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Loyalty programs can be a great bonus to those who use them correctly but can be a serious cash drain on those who don’t keep their eye on what they’re truly designed for.
Let’s get something clear form the very start: Loyalty or Rewards programs have nothing to do with rewarding a consumer’s loyalty. They have everything to do with encouraging the consumer to make illogical decisions when it comes to making a purchase. That’s how they make money.
Loyalty programs have been designed to try encourage the consumer to spend with a given airline or hotel chain (for example) rather than with a competitor even if the competitor is offering a similar product for less. And it works.
Consumers often rationalise their purchasing decisions by talking about the ‘benefits’ that they receive for being loyal to a program. Benefits like a free checked baggage allowance on an airline or a free room upgrade at a hotel. The trouble is that a lot of consumers don’t actually look at the true value of what it is that they are receiving in return for their loyalty. How much is that baggage allowance really worth? Is that room upgrade (which, in most cases, is unlikely to be guaranteed) worth the price differential between the room you booked and a cheaper option? Do you even really need a room upgrade?
Don’t misunderstand me, I’m not saying that there isn’t value to be had from loyalty programs, far from it. When used correctly and by the right people, loyalty programs can be very rewarding – but usually only to a minority of people participating in the program.
The biggest mistakes I see being made are by consumers on the lower rungs of the loyalty program ladder. These are the consumers who don’t travel enough to receive the more valuable benefits a program may offer higher up the chain but travel just enough to get a shiny card with the name of a precious metal or stone embossed on it.
Let’s take American Airlines “Gold” status as an example of this.
While “Gold” may sound fancy it’s actually the lowest of the 3 “Elite” tiers in the AAdvantage program. American lists the benefits of this status as:
- Complimentary auto-requested upgrades on American flights 500 miles or less
- Complimentary auto-requested upgrades on US Airways
- 24-hour upgrade window
- 25% elite mileage bonus
- 50% off Main Cabin Extra Seats (complimentary at check-in)
- Complimentary Preferred Seats
- 1 free checked bag
Point 1 – 3: We can pretty much dismiss these as being a valuable benefit because a passenger with Gold status will have everyone in the two status tiers above them ahead of then in the upgrade queue – upgrades are very hard to come by as an AAdvantage Gold member and they are rare.
Point 4: The 25% elite milage bonus is nice to have (better than nothing) but is it actually valuable enough to make it worthwhile being loyal to American?
Point 5: 50% off Main Cabin Extra seats – you get these for free 24hrs before departure so that automatically reduces the value of the benefit but it’s nice to have the option of paying for a more comfortable seat at the time of booking just in case the flight is sold out. Seats start at $20 and increase in cost based on the length of the journey.
Point 6: Preferred seats are just seats in a “more favourable location”. There’s no increase in personal space or legroom. This is a pretty meaningless benefit.
Point 7: American charges $25 for the first checked bag (per person) on all domestic routes as well as routes to Mexico, Central America and the Caribbean so this benefit is a true cost saver.
Taking a look at the benefits as a whole, the only one that leaps out as having a solid value is the saving on checked baggage – especially as up to 4 people travelling on the same reservation as a passenger with AAdvantage Gold status get to share the benefit – that’s a significant saving for a family travelling on vacation.
You could make an argument for putting a value on the bonus miles that AAdvantage Gold members receive and on the discount that they get on Main Cabin Extra seating but both depend on the travel patterns of the consumer.
If you mainly travel short to mid-distance journeys then you’re unlikely to be willing to pay for Main Cabin Extra so the discount is meaningless. If you only travel enough to reach Gold status then the chances are that it will take a number of years for you to build up a milage balance big enough to redeem for a meaningful award.
So we’re left wondering if it’s worth sticking with American Airlines to get the baggage fees waived? Well, it depends on just how irrational you’re being (how much you’re overpaying) when choosing to stick with American for all your travels…. but the answer is that it’s almost certainly not worth it. Why? Because you can get the exact same benefits by taking out a Citi AAdvantage credit card at cost of $95/year.
If you take out the credit card and you don’t have status then you’ll probably recoup the cost of the card in the space of just 1 family trip. You’re then free to play the Kayak game and choose to fly with whatever airline is offering the cheapest and most convenient flights (when all extras are factored in) – and this is exactly what most passengers should be doing.
The lower-tier status benefits are, almost always, not worth the effort and cost that are associated with attaining the status in the first place. If you’re not travelling a significant number of miles each year the most cost effective option for you is almost certainly a combination of a sensible credit card and flying the most economical flights you can find.
So, the next time you’re wondering if you should be aiming for status with an airline or hotel loyalty program, do the math. Work out just exactly what the benefits you’ll receive are worth to you. Will the benefits save you money or will the quest for “status” end up costing you? Be honest with your calculations and don’t be one of the many consumers swayed by a shiny plastic card – they’re the ones paying for the benefits those of us playing the system correctly are getting on the cheap.
Featured Image: Larry Johnson via Flickr
