The Win-win Mechanism of Loyalty Programs Partnerships: Considering the Customer Heterogeneity

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1 Association for Information Systems AIS Electronic Library (AISeL WHICEB 013 Proceedings Wuhan International Conference on e-business Summer The Win-win Mechanism of Loyalty Programs Partnershis: Considering the Customer Heterogeneity Li Chunqing College of Economics and Management, Xi'an Technological University Ma Juning College of Economics and Management, Xi'an Technological University Fan Yi College of Economics and Management, Xi'an Technological University Follow this and additional works at: htt://aisel.aisnet.org/whiceb013 Recommended Citation Chunqing, Li; Juning, Ma; and Yi, Fan, "The Win-win Mechanism of Loyalty Programs Partnershis: Considering the Customer Heterogeneity" (013. WHICEB 013 Proceedings. 43. htt://aisel.aisnet.org/whiceb013/43 This material is brought to you by the Wuhan International Conference on e-business at AIS Electronic Library (AISeL. It has been acceted for inclusion in WHICEB 013 Proceedings by an authorized administrator of AIS Electronic Library (AISeL. For more information, lease contact

2 596 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track The Win-win Mechanism of Loyalty Programs Partnershis: Considering the Customer Heterogeneity Chunqing Li, Juning Ma, Yi Fan College of Economics and Management, Xi'an Technological University, Xi'an, , China Abstract: Considering the heterogeneity of customer urchase behavior in loyalty rograms artnershis, in the asymmetric situation of enterrise A who joins the loyalty rograms artnershis while enterrise B who imlements customer loyalty rograms alone, discussing the win-win mechanism of loyalty rograms artnershis through the two stage game model, and roviding equilibrium rice and asymmetric equilibrium existence conditions of enterrise A and B. The results show that the rofits of enterrise A who joins loyalty rograms artnershis is higher than the rofits of the two enterrises who don t join loyalty rograms artnershis, and the rofits of enterrise B who doesn t join loyalty rograms artnershis is higher than the rofits of the two enterrises who both join the loyalty rograms artnershis. Keywords: loyalty rograms artnershis, asymmetric equilibrium, customer heterogeneity, Hotelling model 1. INTRODUCTION Loyalty rograms artnershis is short for "customer loyalty rograms artnershis", it is a marketing attern which droved by exchanging the rewards oints based on the enterrise alliance and the consumer alliance [1]. Loyalty rograms artnershis rovides a new way to imrove customer loyalty for enterrises, a variety of consumtion atterns for consumers, a innovation marketing method for alliance arties, and it also lays an imortant role in imroving the oularity of enterrises and keeing sustainable cometitive advantage []. Many scholars think that enterrises who imlement customer loyalty rograms can imrove customer loyalty through the rewards of customer urchase, so as to create goodwill and imrove rofitability [3]-[4], Bolton (004 think loyalty rograms artnershis strengthen the customer loyalty and enhance the erformance of the action because of its reinforcing effects on customer urchase and the higher commitment and switching costs which customer erceived [5]-[7]. Lemon and Wangenheim (009 think that the mechanism enhance and achieve the goal of win-win when loyalty rograms artnershis is in effective oeration state [8]-[10]. Sookyoung & Heajung (009 analysis the loyalty rograms artnershis of different industries, the brand image of enterrises can enhance when multile industries join loyalty rograms artnershis [11]. A art of the research achievements have been made, however, the win-win mechanism of loyalty rograms artnershis is needed to further study. Therefore, in this aer, according to the characteristics of loyalty rograms artnershis and considering the customer heterogeneity, in the case of asymmetric enterrise marketing strategy (that is, enterrise A who joins loyalty rograms artnershis while enterrise B who doesn t join the loyalty rograms artnershis, to analyze the market equilibrium and otimal rofits of enterrises through the discussion of the customer continuous urchase robability, the rewards of customer loyalty rograms and the rewards of loyalty rograms artnershis.. MODELING Assume that enterrise A and B who rovide homogeneous roducts or service are in duooly market and the market size is 1, enterrise A who joins loyalty rograms artnershis while enterrise B who imlements

3 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track 597 customer loyalty rograms alone. Enterrise A and B are located in the ends of the line which length is 1 resectively. Consumers are uniform distributed in the line of 0 to 1and choose which enterrise to consume mainly deends on the following three factors: the rice of roducts or service, the distance of consumers and enterrises and the rewards of customer loyalty rograms. Alliance and enterrises reward the customers who urchase in the two continuous stages, the customer would get β of the alliance in rewards if he urchases in enterrise A in the two continuous stages or urchases in enterrise B in the first stage and urchases in enterrise A in the second stage; the customer would get α ( β > α of enterrise B in rewards if he urchases in enterrise B in the two continuous stages; the customer would not get anything in rewards if he urchases in enterrise A in the first stage, and urchases in enterrise B in the second stage. Therefore, the whole market is divided into three segments, customers in the range of [0, x1] who urchase in enterrise A in the two stages, customers in(x1, x who urchase in the first stage and leave in the second stage, but there will be the same number of customers who come into the market in the second stage, customers in [x, 1] who urchase in enterrise B in the two continuous stages. Customers in the middle of the range (x-x1 who urchase in enterrise A in the first stage, and continue to urchase in enterrise A in the second stage would get β of the alliance in rewards, if the customer switch to urchase in enterrise B he can not get anything in rewards. Assume that this art of the customers urchase in enterrise B in the first stage, and switch to urchase in enterrise A in the second stage, he would get a greater β in rewards after the two continuously urchase. Obviously, the switch of customers will only occur in the situation of enterrise B to A (see figure 1. 0 x 1 x 1 Enterrise A Figure 1. Market structure Enterrise B The rice decision-making of the enterrise and customer urchase behavior are divided into two stages. In the first stage, the enterrise A and B announce the rice of the roducts, customers decide which enterrise to urchase; assume that the robability of customers who urchase in the two stage is, at the end of the first stage, there are 1- customers loss, in order to kee the total market size constantly, there will be added in the same amount of customers in the second stage, there are µ customers of this art who urchase in enterrise A, and 1- µ customers who urchase in enterrise B. In the second stage, the enterrise A and B announce the rice of roducts, customers decide which enterrise to urchase; At the end of the second stage, the customers who urchase roducts in the two stage continuously will get rewards (see figure. On the basis of above hyothesis, the enterrise two stage total revenue function is as follows: ( ( ( π π + π x + [ x 1 β + x x + 1 µ ] (1 A 1a a 1a 1 1 a a 1 a ( 1 ( 1 ( 1 ( 1 ( 1 π π + π x + α x + µ ( B 1b b 1b b b 1a is the rice for customers who urchase in enterrise A in the first stage, a is the rice for

4 598 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track x1 x x1 1 x A B The first stage Purchase in A Purchase in B with 1b with 1a The second stage Purchase in A with a, urchase continuously urchase in B with b, will get β in rewards, transfer will get will getα in rewards nothing 1-1- µ 1 µ F Figure. Customer urchase behavior in two stage model customers who urchase in enterrise A in the second stage, who urchase in enterrise B in the two stages resectively. 1b and b are the rices for customers 3. SOLUTION METHOD FOR MODEL In order to get the solution, we use reverse ush induction in the two stage game. First of all, according to the rincile of enterrise rofits maximization in the second stage, we find out the rices of roducts or service in the second stage; ( 8β ( ( ( ( 4 1+ α α + 3 a x x (3 ( 4β ( ( ( ( 4 α 1 4α b x x ( x x1 ( ( ( α β α 5 + µ x ut 1, x, a, b, µ into two stage rofits equations(1(,solving 1a and 1b (4 (5 resectively

5 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track 599 π A when 1 a 0 π B, 1 b 0, 1a and 1b are the equilibrium rices of the first stage, the concrete exression of the letters in (6 and (7are in the aendix. BE + C 1a 1 BD (6 DC + E 1 B 1 BD (7 4. THE CONDITIONS OF ASYMMETRIC EQUILIBRIUM EXISTENCE In order to rove that the existence of asymmetric equilibrium, we need to rove that the rofits of enterrise A who joins loyalty rograms artnershis alone is higher than the two enterrises who don t join loyalty rograms artnershis; And we have to rove that the rofits of two enterrises A and B, when enterrise A joins loyalty rograms artnershis alone while enterrise B doesn t join loyalty rograms artnershis is higher than the two enterrises who both join the loyalty rograms artnershis. So we need to rove the following equations: * α + 3α 4α + 6 A Asym π ( > ( * β + 3β 4β + 6 B Asym π ( > ( (8 (9 If the equations are satisfied at the same time, it means that the equilibrium solution is existence in the asymmetric condition. Obviously, it deends on three arameters: rewards of loyalty rograms artnershis, rewards of enterrise who imlements loyalty rograms artnershis alone and the robability of customers who urchase in the two continuous stages. Due to the comlexity of the exression of equilibrium rofits, it is difficult to solve directly, so we use numerical analysis to rove the conditions of asymmetric equilibrium existence. First of all we need to consider the range of the arameters, in our study the range of the three arameters is (0, 1. For the solution of the inequality, we calculated the value of the exressions before the greater-than sign, if the value is ositive, the inequality is established, if the value is negative, the inequality is not established. Before the calculation we fixed the continuous urchase robability, make it as a known variable, then take in 0.1, 0., 0.3, 0.4, 0.5, 0.6, 0.7, 0.8 resectively, and take values of α and β in the range of [0,0.8]. First of all, we calculated values of 3.1. The range of is 0.1 to 0.6, values of the exression are negative, and inequality 8 is not established. That is to say, when the two stages continuous urchase robability is less than or equal to 0.6, in the condition of β > α, the rofits of enterrise A who joins customer loyalty rograms artnershis alone is less than who doesn t join. At this time the otimal decision of enterrise A is not joining customer loyalty rograms artnershis, and imlementing the customer loyalty rograms indeendently like enterrise B. table 1. When the two inequalities 8 and 9 above are established at the same time, values of α and β are shown in

6 600 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track 0.7 Table 1. The value condition of inequalities are established at the same time 0.8 α (0.57,0.69 (0.6,0.7 (0.01,0.09 (0.11,0.19 (0.1,0.9 (0.31,0.39 (0.41,0.49 (0.51,0.59 (0.61,0.69 β (0.58,0.70 (0.7,0.8 (0.08,0.10 ( (0.8,0.30 (0.38,0.40 (0.48,0.50 (0.58,0.60 (0.68,0.70 In the range of table 1, as for enterrise A, the rofits of joining customer loyalty rograms artnershis is higher than the two enterrises who don t join customer loyalty rograms artnershis; As for enterrise B, when enterrise A joins customer loyalty rograms artnershis alone, the rofits of enterrise B who doesn t join customer loyalty rograms artnershis is higher than the two enterrises are both joining the customer loyalty rograms artnershis. So at this time, the otimal decision of enterrise A is to join the customer loyalty rograms artnershis, the otimal decision of enterrise B is not to join the customer loyalty rograms artnershis but to imlement customer loyalty rograms indeendently. The calculation and analysis show that asymmetric equilibrium is existed and the equilibrium is not single. Obviously, among the several equilibriums there are low efficiency equilibrium solutions, the integral rewards which the enterrises give to customers is the main costs of enterrises when imlement customer loyalty rograms, the higher rate of rewards, the higher costs of enterrises is. So among several equilibriums, when the value of is equal to 0.8, take α in the range of (0.01, 0.09, take β in the range of (0.08, 0.10, comared with other equilibrium solutions, the costs of enterrises who ay for the rewards is the lowest, so as for the enterrises, this is the best symmetrical balance. 5. CONCLUSIONS This aer consider the heterogeneity of urchase behavior of customer in the loyalty rograms artnershis, in the asymmetric situation of enterrise A who joins the loyalty rograms artnershis while enterrise B imlements the customer loyalty rograms alone, examine the win-win mechanism of loyalty rograms artnershis through the two stage game model. We found that, under certain conditions, the asymmetric equilibrium exists in the market, namely the rofits of enterrise A who joins loyalty rograms artnershis is higher than two enterrises who don t join loyalty rograms artnershis, the rofits of enterrise B who doesn t join loyalty rograms artnershis is higher than two enterrises who both join loyalty rograms artnershis. At this oint, the two enterrises have higher rofits. If the customer urchase in the two stages continuously, the adation of different market ositioning for enterrises is rofitable, such as a enterrise rovides loyalty rograms artnershis and another enterrise adats the low rice cometition strategy. The asymmetric equilibrium makes customer segment through the urchase, and makes the two enterrises have higher rofits. We can use emirical methods in the future, to distinguish target markets through the enterrise customer transaction data, and to make the enterrises adat more targeted marketing. We can measure the comrehensive costs of imlementation of loyalty rograms artnershis according to the actual oeration data, the settlement rules of enterrises in loyalty rograms artnershis and the rewards of customer loyalty rograms, and then to otimize the corresonding rate of rewards.

7 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track 601 ACKNOWLEDGEMENT This aer is suorted by National Natural Science Foundation of China ( ; Foundation of Ministry of Education of China for Youth (YJC630149; Scientific Research Plan Projects of Shannxi Education Deartment(010JK141; The Ordinary University Philosohy and Social Science Disciline Construction Project of Shaanxi Education Deartment; The Program for Innovative Science and Research Team of Xi'an Technological University. REFERENCES [1] Li Chun-Qing, Fan Yi, Ma Jun-ing et al. (011.The Reinforcing Effects of Loyalty rograms artnershis: A Framework and Proositions for Future Research. Journal of Chinese Marketing, (10: [] Wang Xiao-guang. (004. Loyalty rograms artnershis: New Weaon of strategic alliance. Enterrise Reform and Management, (1: [3] O Brien, Louise, Charles Jones. (1995.Do Rewards Really Create Loyalty? Harvard Business Review, 73(5-6: [4] Shoemaker, Lewis. (1999.Customer Loyalty: The Future of Hositality Marketing. Hositality Management, (18: [5] Drèze Xavier, Nunes Joseh C. (008.Feeling Suerior: The Imact of Loyalty Program Structure on Consumers Percetions of Status. Journal of Consumer Research, 35 (4: [6] Bolton, Ruth N., P. K. Kannan, and Matthew D. Bramlett. (000.Imlications of loyalty rogram membershi and service exeriences for customer retention and value. Journal of the Academy of Marketing Science, 8 (Winter: [7] Bolton, Ruth N., Katherine N. Lemon, and Peter C. Verhoef. (004.The theoretical underinnings of customer asset management. Journal of the Academy of Marketing Science, Vol.3 (Summer: [8] Lemon Katherine N, Wangenheim Florian V. (009.The Reinforcing Effects of Loyalty Program Partnershis and Core Service Usage: A Longitudinal Analysis. Journal of Service Research, 11(4: [9] Yi Youjae, Hoseong Jeon. (003.Effects of loyalty rograms on value ercetion, rogram loyalty, and brand loyalty.journal of Academy of Marketing Science,31(3:9-40 [10] Nor Asiah Omar, Che Aniza Che Wel,Rosidah Musa and Muhamad Azrin NazrProgram. (010.Benefits, Satisfaction and Loyalty in Retail Loyalty Program: Exloring the Roles of Program Trust and Program Commitment.Journal of Marketing Management,4(4:6-18 [11] Sookyoung Ahn, Heajung. (009.Co-Marketing Alliances Between Heterogeneous Industries: Examining Perceived Match-U Effects in Product, Brand and Alliance Levels. Journal of Retailing and Consumer Services, (16: BE + C 1 a 1 BD 1B DC + E 1 BD APPENDIX where B C (6 (3(5(14 (14(4( (15(4(5 (3((16 {(5 (14((5 (15(5 ( (16} 1 (4 + (1(5 + (13( + (4( (15(4(5 (16(1 {(5 (14((5 (15(5 ( (16}

8 60 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track D E where (1 ( (9(4( (9(1(5 (10(1( (11(6(5 (3 (8(3(6 + (10(3 + (11(6 (1 (7(3 (8(6 (9(1(6 (9(3(4 (10(1(3 (11(4(6 (3 (8(3(6 + (10(3 + (11(6 8( β + αβ ( β + αβ + ( 3 α + α ( 3β β αβ ( α + α + + α α + β β αβ + α β ( α + α ( ( ( α + α + + α α + β β αβ + α β ( α + α ( ( ( α + α + + α α + β β αβ + α β 8( β + αβ ( β + αβ ( 4α 3α 3α ( α + α + + α α + β β αβ + α β ( α + α ( ( β β αβ ( β + αβ ( α + α + + α α + β β αβ + 3α β ( ( β + αβ 3 1 ( ( α + α + + α α + β β αβ + α β ( ( β + αβ 3 1 ( ( α + α + + α α + β β αβ + α β ( ( ( ( ( 1 ( 9( α + 3 β 1 β α + 3 4β α ( ( 3( ( ( ( ( ( ( α + 3 α α α α ( (9 ( + ( ( 3( 1 ( ( 9( α β + α β β α + β + α ( 8 8 3( 1 9( 1 8β 1 β + β β (10 + ( ( + ( 4 + 9( 1 α α α

9 The Twelfth Wuhan International Conference on E-Business Innovation Management and IT Business Value Track 603 (1 ( 13 ( 14 ( 15 ( ( ( ( ( ( ( ( ( 1( 3 9( 1 α α + α α + + α α + + α α ( ( ( ( ( ( 4β 1 α β 4α 3 4β α β β ( ( α ( ( 1( 1 9( 1 α α (

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