Dynamics of price premiums in loyalty programs
Abstract
Purpose
A loyalty program might influence buyer behavior in several ways. Prior research offers evidence that buyers might increase the frequency of purchases and volume per occasion in a loyalty program; however, the effect on buyers' price tolerance has not been studied before. The aim of this paper is to examine buyers' willingness to pay a price premium for a firm offering a loyalty program reward.
Design/methodology/approach
An analytical model of dynamic consumer choice is developed, where one of the two selling firms offers a reward for a certain number of purchases. The maximum price premium that a normatively rational buyer should be willing to pay at each level of accumulated purchases is obtained. A price tolerance in controlled settings is obtained and these are compared with normative solutions.
Findings
Analytically, it is shown that the maximum price premium increases as purchases are accumulated; and the exact solutions can be found, given the price distributions and program design parameters. In the empirical studies it is found that individuals' maximum premiums are less than the normative levels. On the other hand, as buyers accumulate purchases from the reward offering firm, and get closer to the reward, maximum premiums paid increase – particularly when the reward is immediate.
Originality/value
This paper contributes to the loyalty programs literature by examining the price premium, or switching barrier, aspect of buyer response. Furthermore, the paper not only models and solves the normative strategy, but also obtains actual price tolerance in laboratory settings.
Keywords
Acknowledgements
The authors would like to thank Eric Bradlow, Fikri Karaesmen, Ömer Yedekçioğlu, and Demir Çilingir for their contributions at various stages of this research. This research is supported by funds from Koç University.
Citation
Sayman, S. and J. Hoch, S. (2014), "Dynamics of price premiums in loyalty programs", European Journal of Marketing, Vol. 48 No. 3/4, pp. 617-640. https://doi.org/10.1108/EJM-11-2011-0650
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited