The Impact of Introducing a Customer Loyalty Program on Category Sales and Profitability (CEIBS Working Paper, No. 026/2020/MKT, 2020)

The authors propose and empirically investigate the effect of category-specific attributes as important factors associated with the change in pre- versus post-loyalty program introduction category sales and profits. Category penetration and frequency are positively correlated with loyalty program success with an increase in sales and profits, whereas impulse buying and ability to stockpile show negative correlations. Furthermore, although introducing a loyalty program generates immediate spikes in sales and profits in most categories; its impact is generally short-lived. It results in an initial redistribution of category expenditures during the program launch, where consumers seemingly shift consumption from lightly purchased categories to heavily purchased categories. But the effect soon erodes. Nevertheless, by modeling the diffusion process of loyalty program performance, this paper finds that penetration rate and private label share are key drivers of a category’s sustainable growth. The evolution of consumer price elasticities and promotion sensitivities are tracked pre- and post-loyalty program introduction, and profit-driving categories are identified according to their category characteristics. New insights are offered on category management and long-term program planning.