On the value of customer incentive programs

Abstract

This thesis investigates the optimal design and implementation of customer incentive programs, including coalition loyalty programs (CLPs) and take-back programs (TBPs), as tools to enhance customer engagement and build firm competitiveness. Both program types are intended to shape customer behavior beyond a single transaction, thereby generating long-term value for both firms and their customers. The first study explores CLPs, where firms partner with other brands to offer joint loyalty initiatives. Despite their increasing popularity, CLPs remain understudied in comparison to proprietary loyalty programs (PLPs) managed by individual firms. We investigate CLPs and compare them to PLPs using an analytical framework. In an infinite time horizon setting, n firms within a CLP offer nondurable products to a continuum of heterogeneous customers. We analyze the design of CLPs and show that CLPs can significantly expand the range of market conditions under which offering reward programs is desirable. That is, firms have incentives to join CLPs even when PLPs are ineffective since price discrimination can be executed more efficiently. The study also reveals the pivotal role of market composition, customer discounting, and coalition size in the effectiveness of CLPs. In a market with high heterogeneity in customers’ valuations, larger CLPs are not always preferred, offering one explanation for the struggles of some CLPs in their expansion. Conversely, in a market where customer valuations are more homogeneous, the per-firm profit may increase or decrease monotonically with coalition size, or exhibit a non-monotonic relationship, indicating the existence of an optimal intermediate coalition size. The second study examines in-store TBPs, in which firms incentivize customers to return used products or packaging at retail locations. Although TBPs are increasingly adopted by environmentally conscious firms, their implementation remains optional and presents operational and financial challenges. In this study, we investigate the strategic implementation and economic implications of TBPs in competitive markets by comparing three scenarios: no TBP implementation, partial TBP implementation, and full TBP implementation. Customers derive psychological satisfaction from recycling, but also incur hassle costs from the return process. Our analysis reveals that partial TBP implementation can emerge as an equilibrium. Notably, even asymmetric adoption of TBPs can result in win-win outcomes, allowing firms to differentiate themselves by appealing to either environmentally conscious or price-sensitive customers. This, in turn, enhances overall profitability while advancing sustainability goals. Collectively, these studies provide strategic insights into the design and implementation of customer incentive programs. By uncovering key trade-offs and market dynamics associated with CLPs and TBPs, this thesis offers actionable guidance for firms seeking to leverage such programs to remain competitive and responsive to evolving societal expectations.