Leveraging Loyalty Programs Using Competitor Based Targeting

Hollenbeck, Brett and Taylor, Wayne (2021): Leveraging Loyalty Programs Using Competitor Based Targeting. Published in: Quantitative Marketing and Economics

Abstract

Loyalty programs (LPs) are widely used by firms but not well understood. These programs provide discounts and perks to loyal customers and are costly to administer, but produce uncertain changes in spending patterns. We use a large and detailed dataset on customer shopping behavior at one of the largest U.S. retailers before and after joining a loyalty program to evaluate how behavior changes. We combine this with detailed spatial data on customer and store locations, including the locations of competing firms. We find significant changes in behavior associated with joining the LP with a large amount of heterogeneity across customers. We find that location relative to competitors is the factor most strongly associated with increases in spending following joining the LP, suggesting that the LP's quantity discounts work primarily through business stealing and not through other demand expansion. We next estimate a model of what variables determine how spending will change after joining the LP. We use high-dimensional data on spatial relationships between customers, the focal firm's stores, and competing stores as well as customers' historical spending patterns. This model is used to test whether past sales data reflecting customer's vertical value to the firm or spatial data reflecting customer's horizontal vulnerability are more important determinants of post-LP spending increases. We show how LASSO regularization estimated on complex spatial relationships are more effective than are models using past sales data or simpler spatial models. Finally, we show how firms can use customer and competitor location data to substantially increase LP performance through spatially driven segmentation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Loyalty programs, predictive analytics, spatial models, retail competition, price discrimination, LASSO
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C45 - Neural Networks and Related Topics; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing

References

Ahn, H. and Powell, J. L. (1993). Semiparametric estimation of censored selection models with a nonparametric selection mechanism. Journal of Econometrics, 58(1-2):3–29.

Ascarza, E. (2018). Retention futility: Targeting high-risk customers might be ineffective. Journal of Marketing Research, 55(1):80–98.

Besanko, D., Dube, J.-P., and Gupta, S. (2003). Competitive price discrimination strategies in a vertical channel using aggregate retail data. Marketing Science, 49(9):1121–1138.

Bijmolt, T. H., Dorotic, M., Verhoef, P. C., et al. (2011). Loyalty programs: Generalizations on their adoption, effectiveness and design. Foundations and Trends® in Marketing, 5(4):197–258.

Bronnenberg, B. J. and Mahajan, V. (2001). Unobserved retailer behavior in multimarket data: Joint spatial dependence in market shares and promotion variables. Marketing Science, 20(3):284– 299.

Chen, Y., Li, X., and Sun, M. (2016). Competitive mobile geo targeting. Marketing Science, 36(5):645–812.

Chen, Y., Narasimhan, C., and Zhang, Z. J. (2001). Individual marketing with imperfect targetabil- ity. Marketing Science, 20(1):1–98.

Davis, P. (2006). Spatial Competition in Retail Markets: Movie Theaters. The RAND Journal of Economics, 37:964–982.

DeWulf, K., Odekerken-Schröder, G., and Iacobucci, D. (2001). Investments in consumer relation- ships: A cross-country and cross-industry exploration. Journal of Marketing, 65(4):33–50.

Dreze, X. and Nunes, J. C. (2008). Feeling superior: The impact of loyalty program structure on consumers’ perceptions of status. Journal of Consumer Research, 35(6):890–905.

Dube, J.-P., Fang, Z., Fong, N., and Luo, X. (2017). Competitive price targeting with smartphone coupons. Marketing Science, 36(6):813–1017.

Ellickson, P. and Misra, S. (2012). Enriching Interactions: Incorporating Revenue and Cost Data into Static Discrete Games. Quantitative Marketing and Economics, 10:1–26.

Fong, N. M., Fang, Z., and Luo, X. (2015). Geo-conquesting: Competitive locational targeting of mobile promotions. Journal of Marketing Research, 52(5):726–735.

Hartmann, W. and Viard, B. (2008). Do frequency reward programs create switching costs? a dynamic structural analysis of demand in a reward program. Quantitative Marketing and Economics, 6(2):109–137.

Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica, 47(1):153–161.

Hoch, S. J., Kim, B.-D., Montgomery, A. L., and Rossi, P. E. (1995). Determinants of store-level price elasticity. Journal of marketing Research, pages 17–29.

Hotelling, H. (1929). 1929: Stability in competition. the economic journal 39, 41-57.

James, G., Witten, D., Hastie, T., and Tibshirani, R. (2013). An introduction to statistical learning, volume 112. Springer.

Li, Y., Gordon, B., and Netzer, O. (2018). An empirical study of national vs. local pricing by chain stores under competition. Marketing Science, 37(5):812–837.

Liu, Y. and Yang, R. (2009). Competing loyalty programs: Impact of market saturation, market share, and category expandability. Journal of Marketing, 73(1):93–108.

Luo, X., Andrews, M., Fang, Z., and Phang, C. W. (2014). Mobile targeting. 60(7):17356.

McCall, M. and Voorhees, C. (2010). The drivers of loyalty program success: An organizing framework and research agenda. Cornell Hospitality Quarterly, 51(1):35–52.

Roehm, M. L., Pullins, E. B., and Roehm Jr, H. A. (2002). Designing loyalty-building programs for packaged goods brands. Journal of Marketing Research, 39(2):202–213.

Rossi, P., McCulloch, R., and Allenby, G. (1996). The value of purchase history data in target marketing. Marketing Science, 15(4):301–394.

Seim, K. (2006). An Empirical Model of Firm Entry with Endogenous Product-type Choices. RAND Journal of Economics, 37:619–640.

Shaffer, G. and Zhang, Z. J. (1995). Competitive coupon targeting. 14(4):343–466.

Shugan, S. (2005). Brand loyalty programs: Are they shams? Marketing Science, 24(2):185–193.

Thomadsen, R. (2007). Product positioning and competition: The role of location in the fast food industry. Marketing Science, 26(6):792–804.

Verhoef, P. (2003). Understanding the effect of customer relationship management efforts on cus- tomer retention and customer share development. Journal of Marketing, 67(4):30–45.