The other day someone asked me why firms use these cards where you buy 10 get one free. For example, at the coffee shop I frequently, they have a card that every time you purchase a coffee the lady initials it. After 10 coffees, you get a free one. At first glance, the reasons for these programs don’t fit into a simple framework. Thus, it’s fun to think and write about.
First, it’s a loyalty program. They are rewarding their loyal customers with a lower price. This is good for building long term clients and maximizing lifetime revenue of a customer. However, as a loyalty program it has a pretty big flaw. After the customer gets his free coffee, he is back to ground zero and has no built up financial incentive to return. Of course he does still know he gets a lower price if he buys 10 more.
Second, it’s a coupon. Only price sensitive people will carry a card and show it each time they make a purchase. Hence, you are giving a discount only to people who are willing to jump the hurdle of carrying around the card.
Third, it segments locals and outsiders. If a tourist finds his way into a coffee shop, they are probably less price sensitive and should pay more. This helps acheive that.
Fourth, it’s a volume discount for products that are purchased over time instead of all at once.
In case you’re curious, I drink a lot of coffee and don’t carry one of those cards. Hmmmm.
Mark Stiving, Ph.D.
Pricing Expert, Speaker, Author
Photo by Tim Boyd