, Study 2 uses a series of complimentary experiments on actual loyalty program members to help explain how loyalty program adjustments influence customer feelings of gratitude and unfairness. Results find evidence that loyalty program contractions (e.g. a program termination, or reduction in rewards) are associated with negative abnormal stock returns, while loyalty program expansions (e.g. a program introduction, or expansion of rewards) result in both positive and negative abnormal stock returns, suggesting a role for contextual factors.