Quantitative Marketing and Economics

, Volume 1, Issue 2, pp 179–202 | Cite as

The Impact of Frequent Shopper Programs in Grocery Retailing

  • Rajiv LalEmail author
  • David E. Bell


Frequent shopper programs are becoming ubiquitous in retailing. Retailers seem unsure however about whether these programs are leading to higher loyalty, or to higher profits. In this paper we analyze data from a U.S. supermarket chain that has used a number of frequent shopper rewards to improve sales and profitability. We find that while these programs are profitable, this is only because substantial incremental sales to casual shoppers (cherry pickers) offset subsidies to already loyal customers. In this way our findings are inconsistent with existing theories about how frequent shopper programs are supposed to work. We construct our own Hotelling-like model that explicitly models cherry picking behavior and show that its predictions match the data quite closely. We further test the predictions of our model by characterizing the impact of such programs on trip frequency and basket size. We then use the model to examine more complex scenarios. For example, our analysis suggests that frequent shopper programs may be unprofitable if they eliminate all cherry picking. This may explain why some retailers seem dissatisfied with their programs. We end by proposing a solution that retains the benefits of the frequent shopper programs and yet continues to let supermarkets benefit from price discrimination.

frequent shopper programs loyalty programs grocery retailing game theory 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Caminal, Ramon and Carmen Matutes. (1990). “Endogenous Switching Costs in a Duopoly Model”, International Journal of Industrial Organization 8, 353-373.Google Scholar
  2. Curtis, James. (1999). “Cards versus Cuts in the Loyalty Wars”, Marketing, London.Google Scholar
  3. Dowling, Grahame R. and Mark Uncles. (1997). “Do Customer Loyalty Programs Really Work?”, Sloan Management Review Summer, 71-82.Google Scholar
  4. Dreze, Xavier and Stephen Hoch. (1998). “Exploiting the Installed Base Using Cross-merchandising and Category Destination Programs”, International Journal of Research in Marketing 15, 459-471.Google Scholar
  5. East, Robert, Annik Hogg, and Wendy Lomax. (1998). “The Future of Loyalty Schemes”, Journal of Targeting, Measurement and Analysis for Marketing 7(1), 11-21.Google Scholar
  6. Heskett, James L., Earl Sasser, W. Jr., and Leonard A. Schlesinger. (1997). The Service Profit Chain. New York: Simon and Schuster.Google Scholar
  7. Kim, Byung-Do, Mengze Shi, and Kannan Srinivasan. (2001). “Reward Programs and Tacit Collusion”, Marketing Science 20(2), 99-120.Google Scholar
  8. Kim, Byung-Do, Mengze Shi, and Kannan Srinivasan. (2001). “Managing Capacity through Rewards Programs”. Working paper, Carnegie Mellon University.Google Scholar
  9. Klemperer, Paul. (1987). “The Competitveness of Markets with Switching Costs”, Rand Journal of Economics 18(1) (Spring), 138-150.Google Scholar
  10. Kopalle, Praveen, et al. (1999). “The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment”. Working paper, Amos Tuck School of Business Administration, Dartmouth College, Hanover, NH.Google Scholar
  11. Kramer, Jon. (2000). “Fool's Gold”, Supermarket Business. New York.Google Scholar
  12. Sharp, Byron and Anne Sharp. (1997). “Loyalty Programs and their Impact on Repeat-purchase Loyalty Patterns”, International Journal of Research in Marketing 14, 473-486.Google Scholar
  13. Shepherdson, Nancy. (2000). “Holding all the Cards”, American Demographics 22(2), 35-37.Google Scholar
  14. Woolf, Brian P. (1996). Customer Specific Marketing. Teal Books, Greenville, SC, USA.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  1. 1.Harvard Business SchoolBoston

Personalised recommendations