How can credit card companies afford to offer big sign-up bonuses?
The more that we use our credit cards for automatic payments, the harder it is to end the relationship with the credit card company. Think about how many websites are tied to your credit card -- Grubhub, Uber, phone bills, etc. It’s so difficult and time-consuming to untangle all of our automatic payments. Because of this, customer acquisition costs are increasing exponentially. Who wants to spend the time switching all of their online purchases to the new card? Basically no one, and credit card companies are aware of this.
How important are limited-time promotions to credit card application rates?
Limited-time promotions are very important in application rates. When you know that a good deal is about to expire, it prevents you from delaying your decision. Additionally, it helps the forecasters understand demand, so that similar promotions can run again in the future.
Are bonus-seekers good customers for credit card companies?
I started my career doing bank marketing research. At the time, we had a love/hate relationship with the customers who only opened CDs with us, because we had the best percentages available. We loved them because the acquisition rate was low, and now we could cross-sell to them through direct mail. But we hated them because we knew that as soon as the CD timeframe expired, they would take their money and leave.
Bonus seekers for credit cards are a different animal, though. They generally have to spend thousands of dollars in a short time frame, as well as keep their card open for a certain amount of time. By continually using the card, they have more contact with it and are more likely to use it out of habit. It’s much more likely that the consumer will keep their card open for longer than the promotional period.
What does the value of credit card sign-up bonuses tell us about the economy?
Assuming that an increase in value of sign-up bonuses indicates an increase in consumer spending (due to the thousands that they make you spend to get the promo), then we should assume that the economy is doing well.
Acquisition costs for consumers who spend over $20,000 per year and use their cards daily are getting increasingly competitive. Not much differentiates credit cards anymore, so providing perks and promos is what “hooks” the customer’s application. For instance, the number of customers who applied for the Chase Sapphire Reserve card in the first two months exceeded Chase’s expectations of applications for two years. They targeted picky millennials who use their cards daily and wanted a lot of travel perks. Without realizing it, Chase made their perks a little too attractive and too many people applied for the card. Chase had to decrease the promo miles that were awarded (100,000 to 50,000) so that they could continue to make money on the acquisition. Recognizing the sweet spot for supply and demand is something that all credit card companies have to work on.