An empirical analysis of loyalty programs and private label demand

Abstract

Loyalty programs (LP) are present in almost all the retailing markets. Most work the same way: a member who purchases today gets a reward to be used next time she is back to the store (or after she crosses some threshold). Previous researchers have concluded that the purpose of LPs as a marketing strategy is customer retention. In the grocery retailing industry it seems to be as well the boost of private label (PL) demand. This paper empirically examines this conjecture. By setting out a simple theoretical dynamic model, I show that even though loyalty rebates are generally deferred, customers perceive current prices lower. Firms take advantage of this to set higher prices compared to those in the absence of LPs, leading higher overall profits. Empirically, I find that although consumers give a lower value to store brands, loyalty programs have a positive and significant effect on PL choice, the marginal valuation for a PL is higher for LP members. Moreover, the more prone to subscribe to LPs a customer is, the higher his sensitivity to a price increase. However, when multi subscription is present the expected effects of LPs are weaker.

Keywords