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How can credit card companies afford to offer big sign-up bonuses?

The profitability of a customer is not measured by a single transaction or by a month of those. It is measured according to the customer lifetime value (CLV). The CLV is the total discounted net profit of customers across their entire time with the firm. What credit companies are trying to do is to calculate the CLV of every prospect and to offer an incentive that still makes the customer profitable. For example, if a customer has a CLV of $1000, offering $500 to join would still leave the firm with a $500 profit in the long run.

How important are limited-time promotions to credit card application rates?

Limited-time, or restricted promotions are not special to credit cards. What they do is create a sense of scarcity that promotes action on the part of the customer. This usually helps in cases where the market has relatively low differentiation and high customer uncertainty. These conditions happen to be a good fit with the credit industry.

Are bonus-seekers good customers for credit card companies?

This could go both ways. Notice, though, that unlike groupon, getting customers who follow bonuses may be good for credit companies in the long run.

What does the value of credit card sign-up bonuses tell us about the economy?

It probably is an indication that consumers are a bit more skeptic and are slower to take on more credit, which makes the industry ever more competitive and aggressive in an attempt to recruit new customers. It also might suggest that the abundance of data is allowing credit companies to better calculate CLV, and thus employ more aggressive strategies without increasing their risk exposure.

How can credit card companies afford to offer big sign-up bonuses?

Credit card companies charge consumers on the back end through over limit fees, late fees, and interest rates to make up the companies' costs on sign-up bonuses. It can be tricky because consumers see the concrete benefit upfront which is easy to value, but it is much harder for any given consumers to guess how much they will pay over the life of the credit relationship.

Are bonus-seekers good customers for credit card companies?

Even though individuals are bad at predicting how much their credit card will cost them, credit card companies are amazing at it. They have millions of data points to use to estimate how much they will make from fees from consumers, and they leverage that information to build their business. While it might seem hard to believe, your credit card company is able to predict how you will use your card way better than you are.

How can credit card companies afford to offer big sign-up bonuses?

The credit card companies make a lot of money. They charge a percentage of the purchase -- often around 2% -- to the vendors who use the cards and that translates into big bucks for marketing. Recently, Chase entered the market with a high end travel card to compete with American Express for the luxury consumers who spend heavily and expect big rewards.

How important are limited-time promotions to credit card application rates?

Even a few customers who sign up offer value to the credit card company. The companies are hoping to attract people who pay only minimum balances, thus racking up additional fees to add to the bottom line.

Are bonus-seekers good customers for credit card companies?

Most likely. Credit card companies like people who do not pay their full balances, so they can charge fees. However, even customers who pay their full balances offer the opportunity for the firms to make money from vendors.

What does the value of credit card sign-up bonuses tell us about the economy?

The average American has $16,000 in credit card debt. The Economic Policy Institute estimates that half of Americans do not have a retirement savings account at all and almost half of working-age families have nothing in retirement savings.

The credit card debt means less money available for daily expenses and less for savings. This is likely to become a long-term problem for the elderly and big public policy headache in the future.

How can credit card companies afford to offer big sign-up bonuses?

ROI. For what looks like a large upfront incentive to open a card account, the long-term revenue stream will more than make up for the "one-time payout," or even an ongoing cash back offer. Between the retailer transaction fee and the interest paid by the consumer, credit card brands stand to gain much more than appear to lose. They may even get a referral or two from a happy customer during a credit card conversation with friends and relatives.

How important are limited-time promotions to credit card application rates?

Like any consumer incentive, the goal is to motivate prospects to act. Card companies are in a constant state of A/B split testing of their offers and messages to continually hone both. Limited-time promotions work well, spiking application numbers for a while. However, these offers are susceptible to wear out, or another card company coming along with a better offer and maybe even a better way to message the offer, i.e., advertising. At that point, the card company needs to hit the reset button to offer up a fresh new promotion, more attractive than competitors', to grab the consumer's attention and get them to respond.

Are bonus-seekers good customers for credit card companies?

Just because someone is a bonus-seeker doesn't automatically mean he/she is going to be a net loss for a card company. What it really indicates is that we have more savvy card shoppers today who have the time and wherewithal to do their research to get the best offer out there. Personally, my family holds and uses several different cards to maximize our bonuses, mainly cash back, and we use them to pay for most of our purchases. That's good for any card company.

How can credit card companies afford to offer big sign-up bonuses?

Essentially, the only way to do this is to make money on the back end. For instance, gradually or periodically raising the interest rates for carryover charges; adding additional features like a chairman's club opportunity in an airport in return for annual fees. What happens is that you create a desirable reason to sign up and then gradually remove or alter that part of the deal. The key is understanding the trigger point that will lead customers to look elsewhere.

How important are limited-time promotions to credit card application rates?

Similar to the first question, yes, limited promotions offer numerous opportunities for the credit company, and if carefully managed, for the consumer as well. What does it do for the firm -- primarily it adds new customers to the base. The keys are the costs associated with acquiring the customer and the maintenance costs to keep them. Assuming that switching barriers can be erected (i.e., making it more difficult for the customer to change providers) this can be an effective approach. Customers don't like change and relatively few like to change credit companies frequently -- too much effort.

Therefore, the goal is to keep them by understanding what drives their choices and reasons for staying. For the consumer, these opportunities offer the unique ability to pay off existing credit balances at significantly lower rates. The threat for all consumers is the idea that carrying a balance is generally not an economically viable approach.

Are bonus-seekers good customers for credit card companies?

As always, yes and no. The yes first: you must, I repeat, must understand the value proposition that you offer and what the customer wants. When these two entities align, life is good. The key is to identify customer desires that can be delivered with minimal costs to the firm. For instance, preferred customers may have a designated line or service option that offers more efficiency. The problem is that "deal-seekers" have a prior history of leaving -- create barriers to prevent that.

Price-sensitive customers are not loyal customers. This is where the no comes in. In the absence of switching barriers, the consumer passes through. Managers may be rewarded for additional "sign-ups" but these customers should not have been enrolled in the first place. This is both interesting and requires a significant intellectual investment to best understand and manage.

What does the value of credit card sign-up bonuses tell us about the economy?

It shakes the trees. We have become an economy of deal seekers and thoughtless service providers. Customers would likely be reluctant to leave if they felt appropriately emphasis on appropriate appreciation. Firms that take a "bun and churn" tend to generate larger customer bases that are equally less loyal and also less likely to engage in positive word of mouth as desired.

How can credit card companies afford to offer big sign-up bonuses?

The credit card market is saturated, and competition is fierce. Most credit card companies bet on the lifetime value of new customers. If new customers switch to use the new credit cards, then they can recover the promotional cost.

How important are limited-time promotions to credit card application rates?

Limited-time promotions can nudge potential customers to sign up quickly, so they will not miss the deal.

Are bonus-seekers good customers for credit card companies?

Bonus-seekers are bad to credit card companies, because they can lose money by serving these bonus-seekers (who sign up now, and cancel later).

What does the value of credit card sign-up bonuses tell us about the economy?

Sign-up bonuses show that the market is saturated and these companies need new customers.