Companies are increasingly using frequency reward programs as a part of their marketing/promotion mix.  Airlines reward travelers with free flights after they have accumulated a required level of travel miles.  Hotels reward their customers with free rooms after they’ve stayed at the hotel a certain number of nights.  Bookstores award free merchandise to customers who have purchased a requisite number of books.  The common thread is that frequency reward programs provide customers with a tangible benefit for repeatedly purchasing the company’s product(s).

            Though the benefits to the customer are clear, the fundamental question facing retailers is, “What is the sales impact of frequency reward programs?”  This question is particularly intriguing in that reward programs can increase sales through two mechanisms:  “points pressure” and “rewarded behavior.”  The points pressure mechanism is the short-term impact, whereby customers increase their purchase rate in an effort to earn a reward.  The rewarded behavior mechanism is the long-term impact, whereby customers increase their purchase rate after they’ve received the reward.  If reward programs have a points pressure impact but no rewarded behavior impact, they function essentially as multi-period, but still episodic, promotions.  If however, there also is a rewarded behavior effect, frequency reward programs can be a strategic tool for building the brand.  It is therefore important to understand the relative contributions of these mechanisms to the overall sales impact of a particular reward program.

            In this paper, using actual field data, the authors examine the impact of a turkey reward program offered in two successive years.  The results for both years show a current period “points pressure” impact and a post-program “rewarded behavior” effect.  Store-wide, weekly sales increased on average by 6.1% in year 1 and 6.4% in year 2 during the 8 week program- period, as shoppers increased their purchase levels in order to receive a reward.  This points pressure effect was particularly strong among shoppers who ordinarily do not consider frequent shopper programs to be an important benefit. 

Study findings also revealed that the shoppers who were rewarded with a free turkey experienced a rewarded behavior effect. That is, the redeemers’ purchase rate did not immediately return to pre-program levels after they redeemed the free turkey.  The magnitude of the effect is nearly a 2% weekly increase in store sales over a 7-week period.

It is interesting that the points-pressure effect is larger in aggregate than the rewarded behavior effect.  This is consistent with work in the sales promotion field that finds repeat purchase effects to be smaller than current period effects.  However, the rewarded behavior effect is isolated to a minority of customers who redeem a reward, and can be quite substantial among these customers.

These findings have multiple implications for retailers.  The first implication is that reward programs can contribute to profit.  Just taking into account points pressure, an increase of 6% per customer translates to $2.40 per customer per week (on a base of $40 per week) over the 8 weeks of the program, or $19.20 per customer.  Using a gross margin of 28.4%, this implies a contribution of $5.45 per customer.  With program costs approximating $1.03 per customer the company has an ROI of ($5.45-$1.03)/$1.03 ≈ 400%.  One could make the calculation more precise by including the rewarded behavior effect and more detail on costs, but the calculation illustrates that the reward program can generate substantial profits. 

            A second implication involves the difference between short-term discounts delivered via frequent shopper cards, and the long-term reward delivered through a buy-x-receive-xx reward program.  Both intend to increase store loyalty.  However, the finding of a rewarded behavior effect implies that the reward program actually increases loyalty after the promotion.

            A third implication is that the study results suggest that the frequency reward program is a targeted promotion.  For example, study findings revealed that the promotion was effective among those who place less value on the store’s current frequent shopper program.  The results suggest that a frequency reward program could target one set of shoppers while the everyday frequent shopper program (immediately-available discounts) could target a different set, suggesting there is room for both types of activities in the store’s promotion mix.

            A final implication is that frequency reward programs need to be evaluated both in the short and long term.  The points pressure effect could by itself make the reward program profitable.  However, the rewarded behavior effect can be significant, albeit by definition only among those who receive the reward.