Glance at your wallet or smartphone, and you’ll likely find a few cards and apps to your favorite stores. These tools represent your loyalty to these establishments and reward you with perks such as points, discounts and special pricing. It pays to be loyal, after all.
Or does it?
Recently, accusations of price optimization in the auto insurance industry revealed that being loyal to your auto insurance company doesn’t always result in better pricing. In fact, you may be paying more than a brand-new customer due to price increases. Meaning, those who shop around and switch their carriers based on price will get the best deal, while those who stick it out may be gouged for their commitment.
Given the auto insurance example, consumers should recognize that being brand loyal doesn’t typically result in better pricing. In fact, loyalty programs are designed to make you less price sensitive, appealing to your emotions instead of your budget. To illustrate this further, consider these three popular consumer expenditures and how brand loyalty can negatively impact your bottom line.
Travel. The airline industry is well-known for loyalty programs, with frequent travelers accumulating points for free flights, upgrades and more. But what happens when an airline dramatically changes its loyalty program, as United Airlines recently did? Effective earlier this year, United now bases reward accrual on money spent instead of miles flown. This move essentially penalizes loyal members who select the most economical fare, even when they don’t venture outside of United’s flight options to find the best deal. United joins Delta Airlines in adopting the revenue-based loyalty program, with travel experts expecting other airlines to follow suit.
Loyalty can also be pricey in the hotel industry, according to Thomas Nitzsche, spokesman for ClearPoint Credit Counseling Solutions. “I travel extensively and have found that it is actually more expensive to be brand loyal to a hotel chain, even with their loyalty and rewards programs,” he says. Nitzsche estimates that bidding on hotel rooms using Priceline.com and BiddingForTravel.com saves him an average of 60 percent on retail rates, even when he applies loyalty discounts and rewards points issued by the hotel.
For example, Nitzsche recently received a nightly rate of $62 at the Hyatt Regency in Atlanta, compared to the hotel’s rate of $230. He also paid $46 per night at a Courtyard Marriott in Nashville, Tennessee (compared to $110) and $55 per night at a DoubleTree in St. Louis (compared to $180). A recent last-minute trip to Atlanta cost him $644, a whopping $902 less than if he had booked directly with the airline, hotel and car company he used for the trip.
While bidding on travel isn’t for everyone, the strategy outlines the money savings available when brand loyalty isn’t a factor.
Gadgets. John Nesler, a Web developer for Creative California, a Sacramento-based online marketing firm, says developing a brand is a difficult process. “The whole endgame is to get customers to be willing to accept the opportunity cost of discarding other options by giving them a sense of trust in the familiar in exchange for that cost,” he says.
So what’s wrong with that? Nothing, until companies try to squeeze more money out of their most loyal customers while taking away perks and features, some of which may have attracted these customers to the brand in the first place.
Many experts point to Apple as a prime example of a brand that garners a cult-like following of fans willing to overlook premium prices and inflexible features. “Brand loyalty has enabled Apple to lock down their phones in ways few other brands would dare to try — you can’t even replace a battery on your own,” Nesler says.
He adds that Apple has “reached their endgame in the process of grooming their customers,” and Samsung appears to be following a similar path. For example, the popular Galaxy line of phones currently offer users the option to change out the battery and add additional storage. Yet those features likely won’t be available in the latest Galaxy Note 5 device. “[Samsung] has signaled that they’ve achieved the desired level of user buy-in to the brand by removing both of these features,” Nesler says. (Note that specifications for this device are not yet confirmed and likely won’t be until it’s released later this month, but speculation among top tech blogs and forums like GottaBeMobile.com suggest the Note 5 isn’t expected to have a microSD card slot or removable battery.)
Amazon. Amazon Prime members sign up to receive free two-day shipping and access to other perks, but they pay more than the $99 price tag associated with the membership. According to an analysis last year by Consumer Intelligence Research Partners, Prime members typically spend $1,500 per year on Amazon, compared to $625 per year from non-Prime members. Additionally, 74 percent of Prime members “convert” on the site, or complete a purchase within the same visit, compared to just 13 percent of non-Prime members, based on recent data collected by marketing consulting firm Millward Brown Digital.
Miro Copic, professor of marketing and branding at San Diego State University and co-founder of BottomLine Marketing, puts it this way: “The real consumer issue regarding loyalty programs is that they force behaviors that would not be in the consumer’s best interest.” This rings true with Amazon Prime members, who are likely more influenced by their desire to “get their money’s worth” out of their Prime membership than to shop around and find a better price. It’s also true in the airline industry, with more than one-third of travelers “nearly always” selecting a flight based on the number of miles they’ll earn, according to a 2014 survey by MileCards.com. It’s also true in the case of Apple and other brands whose products promote a lifestyle with which consumers identify or aspire to, reducing the desire to compare prices and make decisions based on budget.
Loyalty programs are not all bad, of course, and often extend valuable benefits to subscribers. However, it’s important to remember this loyalty doesn’t come free and is actually paid for by the consumers. “Loyalty programs are part of a company’s marketing budget,” Copic says, “and ultimately, those costs are incorporated into the price of a ticket or goods purchased.”
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When Brand Loyalty Costs You More originally appeared on usnews.com
