With consumers typically not needing the incentive of a coupon to return to their favorite physical store, discounts from loyalty reward programs tend to be more effective in encouraging repeat customers online, according to a new university study.
Internet shoppers are "more variable," intently looking for bargains and less loyal to particular websites, writes Sanghee Lim, an assistant professor at Johns Hopkins Carey Business School in her study, "Loyalty programs and dynamic consumer preference in online markets," published in Decision Support Systems.
"Offline stores may be giving away profits when they offer loyalty rewards to customers who will keep coming back anyway, regardless of any discount that's offered," Prof. Lim said in a statement. "Online shoppers, on the other hand, may use a coupon to revisit a retail website even when it's not one of their preferred sellers."
The findings are based on the game-theoretic model developed by economist Harold Hotelling, which analyzes the economic activities in a market consisting of two firms. Prof. Lim's study looked into how consumers might behave after making a purchase. It particularly looked into three factors: price, potential rewards (including coupons for repeat customers), and possible expenses such as transportation.
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The study claims to be the first to compare the effectiveness of loyalty reward programs in both online and offline markets. It also investigates the value of the transaction data collected through loyalty programs, or information about consumer habits and preferences that triggers the mailing of coupons to regular buyers of particular products.
Online retailers were found to reap greater benefits using transaction data to build loyalty programs. For brick-and-mortar stores, transaction data might lead to the offer of rewards to loyal customers, but price competition would probably eat into any profits that offline merchants in relative proximity of each other might make from their programs, said Prof. Lim.
Prof. Lim suggests that future studies of the topic could look at periods of more than two purchases and at the ways loyalty rewards might best be used by companies that have both offline and online channels. The paper compared rewards programs among online-only and offline-only retailers.