Do Loyalty Programs Really Enhance Behavioral Loyalty? An Empirical Analysis Accounting for Self-Selecting Members

57 Pages Posted: 9 Mar 2007

See all articles by J. Leenheer

J. Leenheer

affiliation not provided to SSRN

Harald J. van Heerde

Massey University - Dept of Communication, Journalism & Marketing

T.H.A. Bijmolt

affiliation not provided to SSRN

A. Smidts

Erasmus Research Institute of Management (ERIM)

Date Written: November 1, 2006

Abstract

One of the pressing issues in marketing is whether loyalty programs really enhance behavioral loyalty. Loyalty program members may have a much higher share-of-wallet at the firm with the loyalty program than non-members have, but this does not necessarily imply that loyalty programs are effective. Loyal customers may select themselves to become members in order to benefit from the program. Since this implies that program membership is endogenous, we estimate models for both the membership decision (using instrumental variables) and for the effect of membership on share-of-wallet, our measure of behavioral loyalty. We use panel data from a representative sample of Dutch households who report their loyalty program memberships for all seven loyalty programs in grocery retailing as well as their expenditures at each of the 20 major supermarket chains. We find a small positive yet significant effect of loyalty program membership on share-of-wallet. This effect is seven times smaller than is suggested by a naïve model that ignores the endogeneity of program membership. The predictive validity of the proposed model is much better than for the naïve model. Our results show that creating loyalty program membership is a crucial step to enhance share-of-wallet, and we provide guidelines how to achieve this.

Keywords: Attraction models, Endogeneity, Grocery retailing, Loyalty programs, Tobit-II model

Suggested Citation

Leenheer, J. and van Heerde, Harald J. and Bijmolt, T.H.A. and Smidts, Ale, Do Loyalty Programs Really Enhance Behavioral Loyalty? An Empirical Analysis Accounting for Self-Selecting Members (November 1, 2006). ERIM Report Series Reference No. ERS-2006-076-MKT, Available at SSRN: https://ssrn.com/abstract=969532

J. Leenheer (Contact Author)

affiliation not provided to SSRN

No Address Available

Harald J. Van Heerde

Massey University - Dept of Communication, Journalism & Marketing ( email )

Dept of Communication, Journalism & Marketing
Private Box 756
Wellington, 6140
New Zealand

T.H.A. Bijmolt

affiliation not provided to SSRN

No Address Available

Ale Smidts

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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