When making a purchase, a consumer has a choice between using frequent-flier miles, cash, or some combination thereof. Which will he or she choose? Another consumer has an opportunity to participate in a special program to get a free car wash after paying for a certain number of washes. What's the best way for the car-wash owner to motivate the customer to participate?

Such questions are serious business for airlines, hotel chains, credit-card companies and other corporations that offer loyalty programs to customers. Wharton marketing professor Xavier Drèze and Joseph C. Nunes of the University of Southern California's Marshall School of Business have spent several years studying these programs and have reached a number of conclusions as to how they can be structured to generate the most revenue for companies that offer them.

Drèze and Nunes became interested in loyalty programs after suspecting that many of them were not performing as well as they could for the corporations promoting them. "There are a lot of ineffective programs out there," Drèze says. "To distinguish a good one from a bad one you have to understand how they motivate people. There hasn't been that much research on the underlying principles that make a loyalty program work or not work for a firm. We felt that was a significant gap that needed to be filled."

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