Jiwoong Shin and K. Sudhir on When to Reward Your Customers
In June 2011, Yale SOM marketing professors Jiwoong Shin and K. Sudhir won the John D. C. Little Award at the 33rd INFORMS Marketing Science Conference for their 2010 paper "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?" The Little Award is given annually to the best marketing paper published in Marketing Science or Management Science.
The award-winning paper helps to reconcile a contradiction between marketing theory and practice. Marketing scholars have generally held that in order to maximize profits, firms should attract new customers with low prices, rather than giving discounts to current customers to reward them for their loyalty. But such rewards for existing customers are common in practice.
Shin and Sudhir found that rewarding your own customers can be justified in industries where two conditions apply. First, heterogeneity in customer value is high; that is, a small group of customers provide a large percentage of profits. And second, stability of customer preferences is low: customers can easily switch to competitors.