When making a purchase, a consumer has a choice between using frequent-flier miles, cash, or some combination thereof. Which will he or she choose? Another consumer has an opportunity to participate in a special program to get a free car wash after paying for a certain number of washes. What's the best way for the car-wash owner to motivate the customer to participate?
Such questions are serious business for airlines, hotel chains, credit-card companies and other corporations that offer loyalty programs to customers. Wharton marketing professor Xavier Drèze and Joseph C. Nunes of the University of Southern California's Marshall School of Business have spent several years studying these programs and have reached a number of conclusions as to how they can be structured to generate the most revenue for companies that offer them.
Loyalty programs have been around for more than 100 years and are experiencing an enormous resurgence, according to Nunes. Frequent-flier programs are among the best-known -- American Airlines is credited with launching the first in 1981 -- but companies began trying to win the hearts and minds of customers long before that. One of the early efforts to encourage customer loyalty was the S&H Green Stamps program, which began in the 1930s. Consumers received tiny stamps when they made purchases from participating merchants, glued them onto pages of booklets, and redeemed them for products when the accumulated stamps -- a form of "alternative currency" -- had attained a certain value.
"Trading stamps of all kinds are often seen as the first alternative currency to be awarded to encourage repeat purchases," Nunes notes. "They were initially awarded to customers who paid with cash instead of credit in the 1800s, but evolved into something given out with purchases. After World War II, dozens of companies began trying to outdo each other, offering double, triple and ultimately quadruple stamps.
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