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Economics of Rewards Programs

Economics of Rewards Programs

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 This week, we dive into the economics behind rewards programs and credit card perks. We explore how loyalty schemes influence consumer behavior and how companies use them strategically. The episode covers travel points, airline upgrades, hotel loyalty tiers, and their broader economic implications. We also consider who really foots the bill for all those “free” perks.In this episode, we discuss:* Why companies offer points, perks, and loyalty rewards, and how they profit from it* The trade-offs consumers make to stay loyal to specific brands or services* How status tiers shape travel habits* The hidden costs of rewards programs and who ends up paying for them* Whether reward cards truly benefit most people, or just the most organized few* And a whole lot more!Catch up on some old episodes:You can also listen to us on Google Podcasts, TuneIn Radio, and Apple Podcasts. If one of these is your go-to podcast service, be sure to rate us and subscribe! Watch this episode on YouTube:Some show notes:Jadrian is close to cleaning out his beer shelf, but the remnants aren’t lining up with the season. A shelf full of porters is a lot harder to drink in the middle of a hot summer. Jadrian had a Pay It Forward Cocoa Porter from West Sixth Brewing (Lexington, KY), a leftover from a past JET SET. Matt is recovering from a migraine and opted for something close to water: a Bud Zero. This week’s conversation came courtesy of a Bloomberg story about a CEO who used 1.83 million Amex points to pay off an unexpected $11,000 tariff bill. We aren’t talking about tariffs, but rather a wider conversation about the purpose and strategy behind credit card rewards and loyalty programs. We each share our own experiences, whether that involves the way we track multiple reward accounts in a spreadsheet or weighing the value of lounge access, upgrades, and travel perks. Both of us are loyal card-carrying members of popular loyalty programs offered by Delta Airlines and Marriott hotels, which means we must have some good reasons for paying the annual fee.But do the perks (like companion passes, free nights, or waived baggage fees) outweigh the cost? We seem to think so, but then it left us wondering who is really paying for all these benefits we cash in on?In a classic case of “nothing is free,” it’s important to remember that businesses pass along credit card fees in the form of higher prices for everyone, often including those who pay in cash. That creates a subtle redistribution of resources where people who optimize rewards programs are subsidized by those who don’t. It’s worth noting that companies are also incredibly profitable with their rewards programs. For example, Delta received billions from Amex for its co-branded cards last year.One big takeaway: airline and hotel rewards cards might make sense for frequent travelers, but that’s a small slice of the population. After a long stretch focusing on airline perks, we stopped to consider how often people even fly. According to Gallup, only about 15–20% of Americans take more than three flights per year. Most Americans don’t ever fly during the year.We wrap up our conversation discussing how rewards programs have evolved. In recent years, companies like Delta and Carnival Cruises have shifted their loyalty structures to reward spending on co-branded credit cards rather than prioritizing brand loyalty alone. It’s a subtle but important shift, one that favors high-spending customers and raises the bar for earning perks through behavior like repeat flying or cruising. These programs have become so gamified that they often blur the line between savvy planning and status chasing. For some, that chase is part of the appeal. Take JetBlue’s recent 25th anniversary promotion: fly to 25 different cities before the end of the year, and you’ll earn Mosaic status for the next 25 years. It’s a clever marketing strategy, but also a reminder of how far people are willing to go when there’s a shiny perk on the line.This week’s pop culture references:Matt talked about the 2009 movie Up in the Air, where George Clooney's character obsessively pursues airline miles and elite travel status. In one scene with Anna Kendrick, they discuss the perks of frequent travel and how to maximize them. Jadrian took a different angle, highlighting a more common loyalty program. In this Seinfeld episode, Elaine is determined to complete her punch card to earn a free sub even though she doesn’t like the subs she’s eating. When she loses the card, she’s crushed. Jerry offers a valuable economics lesson, reminding her about sunk costs. Those bad subs are already gone, so is the “free” one really worth it? This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit econhappyhour.substack.com
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