Bronze, Silver and Gold: Effective Membership Design in Customer Rewards Programs

Document type: Conference Papers
Peer reviewed: Yes
Author(s): Anders Hederstierna, Henrik Sällberg
Title: Bronze, Silver and Gold: Effective Membership Design in Customer Rewards Programs
Translated title: Brons, Silver och Guld: Effektiv design av medlemskapsnivåer i kundbelöningsprogram
Conference name: 2nd European Conference on Information Management and Evaluation
Year: 2008
ISBN: 978-1-906638-12-2
Publisher: ACADEMIC CONFERENCES LTD
City: London
ISI number: 000261579800023
Organization: Blekinge Institute of Technology
Department: School of Management (Sektionen för management)
School of Management S- 371 79 Karlskrona
+46 455 38 50 00
http://www.bth.se/mam/
Authors e-mail: ahe@bth.se, hsa@bth.se
Language: English
Abstract: Many companies use rewards programs to create so called “loyal” customers. Information Technology (IT) has made it possible to design such incentive programs with in principle endless variations at a low cost. It means that the company can, with the use of IT, offer non-linear incentives that create “loyal” customers more effectively than linear ones. Internet has also reduced the cost for the customer to search and compare products and services like air flights, hotels etc. In such a competitive context, the company can use the programs to gain an advantage with a differentiated offer to the customer and to create lock-in effects still at a low IT cost. Field observations show surprisingly that programs look very much alike and do not present as much variation as could be expected. Of special interest in this paper is the fact that companies typically offer three, or less, membership levels to increase the incentive for the customer to spend money at the company. These three levels come in different versions like, for example, “Bronze”, “Silver” and “Gold” or with similar labels. The reward to the customer is generally associated and accelerated with membership level. In this paper, we analyze the consequences of using membership levels as a way to create both competitive differentiation and effective customer incentives. We suggest a model for understanding how the consumer decides on spending at a company that offers a reward program with different membership levels. The decision setting for the customer is described as a risky contract with a risky time-state-contingent claim. The contract is risky since the terms and conditions for membership can be altered by the company, without any legal penalties. The claim is risky since it is uncertain to the customer whether the state required for the membership will be achieved. We show with the help of this model that the present use of a small number of membership levels could be questioned as the most effective incentive mechanism.
Summary in Swedish: Innehåller en analys av varför flygbolag och hotellkedjor använder typiskt tre medlemsnivåer i sina kundbelöningsprogram (lojalitetsprogram). En modell av vilka incitament för kunden att spendera mot dessa nivåer presenteras. Modellen visar att företagen, med hjälp av IT, bör använda fler nivåer än tre för att skapa maximala incitament för kunder. Nyckelord: kundbelöningsprogram, lojalitetsprogram, medlemsnivåer, incitament, differentiering, time-state-contingent-claims
Subject: Business Administration\Information
Business Administration\Marketing
Keywords: customer rewards program, customer loyalty, membership levels, incentives, differentiation, time-state-contingent claims.
Note: Published in The Electronic Journal of Information Systems Evaluation. http://www.ejise.com/
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