Question

Airlines and hotels have many frequent-flyer and frequent-visitor programs in which individuals who fly the airline or stay at the hotel receive bonuses that are the equivalent to discounts.

Give two reasons why these companies have such programs rather than simply offering lower prices.

Can you give other examples of such programs?

What is a likely reason why firms whose employees receive these benefits do not require their employees to give benefits to the firm?

Answer 1

The first reason is that it encourages these flyers to fly more or individuals to stay more in hotels to get more of bonuses as promised by the programs. It also helps these people to remain loyal and develop a strong bonding with the airlines and or hotels.

The second reason is that price discount is the strategy that can be easily copied by the competitors and benefits gained will be nullified. Hence, the bonus strategy is used to maintain the market share and hold competitive advantage over the competitors.

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One example is the bonus points offered by credit card companies or value points by eCommerce companies to the customers, rather offering discounts. Later on these bonus points can be converted into cash and buy some other goods. It increases the further uses of the services.

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Firms do not require it, because when employees buy services from these firms, then are in the market of services as households. When, firms take their services, then these employees work as factors of production in the firm. So, employees are the same households, but their roles are different. In services market, they are customers, and in factors market , they are factors of production. Hence, firms cannot claim the benefits in one market that was awarded to them in another market.