An Analysis of “Buy X, Get One Free” Reward Programs

Redemption hurdles, such as finite expiration terms and redemption thresholds, are common for customer reward programs. In “An Analysis of ‘Buy X, Get One Free’ Reward Programs,” Yan Liu, Yacheng Sun, and Dan Zhang study the economic rationale behind redemption hurdles and how they should be optimally set. They show analytically that redemption hurdles can be used as a price-discriminating vehicle that increases firm profitability. Redemption hurdles can facilitate the firm’s price discrimination on consumers whose valuations may vary over time. Redemption threshold alone cannot ensure profitability, unless it is coupled with a finite expiration term or a positive transaction utility from the rewarded free product. Optimal design of redemption hurdles is not straightforward, and the interdependence between the two types of redemption hurdles and the price is nontrivial. Optimally set redemption hurdles may not only increase firm profitability but also, increase the welfare of consumers who purchase frequently.