Carnegie Mellon University

Personalizing Reward Program Offers

Consumers are inundated with loyalty and points programs from both banks and merchants.  Consumers can earn rewards when they buy groceries, gasoline, travel on airlines, dine at their favorite restaurant, or more generally whenever they purchase using an appropriate credit or debit card.  In turn these rewards can be redeemed for discounts on similar items (e.g., fly today so you can travel in the future for free), dissimilar items (e.g., buy groceries so you can receive a discount on gas, or use your credit card to earn points that can be redeemed for “gifts”), or simply receive cash back (e.g., earn 1% in cash for all your purchases) which can either be saved or spent whenever a consumer desires. The question for banks and merchants is whether these programs increase loyalty or whether they are simply recruiting “points junkies”.  Furthermore, reward programs tied to credit cards require a more careful understanding of savings and spending since they offer consumers the ability to buy on credit, a feature that most retail reward programs can ignore.  Do these reward programs encourage consumers to consolidate all their purchases to one card?  Do consumers want flexibility in many different types of rewards?  Are consumers willing to go into debt to earn rewards (e.g., rewards now become a type of savings)?To answer these questions our proposed research project develops an econometric model of consumer spending and saving that considers both short-term (e.g., monthly pay cycles) and long-term (e.g., life stage) behaviors to predict how consumers will respond to personalized reward offers.

Alan Montgomery

Alan Montgomery

Project Lead