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AUTHOR:
David
Bell
Harvard University
Rajiv
Lal
Harvard University
TITLE:
The Impact of Frequent Shopper Programs in Grocery Retailing
SUGGESTED CITATION:
David Bell and Rajiv Lal
(2002)
"The Impact of Frequent Shopper Programs in Grocery Retailing",
Review of Marketing Science Working Papers:
Vol. 2:
No. 1,
Article 1.
http://www.bepress.com/roms/vol2/iss1/paper1
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ABSTRACT:
Frequent Shopper programs are becoming ubiquitous in retailing. Retailers
seem unsure however about whether these programs are leading to higher
loyalty, or to higher profits. In this paper we analyze data from a US supermarket
chain that has used a number of frequent shopper rewards to improve
sales and profitability. We find that while these programs are profitable, this
is only because substantial incremental sales to casual shoppers (cherry pickers)
o set subsidies to already loyal customers. In this way our findings are
inconsistent with existing theories about how frequent shopper programs are
supposed to work. We construct our own Hotelling-like model that explicitly
models cherry picking behavior and show that its predictions match the
data quite closely. We further test the predictions of our model by characterizing
the impact of such programs on trip frequency and basket size.
We then use the model to examine more complex scenarios. For example,
our analysis suggests that frequent shopper programs may be unprofitable
if they eliminate all cherry picking. This may explain why some retailers
seem dissatisfied with their programs. We end by proposing a solution that
retains the benefits of the frequent shopper programs and yet continues to
let supermarkets benefit from price discrimination.
