The Hidden Costs of Loyalty Programs:
Why They Can Be Detrimental for Both Customers and Businesses
In today’s competitive marketplace, businesses across various industries have adopted loyalty programs in an attempt to enhance customer retention. While these programs are often marketed to reward consumers for their purchases, they can have unintended consequences that can be detrimental to both customers and businesses alike.
In this blog, we’ll explore the drawbacks of loyalty programs, laying out the cold hard facts that they’re far from the win-win solutions they appear to be at first glance. Examining hard-learned lessons and considering our constant guest feedback loop, we’ll look at some of the moves VACAYA is making to shift the loyalty paradigm into a much more manageable sphere.
The Illusion of Value for Customers
At first, loyalty programs seem to offer significant value to consumers. In most programs, points accumulate with every purchase, enticing customers to return to a brand. However, the reality is that many loyalty programs are structured in a way that makes it difficult for customers to see actual benefits. Most programs require substantial spending before meaningful rewards can be redeemed, effectively locking customers into a cycle of consumption.
Moreover, customers often find themselves overwhelmed by the sheer complexity of these programs. Different tiers, point systems, and expiration dates can turn what’s supposed to be a straightforward way to earn rewards into a convoluted labyrinth of rules. Many people end up frustrated, feeling that they must constantly spend more to maintain their status or to earn rewards, leading to a phenomenon known as “loyalty fatigue.” This fatigue can result in customers disengaging from a brand altogether, countering the primary goal of establishing loyalty.
Invasive Marketing Tactics
Businesses often leverage the data collected through loyalty programs to target customers with personalized marketing strategies. While personalization can be seen as a benefit (and everyone knows VACAYA has multiple personalization efforts), it can sometimes cross the line into invasive tactics. Customers may receive an onslaught of marketing communications that feel more like harassment than helpful nudges. The constant pressure to engage with a brand can lead to customer annoyance and a disdain for the brand itself.
Furthermore, data gathered through loyalty programs can be misused, creating concerns about privacy. Customers may unknowingly sacrifice their personal information, which can be used not only for tailored marketing but also for more nefarious purposes. This erosion of trust can ultimately drive customers away, forcing businesses to rethink their approach to customer relationships. While this isn’t a concern for VACAYA now, what does the future hold if at some point we’re sold (don’t worry… there are no plans for that any time soon)? New owners may not be as transparent or as kind in their efforts.
Economic Impact on Businesses
From a business perspective, loyalty programs can appear to be a sound investment for customer retention; however, the reality is often quite different. The costs associated with implementing and maintaining these programs can be exorbitant. Businesses must invest in technology, staff training, and marketing initiatives, which can detract from other important areas, such as product quality and customer care.
Additionally, loyalty programs can dilute a brand’s value. When discounts or rewards become the primary motivation for supporting a brand, customers begin to expect lower prices or rewards as the norm. This can lead to price wars, where businesses feel compelled to lower prices further, potentially leading to eroding margins and profitability – ultimately leading to the business’ demise. Instead of fostering genuine loyalty, programs can inadvertently create a transactional relationship where customers return only for the incentives, not because they truly value the brand.
The financial implications of loyalty programs can also be staggering. Many companies carry substantial liabilities on their balance sheets due to the rewards points they owe their customers. For instance, Delta Airlines recently reported liabilities of over $3.7 billion related to its SkyMiles loyalty program. Similarly, Starbucks has been transparent about its loyalty program costs, acknowledging that the redemption of rewards has contributed to a debt of nearly $1 billion in unredeemed points. These substantial financial obligations can significantly diminish a company’s liquidity and overall valuation, as they represent cash that has already been promised to customers but not yet realized by the business. As companies grapple with these financial strains, they find themselves diverting funds from other essential areas such as product development (in our case trips) and customer service, further affecting long-term viability.
Our community has seen a real-world example of this phenomenon with one of the granddaddies in the business, a company whose loyalty program became untenable, unmanageable, and along with other crises, ultimately led to the company being sold for peanuts.
The Risk of Neglecting Non-Members
Another significant issue with loyalty programs is that they can alienate or shut out non-members entirely, effectively creating a system that chokes growth. Customers who don’t participate in a loyalty program may feel undervalued and less inclined to engage with a brand. This can be particularly damaging for businesses like VACAYA that rely on word-of-mouth marketing. Those who feel neglected may share their adverse experiences with friends and family, dissuading potential customers from ever trying VACAYA.
And this is the crossroads at which VACAYA finds itself today. We got dangerously close to mirroring the much-maligned ways others in the industry have been handling this thorny issue, and before we went down that rabbit hole, we did a full stop to completely re-examine the very concept of loyalty.
LGBT+ consumers have been programmed to equate loyalty with access, when it’s so much more. Of course, access is tricky because it’s very difficult to control access once a large number of people have reached status thresholds. New Vacayans are then shut out entirely from purchasing an experience. Even at our smaller scale, we’ve already seen this happen with a few of our trips. V List capacity controls and the ability for anyone and everyone to join The V List ensures that won’t happen.
Yes, our Alumni will receive preferred access at a certain milestone of spend, but we’ve shifted our primary focus to enhancing the onboard experience for our most loyal guests. We’ll announce the spend thresholds and the onboard perks that come with sustained loyalty in conjunction with our 2025 Caribbean Cruise.
In a world driven by social media and online reviews, negative sentiment can spread quickly, hurting a brand’s reputation. The focus on loyalty program members can lead to overlooking or underestimating the needs and preferences of the broader customer base. In the long run, that limited perspective is destined to stifle VACAYA’s growth and innovation, much like it has with others out there.
Conclusion: Rethinking Customer Loyalty
While loyalty programs may seem like a good strategy for customer retention, the drawbacks have merited deep and thoughtful consideration from your V Team. We’ve taken the lessons learned by VACAYA CEO Randle Roper (who was an executive with Starwood’s famed and detrimentally costly SPG Program), CMO Patrick Gunn (whose time with other all-gay travel companies led to a deep understanding of the inherent challenges and complexities outlined here), and our entire team (many of whom have given their blood, sweat, and tears to other companies in the LGBT+ travel industry and are now leading the way with VACAYA) to create something altogether fresh and new, just as we’ve done on multiple fronts since Day 1.
As VACAYA seeks to cultivate genuine loyalty with a more holistic approach to the relationships we have with our guests, where we focus on transparency, value, and personal connections, we hope to create a more sustainable model for both you and our business.
We understand change is never easy – especially when you’re battling decades of poorly thought out and executed loyalty schemes, but we hope the transparency here provides you with valuable insight into the thoughtful consideration your V Team has put into this topic. And as we’ve done since the beginning, as we innovate, we learn. Our processes will only get better and better through the years. Together, we have the power to make VACAYA the best in the business. Thank you for helping us get there.