Abstract
Point-based frequency reward programs are widely used by retailers as a sales promotion strategy. To promote a specific product category, retailers offer more favorable reward ratios so that members can earn extra points. This paper examines the impact of reward ratio variations on sales in a multicategory setting and compares the effectiveness of the reward and price promotion strategies. We estimate a multivariate probit model using scanner data of member purchases in four categories, grouped into two category pairs. We found that increasing the reward ratio in a category positively affected its choice probability and that the presence of rewards promotions also had positive impact on the choice probability of nonpromoted but closely related category within the same category pair. As forms of sales promotion, price discounts and reward promotions were shown to substitute for each other. We constructed and computed a measure, the rate of substitution, to quantify the effects of substitution. The financial implications of holding reward promotions are computed and discussed.
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Notes
In the following discussion, we use the term “reward ratio” to refer to the number of reward points a consumer earns for every unit of money spent on particular purchase. Therefore, reward promotions correspond to events in which reward ratios are above the regular level.
Yuan is the unit of the Chinese currency and was approximately worth 1/7 US dollar for the data period.
The prices are standardized as items within the same category may be sold in packages of different sizes, or be measured in a variety of units (milliliters or grams in the case of facial lotions, number of pieces in the case of facial masks, bottles of different sizes for shampoos), hence impossible to compare prices directly. The details of price standardization are available from the authors upon request.
Equation 5 is derived from the following equality: \( \frac{\partial {U}_{kit}}{\partial {\mathrm{Price}}_{kit}}d{\mathrm{Price}}_{kit}=\frac{\partial {U}_{kit}}{\partial ln{\mathrm{Price}}_{kit}}\frac{\partial ln{\mathrm{Price}}_{kit}}{\partial {\mathrm{Price}}_{kit}}d{\mathrm{Price}}_{kit}={\beta}_{kir}\frac{\partial {\mathrm{Price}}_{kit}}{{\mathrm{Price}}_{kit}} \).
As the regular reward ratio at the retailer is 0.1 reward point for each yuan spent, and one reward point can be redeemed for 0.1 yuan, assuming all reward points are redeemed eventually, the effective costs for the retailer is equivalent to 1 % price cut.
We are indebted to an anonymous reviewer for suggesting this analysis.
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Wei, L., Xiao, J. Are points like money? An empirical investigation of reward promotion effectiveness for multicategory retailers. Mark Lett 26, 99–114 (2015). https://doi.org/10.1007/s11002-013-9270-1
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DOI: https://doi.org/10.1007/s11002-013-9270-1