Decomposing the Promotional Revenue Bump for Loyalty Program Members versus Nonmembers

Abstract

Loyalty programs lead to a natural split of a firm's customer base into members and nonmembers. To manage both groups effectively, it is essential to know how marketing activities, such as promotions, affect both groups' contributions to revenues. The authors model each group's contribution as the number of daily buyers times their average expenditures. The model also includes the number of nonbuyers because they may return as customers. Moreover, nonbuyers may influence the expenditures of other customers through crowding effects, and they use personnel time. Model application to two years of daily data from six clothing stores reveals that the number of nonmembers who buy is much more responsive to price discounts than the number of members who buy. Thus, the decomposition of the promotional revenue bump is strongly moderated by the percentage price discount and the communication mode: direct mail to members only and door-to-door flyers to members and nonmembers.