Costco Rewards Card Offers What People Want

By Daniel B. Kline Markets Fool.com

When Costco (NASDAQ: COST) replaced its rewards credit card from American Express (NYSE: AXP)with a new one from Visa (NYSE: V) this year, it offered cardholders more cash back on gas purchases with a higher annual threshold.

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The company upped its cash back on gas purchases from 3% to 4% for the first $7,000 spent in a year, up from a $4,000 limit. That should turn out to be a very smart move for the warehouse club as a new survey from Excentus shows that fuel rewards remain consumers' favorite loyalty card perk for the second year in a row.

Image source: Getty Images.

What did the survey show?

The warehouse club actually ticked off multiple boxes for what the Excentus survey showed consumers want with its new Costco Visa Anywhere card that went live on June 20. In addition to the gas benefit, Costco offers 3% back onrestaurant and eligible travel purchases as well as 2% cash back benefit on all Costco purchases and 1% cash back on everything else.

"Rewards that help consumers save on the cost of gasoline ranked #1 again in 2016 as the most popular loyalty program currency, with 37% of consumers preferring fuel discounts over credit card rewards, coupons, retailer points and instant discounts at the cash register," according to Excentus. "Respondents say they prefer fuel-saving rewards because they like saving money any way they can (39%) and they like earning rewards from everyday purchases made (23%) among a variety of retailers."

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Costco's gas reward actually compares favorably to what's offered by American Express with its Blue Cash Preferred card, which Money Crashers rates as the best gas credit card. That card only offers 3% back on fuel purchases, but it does not cap spending. Still, for the average person, even if you assume gas prices climb to $2.50 per gallon, $7,000 is 2,800 gallons of gas. That's 42,000 miles of travel if you drive a car that only gets 15 miles per gallon, which is more than three times the 13,476 miles the average American drives each year, according to the Federal Highway Administration.

Do rewards cards influence people?

Rewards come in a lot of different packages. They include loyalty credit cards, as well as programs based on frequency of visits or making purchases.Excentus, which surveyed more than 1,000 consumers in the United States, showed that rewards programs do change consumer behavior.

"More than one quarter (26%) of consumers say they shop more frequently at stores where they can earn rewards, 17% plan ahead to take advantage of rewards and promotions, and 14% shop only where they can earn rewards," Excentus, which provides loyalty marketing and technology solutions to retailers, found. "Another 13% said the ability to earn more rewards or save more money would prompt them to switch brands or shop at a different store."

A big win for Costco

As a membership-based retailer, Costco risked pushing customers away when it made the decision to switch to the Visa card. While it offered better rewards, the change required people to activate a new card while their old one became invalid. That did cause initial confusion, but CFO Richard Galanti said that any issues are now well in the past.

"Since June 20 and just the past many weeks, 1.1 million members have applied for the new card and over 730,000 new accounts have been activated or a little over 1 million additional Citi Visa cards in circulation," he said in September. "It's still early. We launched only 14 weeks ago, but so far, we are beating our initial expectations in terms of conversion, usage and new sign-ups to the card."

Costco has found the right rewards card formula based on not just its members' desires, but what consumers as a whole are looking for. Clearly making gas rewards the focus has, and will continue, to pay off.

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Daniel Kline has no position in any stocks mentioned. He finally caught the Pikachu with the Santa hat. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.