×

Impact of loyalty program investment on firm performance: seasonal products with strategic customers. (English) Zbl 07479763

Summary: Customer loyalty programs are often used by retailers as an important marketing tool. As an essential element of loyalty programs (LPs), the reward amount invested by the retailer is often linked to retailer’s profit and customer behavior. We consider a retailer who sells a type of product in two periods to strategic customers. The retailer makes inventory ordering and loyalty program investment decisions. Customers decide whether to purchase immediately (in period 1) to receive the product and reward, or to wait for a markdown discount but face the risk of stockout. We have focused on three main questions: (1) How does the loyalty reward investment decision impact strategic customers’ behavior? (2) What are the optimal decisions and profits for the retailer when investing in a loyalty program? (3) What are the factors influencing the reward investment decision? We find that investing in the loyalty program induces more customers to make an early purchase, leading to a higher inventory ordering decision and more profit for the retailer. The benefits from reward investments are significantly affected by the product’s cost and customers’ valuation of the product. Our results shed light on the reward investment decision of LPs. For products with high profit margins and market-determined prices (valuation approximates price), the retailer should invest in a loyalty program to achieve better profits.

MSC:

90Bxx Operations research and management science
PDF BibTeX XML Cite
Full Text: DOI

References:

[1] Aviv, Y.; Pazgal, A., Optimal pricing of seasonal products in the presence of forward-looking consumers, Manufacturing & Service Operations Management, 10, 3, 339-359 (2008)
[2] Bazargan, A.; Karray, S.; Zolfaghari, S., Buy n times, get one free loyalty cards: Are they profitable for competing firms? A game theoretic analysis, European Journal of Operational Research, 265, 2, 621-630 (2018) · Zbl 1374.90264
[3] Benioudakis, M.; Burnetas, A.; Ioannou, G., Lead-time quotations in unobservable make-to-order systems with strategic customers: Risk aversion, load control and profit maximization, European Journal of Operational Research, 289, 1, 165-176 (2021) · Zbl 07354046
[4] Cachon, G. P.; Swinney, R., Purchasing, pricing, and quick response in the presence of strategic consumers, Management Science, 55, 3, 497-511 (2009) · Zbl 1232.91418
[5] Chen, J.; Zhao, Y., High price or low price? An experimental study on a markdown pricing policy, European Journal of Operational Research, 284, 1, 240-254 (2020) · Zbl 1441.91041
[6] Chen, Y.; Shi, C., Joint pricing and inventory management with strategic customers, Operations Research, 67, 6, 1610-1627 (2019) · Zbl 1444.90061
[7] Chun, S. Y.; Ovchinnikov, A., Strategic consumers, revenue management, and the design of loyalty programs, Management Science, 65, 9, 3969-3987 (2019)
[8] Coase, R. H., Durability and monopoly, The Journal of Law and Economics, 15, 1, 143-149 (1972)
[9] Correa, J.; Montoya, R.; Thraves, C., Contingent preannounced pricing policies with strategic consumers, Operations Research, 64, 1, 251-272 (2016) · Zbl 1336.91041
[10] Dasu, S.; Tong, C., Dynamic pricing when consumers are strategic: Analysis of posted and contingent pricing schemes, European Journal of Operational Research, 204, 3, 662-671 (2010) · Zbl 1181.91066
[11] Gandomi, A.; Bazargan, A.; Zolfaghari, S., Designing competitive loyalty programs: A stochastic game-theoretic model to guide the choice of reward structure, Annals of Operations Research, 280, 1-2, 267-298 (2019)
[12] Kabul, M. O.; Parlaktürk, A. K., The value of commitments when selling to strategic consumers: A supply chain perspective, Management Science, 65, 10, 4754-4770 (2019)
[13] Kreis, H.; Mafael, A., The influence of customer loyalty program design on the relationship between customer motives and value perception, Journal of Retailing and Consumer Services, 21, 4, 590-600 (2014)
[14] Kuksov, D.; Zia, M., Benefits of customer loyalty in markets with endogenous search costs, Management Science, 67, 4, 1993-2656 (2021)
[15] Lin, Y. T.; Parlaktürk, A. K.; Swaminathan, J. M., Are strategic customers bad for a supply chain?, Manufacturing & Service Operations Management, 20, 3, 481-497 (2018)
[16] Liu, J.; Zhai, X.; Chen, L., Optimal pricing strategy under trade-in program in the presence of strategic consumers, Omega, 84, 1, 1-17 (2019)
[17] Liu, Q.; van Ryzin, G. J., Strategic capacity rationing to induce early purchases, Management Science, 54, 6, 1115-1131 (2008) · Zbl 1232.91253
[18] Rossi, F., Lower price or higher reward? Measuring the effect of consumers’ preferences on reward programs, Management Science, 64, 9, 4451-4470 (2018)
[19] Song, Y.; Zhao, X.; Zhu, W.; Chen, Y., Decision biases of strategic customers with private product-value information: An experimental study, Production and Operations Management, 28, 5, 1305-1319 (2019)
[20] Su, X.; Zhang, F., Strategic customer behavior, commitment, and supply chain performance, Management Science, 54, 10, 1759-1773 (2008) · Zbl 1232.91262
[21] Sun, Y.; Zhang, D., A model of customer reward programs with finite expiration terms, Management Science, 65, 8, 3889-3903 (2019)
[22] Wang, S.; Hu, Q.; Liu, W., Price and quality-based competition and channel structure with consumer loyalty, European Journal of Operational Research, 262, 2, 563-574 (2017) · Zbl 1375.90061
[23] Wei, L.; Xiao, J., Are points like money? An empirical investigation of reward promotion effectiveness for multicategory retailers, Marketing Letters, 26, 1, 99-114 (2015)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.