Customer Rewards Programs : Designing Incentives for Repeated Purchase

Abstract: Firms have since long given their regular customers special treatment. With the help of IT, many firms have established formal ways to do this. An example is a so-called customer rewards program (CRP), by which the firm rewards the customer for repeated purchase. Firms allocate large resources in these programs with millions of customers enrolled. Hence, it seems important that the CRP works effectively. By effective we mean that it increases sales. Whether it is effective or not is a matter of how it is designed. A CRP typically comes with membership levels. We study how many membership levels the firm should offer in an effective program. We also study if customers prefer individual or group rewards and whether a CRP can break and create habitual purchasing behavior. In the study, we also analyze under what conditions the customer prefers a CRP over a sales promotion. In general, the study adds to the understanding of Customer Rewards Programs as an incentive structure. There are many different ways to design these incentives and especially the continuing development of IT is expected to influence the future design and role of these types of programs. This study is part of the Swedish Research School of Management and Information Technology (MIT) which is one of 16 national research schools supported by the Swedish Government. MIT is jointly operated by the following institutions: Blekinge Institute of Technology, Gotland University College, Jönköping International Business School, Karlstad University, Linköping University, Lund University, Mälardalen University College, Stockholm University, Växjö University, Örebro University, IT University of Göteborg, and Uppsala University, host to the research school. At the Swedish Research School of Management and Information Technology (MIT), research is conducted, and doctoral education provided, in three fields: management information systems, business administration, and informatics.