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Volume 12 Issue 1
February 2009
Bronze, Silver and Gold: Effective Membership Design in Customer Rewards Programs
Anders Hederstierna and Henrik Sällberg
Blekinge Institute of Technology, Ronneby, Sweden
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Many companies use rewards programs to create so called “loyal” customers. Information Technology (IT) has made it possible to design such incentive programs in principle with 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. Surprisingly, field observations show that pro-grams 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 fewer membership levels to in-crease the incentive for the customer to spend money at the company. These three levels come in different versions 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 with 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, with-out any legal penalties. The claim is risky since it is uncertain for the customer if 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 can be questioned as the most effective incentive mechanism.
Keywords:
customer rewards program, customer loyalty, membership levels, incentives, differentiation, time-state-contingent claims
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