Do Frequency Reward Programs Create Switching Costs? A Dynamic Structural Analysis Of Demand In A Reward Program
Source: Stanford University
This paper examines a common assertion that customers in reward programs become "Locked in" as they accumulate credits toward earning a reward. The authors define a measure of switching costs and use a dynamic structural model of demand in a reward program to illustrate that frequent customers' purchase incentives are practically invariant to the number of credits. In their empirical example, these customers comprise over eighty percent of all rewards and over two-thirds of all purchases. Less frequent customers may face substantial switching costs when close to a reward but rarely reach this state.