No abstract

Reward programs, a promotional tool to develop customer loyalty, offer incentives to consumers on the basis of cumulative purchases of a given product or service from a firm. Reward programs have become increasingly common in many industries. The best-known examples include frequent-flier programs offered by airlines, frequent-guest programs offered by hotels, and frequent-shopper programs offered by supermarkets. Despite the widespread business practice of reward programs, research efforts on reward programs, particularly in marketing, have been scarce. Our paper takes an important step towards understanding the design of reward programs and its implications on pricing strategies. We study a market that consists of two segments: heavy- and light-user segments. The key distinction between the two segments is that the heavy-user segment purchases in each period and thus is a candidate for the reward programs. In contrast, the light-user segment exits the market after one purchase and is not in a position to exploit reward programs. An important feature of our model is that we allow for different price sensitivity between heavy-user and light-user segments. Our model closely examines the type of rewards. A reward worth a dollar to the consumer might have different cost implications for the offering firm, depending on the type of reward. For example, cash rewards have higher unit reward cost () for the firm than a free product of the firm, such as an airline ticket or long-distance minutes (). Specifically, we examine an interesting puzzle observed in the marketplace. Several firms offer a cash reward or a product made by the firm, such as jackets, electronic items, etc. These firms could offer their own product as rewards and significantly lower their cost. We examine whether there is any reason for such a seemingly suboptimal practice. Our analysis shows that reward programs weaken price competition. By offering the incentives for repeat purchases, reward programs increase a firm's cost to attract competing firms' current customers. Because firms gain less from undercutting their prices, equilibrium prices go up. Moreover, as consumers become unwilling to switch because of potential rewards, the firm with a larger market share in the heavy-user segment charges higher prices. Therefore, a low price in the first period, which leads to a larger market share in the heavy-user segment, will always be followed by a high price in the second period. In our model, consumers are rational and can correctly anticipate firms' incentive to offer lower prices initially to enroll them into the reward programs. Our paper offers an explanation as to why the type and amount of reward may vary across the programs. We identify two determining factors for the selection of rewards: size and relative price sensitivity of the heavy-user segment. We find that in a market with a small heavy-user segment that is also much more price sensitive than the light-user segment, it is optimal for firms to offer the rewards. The intuition is based on...

This paper studies the optimal product and pricing decisions in a crowdfunding mechanism by which a project between a creator and many buyers will be realized only if the total funds committed by the buyers reach a specified goal. When the buyers are sufficiently heterogeneous in their product valuations, the creator should offer a line of products with different levels of product quality. Compared to the traditional situation where orders are placed and fulfilled individually, with the crowdfunding mechanism, a product line is more likely than a single product to be optimal and the quality gap between products is smaller. This paper also shows the effect of the crowdfunding mechanism on pricing dynamics over time. Together, these results underscore the substantial influence of the emerging crowdfunding mechanisms on common marketing decisions.

Sales contests are commonly used by firms as a short-term motivational device to increase salespeople's efforts. Conceptually, sales contests and piece-rate schemes, such as salary, commission, or quotas, differ in that in sales contests payment to salespeople is based on relative rather than absolute sales levels. Using the agency theoretic framework where the firm is risk neutral and the salespeople are risk averse, we examine how a firm should design an optimal contest to maximize its profit through stimulating salespeople's efforts. Specifically, we investigate how many salespeople should be given awards and how the reward should be allocated between the winners. Three commonly used sales contest formats are studied. In the first format, termed as Rank-Order Tournament, there are many winners and the amount of reward is based on relative rank achieved, with larger amounts awarded to higher ranks. We also examine two special cases of Rank-Ordered Tournament: a Multiple-Winners format, where the reward is shared equally, and a Winner-Take-All format, where a single winner gets the entire reward. We model salespeople's behavior by considering utility of the reward from achieving one of the winning ranks in the contest and assessing incremental chances of winning by exerting more effort. The analysis was done for two situations based on whether the total reward is large enough for salespeople to participate in the effort-maximizing sales contest or not. The analysis shows that factors impacting contest design include the salespeople's degree of risk aversion, number of salespeople competing in the contest, and degree of sales uncertainty (which reflects strength of the sales-effort relationship). The results show that salespeople exert lower effort when there are larger numbers of participants or when sales uncertainty is high. We find that the Rank-Order Tournament is superior to the Multiple-Winners contest format. In a Multiple-Winners format, the salesperson whose performance is just sufficient to win is better off than any of the other winners as he exerts the least effort to win but obtains as high a reward as any other winners. Specific recommendations on contest designs are obtained assuming that sales follow either a logistic or uniform distribution. Assuming that sales outcome is logistically distributed and the contest budget is high enough to ensure participation, our analysis shows that the total number of winners in a sales contest should not exceed half the number of the contestants. This result is due to the symmetric nature of the logistic distribution. Our analysis also indicates that the total number of winners should be increased and the spread decreased when salespeople are more risk averse. When salespeople are more risk averse, their marginal values for higher rewards become smaller. The spread should increase with ranks when rate of risk tolerance is high and decrease with ranks when the rate of risk tolerance is lower. In the extreme case of risk-neutral salespeople, the optimal design is...