Quantifying the short- and long-term effects of promotional incentives in a loyalty program: Evidence from birthday rewards in a large retail company

Abstract

Nowadays, many retail companies implement their original loyalty programs to stimulate the willingness of their customers to make a purchase. In these programs, promotional incentives are often incorporated to further enhance customer loyalty; however, few previous studies have assessed the effectiveness of such incentives. Therefore, our study examined both short- and long-term effects of promotional incentives in a loyalty program on customer purchase behavior by analyzing a loyalty program using birthday rewards implemented by a major retail company in Japan. For the analysis, we used the Weibull proportional hazards model, generalized linear model, and Pareto/NBD & gamma-gamma framework after implementing propensity score matching. The estimation results indicated that promotional incentives in a loyalty program temporarily weaken the points pressure effect on the purchase frequency. In addition, promotional incentives in a loyalty program had no positive effect of increasing the customer lifetime value. Furthermore, our study revealed that the lifetime values of loyalty program members who do not exhibit their active purchasing behavior for a certain period of time after impulsive actions induced by promotional incentives are particularly low. These findings will help companies to decide how promotional incentives should be incorporated into their loyalty programs.

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