The following is from the Oct. 3, 2017, edition of WalletHub. Daniel Howard, a marketing professor in SMU's Cox School of Business, provided expertise for this story.
October 3, 2017
For more information about eye-catching credit card deals, including what credit card companies get in return for giving away so much, WalletHub posed the following questions to a panel of rewards experts:
- How can credit card companies afford to offer big sign-up bonuses?
- How important are limited-time promotions to credit card application rates?
- Are bonus-seekers good customers for credit card companies?
- What does the value of credit card sign-up bonuses tell us about the economy?
From Daniel J. Howard:
How can credit card companies afford to offer big sign-up bonuses?
Credit card companies realize that switching costs for consumers are typically high with a credit card. It is a hassle, and people do not like doing it. Once they get a consumer to sign up, typically the person stays with them. Hence, they make more money over time from the consumer than they gave out to entice them to sign up.
How important are limited-time promotions to credit card application rates?
They are important because they work. It is called a “scarcity tactic.” People want things and value things more when they believe they are unavailable or becoming unavailable. I did a study once that revealed that 14% of retail ads in newspapers use limited time appeals.
Are bonus-seekers good customers for credit card companies?
They may not be the best of customers. Deal-prone consumers tend to be among the least brand loyal of all consumers.
What does the value of credit card sign-up bonuses tell us about the economy?
It says that competition in the credit card industry is very hot. It also says that many people view credit cards as commodities, and in order to differentiate themselves, credit card companies are forced (or believe they are forced) to use outrageous sign up bonuses. Will it work? Only if a significant number of people sign up and most of them stay with the credit card company long enough to allow the company to make their money back.
Read more about the interview and see related comments.