Reports

Market Positioning Using Cross-Reward Effects in a Coalition Loyalty Program

Valeria Stourm, Eric T. Bradlow, and Peter S. Fader, 2019, 19-101-01

While single-brand reward programs encourage customers to remain loyal to that one brand, coalition programs encourage customers to be “promiscuous” by offering points redeemable across partner stores. For example, a shoe retailer may reward customers with points that can be redeemed not only at its stores, but also at a clothing store that is a partner of the same coalition program. The more a store’s customers are likely to purchase at other partner stores, the faster they will earn points and the more they will value the reward currency.

Despite the benefits of this type of “open relationship” with customers, store managers face uncertainty as to how rewards earned at other partners influence their own transactions. How does the value of the points shared across the coalition’s partners (i.e., the value of the reward currency) influence how customers purchase across partner stores? Are stores influenced more by the rewards offered by partners competing in the same product categories, or by partners that are geographically near? Are more generous store-level reward policies (for example, offering higher reward rates or accepting redemptions) effective levers to compete?

To address these questions, Valeria Stourm, Eric Bradlow, and Peter Fader model the purchase incidence across forty stores within a European city. Some stores compete directly by selling goods within the same product categories, while others do not. Store policies on how customers earn and redeem points also differ: the rate at which customers earn points differs across stores, and points can only be redeemed at select partners that choose to allow it. They measure cross-reward effects from exogenous variation in reward rates at different points in time and across different stores, including a one-time “shock” in 2009: program managers (not individual stores) devalued the coalition’s points to a third of their original value, while at the same time making it easier for customers to redeem rewards. Although these policy changes occurred at the same time, the authors are able to discern the effects of each because some partner stores accept redemptions while others do not.

Their analyses show how a coalition’s reward currency influences how customers purchase across partner stores. These include: (1) measuring reward cross effects, (2) testing hypotheses on how these effects vary across stores, (3) visualizing the market structure of the coalition, (4) calculating metrics that summarize how much stores influence and are influenced by others’ rewards, and (5) analyzing how cross-reward effects change when the value of the shared reward currency is high versus low.

Put into Practice

These analyses can help coalition managers advise partner stores on their specific reward policies, identify partners likely to mutually benefit from cross-marketing opportunities, and assess the design of the reward policies across the coalition. Their findings are also relevant to firms providing rewards across an umbrella of services, such as theme parks and casinos, that might want to understand cross-category complementarity or substitution.

Valeria Stourm is an Assistant Professor of Marketing at HEC Paris. Eric T. Bradlow is the K.P. Chao Professor of Marketing, Professor of Economics, Professor of Education, and Professor of Statistics at the Wharton School of the University of Pennsylvania. Peter S. Fader is the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania.

Acknowledgments
This article is based on the second chapter of the first author’s doctoral dissertation. The dataset was obtained through the Wharton Customer Analytics Initiative. The authors thank the Baker Retailing Center for funding and Robert Meyer, David Bell, and Eva Ascarza for their comments.

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