the price of loyalty

because a free trip to Cancún is the best reward

You know you’re living through late-stage capitalism when you buy something you wouldn’t otherwise have bought because you get 10% cashback on the purchase. 

The first versions of rewards programs in North America were stamp and boxtop redemption coupons in the late nineteenth century (does anyone remember cutting out cardboard ten-cent Box Top coupons to take to school?); the first modern variation is airline frequent flyer programs, which began in the ’80s. The programs are particularly appealing to vendors in markets with little differentiation between brands - you probably don’t care all that much if you fly with Air Canada or WestJet (just not Flair, please not Flair…), so points programs that reward customers monetarily for sticking with one brand are an important way to build customer loyalty. For our American audience, think American Airlines versus United (just not Spirit…) — either way, you’re going to have a profoundly uncomfortable journey and mild back pain no matter the airline. But if you can take a free trip to Hawaii after meticulously taking only Delta flights for the past five years, that’s gotta be worth something, right?

The combination of 70’s-era airline deregulation and the boom of self-book travel websites (which made travel agents obsolete) caused a boom in travel because it was so cheap. To compete when prices fell, airlines introduced loyalty programs, starting with AAdvantage from American Airlines and followed summarily by the other airlines; by giving away a few free seats here and there which otherwise would have remained empty anyway, the airlines made their “lost revenue” back hand over fist in repeat business from loyal customers. Over time, these points have become more valuable sources of consistent income than the flights themselves, and today, most companies award “miles” based on how much money you spend rather than miles actually traveled. In the early 2010s, one airline after another “modernized” their rewards programs, devaluing miles by typically either increasing the amount required to redeem a flight or excluding certain types of flight from being purchased with miles. Recently, Delta was met by such furious backlash for again devaluing points to the extent that they walked back some of the changes; but many once-loyal customers had already switched over to JetBlue and Alaska, which offered status-matching programs in the wake of the chaos. 

The essential issue with the old system was that points were accrued as literal miles traveled; when thrifty travelers began to game the system to get more points (including having other people buy tickets under their name, in the bygone era before the TSA), airlines realized that they would have to start giving away seats that would otherwise have been sold for cash. The Economist estimated in 2005 that the value of unspent miles was higher than the value of all the one-dollar bills in circulation. 

In search of a way to offload burdensome points without having to lose money on flights or anger customers, the airlines started selling the points to banks — and thus an enduring alliance was born. 

Credit card rewards programs, including those associated with airlines, are ubiquitous and have some of the greatest uptake of all brand loyalty programs on the market. Although the details vary between cards and can be extremely convoluted, the general principle is that cardholders receive a small percentage of the cost every purchase they make as reward points or cash-back credits. These can then be applied to pay off a portion of the cardholder’s balance, or redeemed in exchange for various other rewards. The appeal to the customer is obvious, and the benefit to the issuing bank is twofold: generous loyalty programs are effective in encouraging signups, and also act as a psychological trick, subconsciously inciting cardholders to spend more because “at least I’ll get cash back.” 

This may seem to be a win-win for any cardholders with enough self-control not to fall into the obvious trap, but rewards programs have become the source of some controversy among economic journalists: some argue that because wealthier customers overwhelmingly use credit cards and lower-income customers are more likely to be underbanked and use cash, debit cards, and credit cards with less enticing perks, the latter are subsidizing the former in a sort of regressive wealth transfer. This is because credit cards charge fees to merchants as a small percentage of the overall transaction cost, which is how they fund rewards; these fees are passed on to customers in the form of higher prices, which affect all customers, not just those who will go on to obtain those rewards by redeeming points (some credit cards, like American Express, charge higher fees, which is why you may have seen merchants who do not take AmEx cards at checkout). But there are many counterarguments to this point: low- and high-income earners buy different types of goods (Aldi’s versus Whole Foods, Nordstrom Rack versus Bergdorf Goodman); wealthier customers spend more overall, offsetting their rewards earning; low-income customers do benefit from rewards cards as being approved for one is a matter of credit score (except in the case of annual fees); and in fact, low-income customers are more likely to pay attention to and take advantage of rewards, since their disposable income is lower and any rewards earned are more valuable. The Chase Sapphire Reserve card, one of the most successful and coveted rewards cards on the market, lost JP Morgan Chase two-hundred million dollars in 2019, bringing their Q4 profits down forty percent; it would take years for them to break even on the card (much less become profitable, which might entail less valuable rewards), showing that rewards are in fact a transfer from banks to customers (at least until their policies and offerings change). 

Now, let’s talk about some examples of rewards programs that are either unconventional or particularly memorable in the public sphere. The case Leonard v. Pepsico, Inc. at the turn of the century concerned Pepsi’s refusal to honor a tongue-in-cheek advertisement in which seven million Pepsi points (obtainable through purchases of Pepsi or at a cost of ten cents per point) could be redeemed for an AV-8 Harrier II jet. The rewards program was meant to encourage sales and award customers with typical merchandise like branded clothing, baseball hats, and duffel bags; but John Leonard, a 21-year old business students, convinced five investors to pool $700,000 (and a few extra dollars for postage) to purchase the points for cash in order to redeem the jet; after a lawsuit, a countersuit, a Pentagon declaration that the jet could not be sold as it had not been demilitarized, and an adjusted Pepsi commercial with a higher redemption threshold for the jet (and a “Just Kidding” to really drive home the point), a judge in the Southern District of New York ruled in favor of Pepsi, chiefly on the basis that a legally valid offer was not made, a contract was not formed, and the ad constituted puffery. Alas, John Leonard would not get his jet — in any case, Pepsi never cashed his $700,000 check. 

Pepsi had another run in with rewards fiascos in the Philippines, where a promotional contest went wrong: in 1992, the company announced that Pepsi bottle caps would have numbers printed on them for a limited time. The caps could be exchanged for cash prizes, the amount depending on the number - the majority of caps were worth roughly US$4, with rarer numbers worth larger amounts. The grand prize, worth roughly US$40,000, was associated with the number 349, intended to be printed on two bottle caps. Unfortunately, a miscommunication at a bottling plant resulted in 800,000 more bottle caps being printed with that number. Riots ensued when Pepsi refused to pay out the grand prize for these caps (the company claimed they were missing a required security code), eventually resulting in at least five deaths. 

The modern day has seen a rise in rewards programs that fall outside the realm of traditional points-per-dollar-spent. Some examples are things like Panera Bread’s Unlimited Sip (which is basically a coffee subscription service) and Taco Bell’s recent “Taco-a-Day” promotion in which customers could pay ten dollars to get one taco “free” per day for the entire month of October. This writer admits to taking part in the latter promo, and redeemed eight tacos in one month. Then there’s Starbucks: its app is the most popular of all fast food apps, in part because you can store money on your Starbucks card and earn double the rewards on your order by using it to buy. In 2019, over forty percent of customers used funds from the app to buy their drinks, and users held a collective balance of $1.5B in the app — that’s more money than over eighty percent of banks in the United States. Not only that, but 1) Starbucks can use this “loaned” money however it wishes, earning interest through investments and not having to pass any on to customers, 2) it doesn’t have liquidity requirements like a bank, and doesn’t have to hold cash on hand for customers to make “withdrawals”, and 3) given the ubiquity of Starbucks gift cards as a less tacky version of a cash gift, around ten percent of funds purchased are forgotten and never used (this is known as “breakage”), essentially giving the company free money. 

Then there are hotel rewards, which have also been around for a long time — travelers can chose to stay at one of the five major global hotel chains (Marriott, Hilton, Hyatt, Wyndham, or IHG) to maximize their rewards and earn complimentary perks and upgrades when there’s availability; this type of reward capitalizes on the same idea that airlines once did, giving valued customers an upgrade when a nicer room is available and empty just to make them feel good, at little extra cost to the company. These programs have also become less enticing in recent years, especially since the brand offering the points does not usually own the hotel itself; the owners of hotels are essentially franchisees of the brand, and they hate cutting into their bottom line by actually allowing travelers to redeem their points on free breakfast, upgrades, and the like. Combine that with more flexible and valuable rewards offered by credit card companies and the huge commissions taken by third-party booking sites (which is why hotels are so unfriendly and unyielding to people who book with Expedia, Kayak, Travelocity, etc.), and hotel currency is worth a fraction of what it once was. Interestingly, AirBnB has no rewards program; it has been suggested that since business travelers are unlikely to book an AirBnB over a hotel, there isn’t much of a market for repeat business by frequent fliers. 

The writers had a spirited debate on whether Costco memberships and Amazon Prime subscriptions could be considered rewards programs; for those to believe so, the rewards are access to bulk goods and good prices for the former and availability of fast, free shipping for the latter (though, there’s really no such thing as free shipping; see our very first Pacific Dispatch publication for more on this). For those who do not, they are essentially just access fees, like you would pay for cable or Netflix or Spotify. We also discussed Apple, and agreed that it’s proprietary features and incompatibility with other systems, software, apps, and devices could possibly be referred to as a hostile rewards program: in exchange for eschewing access to tons of free, developing, and globally-compatible programs to use only their offerings, you get a streamlined experience free of any critical thinking or thoughtful consideration of options; perhaps they set out to defeat the paradox of choice.

In any case, the landscape of rewards is changing: customers want more flexibility and less hassle, and with easy access to information, companies will have to get creative with their generous offerings to entice people to participate in any sort of brand loyalty. The founder of Eater and Resy recently launched Blackbird, a loyalty app for independent restaurants that allows them to connect with customers on a level similar to chain restaurants but with personalized perks and invitations in the manner of a maître d’. The growing Bay Area chain Sports Basement allows customers to pay a small one-time fee to sign up for their rewards program, which gives them a discount on every purchase, including sale items and excluding rentals and shop labor; the small fee discourages one-time shoppers looking for a discount from clogging up the list of “members” and the good deal encourages dedicated shoppers to return, as does knowing that ten percent of profits are donated to local charities. Successful brands will think outside the box when designing programs for the modern consumer; and we hope consumers know that loyalty shouldn’t be a one-way street.