Can Non Tiered Customer Loyalty Programs Be Profitable?
We examine the effectiveness of a customer loyalty program with a non tiered reward structure. We use a unique data set consisting of all transactions at a chain of hair salons from both before and after the implementation of the loyalty program. We find that the loyalty program is profitable despite the approximate linear structure of the reward that provides a 5% discount to members who regularly return. Importantly, the increased profitability would be hard to pinpoint if a researcher did not have data from both before and after the reward program introduction. The increased profits come from increasing the frequency of visits, and more importantly, from reducing the attrition rate. We find that the de facto discount received by members who redeem rewards is only about 2.7% (the average discounts to all members is only 0.7% These redeeming members increase the frequency of visits by 1.9% Further, the introduction of the loyalty program leads to an approximately 3% increase in customer lifetime value across all consumers. With some basic assumption, this reflects a 6% increase in the value of the program's members, meaning that the program has a significant net benefit to the firm.