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INTRODUCTION
Academic research on customer acquisition and retention clearly point to two simple conclusions: First, it is more expensive to acquire a new customer than to retain an existing customer (for example, Blattberg and Deighton,1 Murphy2 ). Second, even small reductions in customer attrition rates can have a disproportionately positive impact on profits.3 On the basis of these ideas, firms have spent millions of dollars on developing customer retention programs in which they cultivate profitable customers by offering rewards and service upgrades. However, there is considerable controversy regarding the effectiveness of these strategies in generating profit. Although early research suggests that credit card companies can improve their profit by holding on to loyal customers, more recent work has debunked the idea using data from other product categories (for example, Mulhern, 4 Zeithaml,5 Rust and Lemon,6 Reinartz and Kumar,7 Uncles et al8 ). In this article, we propose to describe our findings based on a number of empirical studies we have conducted on customer retention strategies in the credit card industry.
Our analysis was based on a cohort of 9000 new credit card accounts issued in a single month by a major credit card issuing institution and the accounts' transaction history over the following 37 months. We look at two of the most common customer retention programs used by credit card issuers, namely, affinity cards and reward cards. Reward cards offer points for every dollar spent and these points can be redeemed for rewards by the cardholder. The vast majority of the reward cards have an annual fee. Affinity cards tend to tap into the fondness that the customer has for his university, favorite sports team or other specialty group by offering the customer a credit card, which prominently displays the group's image. In addition, the issuing bank pays a small percentage of a customer's transaction amount to the affinity group in the form of a royalty payment. 9 We examined the reward card and affinity card benefit to the issuing bank using three criteria: customer profitability, customer lifetime and customer risk . The conclusions we reached were somewhat contrary to conventional wisdom and hold many lessons for managers.
THE CREDIT CARD INDUSTRY
In the past 50 years,...