A Model of Customer Reward Programs with Finite Expiration Terms

Yacheng Sun () and Dan Zhang ()
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Yacheng Sun: Department of Marketing, School of Economics and Management, Tsinghua University, Beijing 100084, China
Dan Zhang: Leeds School of Business, University of Colorado, Boulder, Boulder, Colorado 80305

Management Science, 2019, vol. 65, issue 8, 3889-3903

Abstract: A little-understood phenomenon of customer reward programs is the prevalent use of finite reward expiration terms. We develop a theoretical framework to investigate the economic rationale behind this phenomenon and the trade-off between short and long expiration terms. In our model, a monopolistic firm sets the expiration term, along with the price and reward size, and interacts with consumers over an infinite horizon. Consumers are heterogeneous in shopping probabilities and product valuations and forward-looking in making purchase decisions. We find that a customer reward program with a finite expiration term can increase firm profits when (i) the valuation difference within the consumer population is intermediate and (ii) the shopping probabilities and valuations are negatively correlated among consumers. Several model extensions confirm the robustness of these results. Finally, we conduct an empirical investigation on the reward program practice of the top 100 U.S. retailers, which provides directional support for several key theoretical predictions.

Keywords: customer reward program; expiration term; reward structure; forward-looking consumers; dynamic programming (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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