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The effects of loyalty program introduction and design on short- and long-term sales and gross profits

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Abstract

Loyalty programs (LPs) are marketing investments designed to foster behavioral loyalty among a firm’s best customers and, ultimately, increase firm performance. Surprisingly, the effectiveness of introducing LPs on firm performance in the short and long term has not been thoroughly evaluated. This research examines the extent to which introducing an LP can increase both firm sales and gross profits. Leveraging data from 322 publicly-traded firms that introduced an LP between 2000 and 2015, the authors demonstrate that introducing an LP can increase sales and gross profits in the short term (within the first year), and these positive effects are sustained long term (for at least three years). However, the effects on gross profits do not become significant until the second quarter after LP introduction, and their overall impact on performance lags substantially behind sales. Complementing these primary findings, the results reveal that offering an LP with tiers or earning mechanisms can provide firms with significant increases in sales and gross profits. Taken together, this research demonstrates that introducing strategically designed LPs can dramatically increase firm performance in both the short and long term.

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Notes

  1. As a robustness check, we also re-estimated the models using a “one to one” matched sample (N = 644), and the results were consistent with respect to signs and significance with those using the entire sample of control firms.

  2. We also assessed the effects of LP introduction on a longer time horizon and found that the effects on both the log of sales and log of gross profits remained significant in years 4 and 5 following launch, providing additional evidence of the enduring effects of LP introduction. These results are available from the authors upon request.

  3. As a robustness check, we also estimated the models using OIDBP as an alternative measure of profitability (Feng et al. 2017), and the results were consistent with those reported for gross profits.

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Authors and Affiliations

  1. School of Business Administration, Department of Management and Marketing, University of Dayton, 300 College Park, Dayton, OH, 45469, USA

    Malika Chaudhuri

  2. Culverhouse College of Business, Department of Marketing, University of Alabama, Box 870225, Tuscaloosa, AL, 35487, USA

    Clay M. Voorhees

  3. The Eli Broad College of Business, N466 North Business Complex, Michigan State University, 632 Bogue Street, East Lansing, MI, 48824, USA

    Jonathan M. Beck

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  1. Malika Chaudhuri
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  2. Clay M. Voorhees
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  3. Jonathan M. Beck
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Correspondence to Malika Chaudhuri.

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Son Lam served as Area Editor for this article.

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Chaudhuri, M., Voorhees, C.M. & Beck, J.M. The effects of loyalty program introduction and design on short- and long-term sales and gross profits. J. of the Acad. Mark. Sci. 47, 640–658 (2019). https://doi.org/10.1007/s11747-019-00652-y

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