Shoppers at Brickell City Centre in Miami, Florida, US, on Wednesday, June 14, 2023.
Eva Marie Uzcategui | Bloomberg | Getty Images
It’s not your imagination: Companies are getting stingier with customer rewards.
Airlines are making it harder to earn elite status. Retailers have tightened return windows and tacked on fees. Dunkin’ and Sephora are even cracking down on birthday treats.
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The shift shows companies are rethinking how to attract, retain and reward customers after the Covid pandemic as consumers change their spending priorities and businesses face pressure to control costs while increasing sales.
Companies have to be careful. If they slash benefits too severely, they risk losing customers, but being too generous comes with a cost.
“It’s not a simple math exercise to say letting few people into a particular group or offering fewer people a promotion just translates to a change in sales volume,” said David Garfield, global head of industries at consulting firm AlixPartners. “It also can change the way people feel about the company and influence others.”
Raising the bar
Some of the biggest shifts in customer perks have come in the airline industry.
During the pandemic, airlines allowed frequent flyers to hold on to their elite statuses. They ended that perk as travel rebounded, and customers racked up loyalty points on co-branded credit cards. Carriers including American Airlines, Delta Air Lines and United Airlines also have raised the number of miles customers need to earn elite status as the ranks of those with the benefits swelled.
“When you have that many customers in the so-called premium tiers, it doesn’t feel that special anymore,” said Yuping Liu-Thompkins, a professor of marketing at Old Dominion University’s Strome School of Business who researches loyalty programs.
The Sky Lounge during a tour of Delta Air Lines Terminal C at LaGuardia Airport (LGA) in the Queens borough of New York, US, on Wednesday, June 1, 2022.
Stephanie Keith | Bloomberg | Getty Images
Delta has taken steps to try to reduce crowding at its popular airport lounges. It has largely barred staff when they’re flying standby and raised membership fees and entry requirements. In February, American Express Centurion Lounges started charging members $50 to bring in an adult guest and $30 for children between the ages of 2 and 17 for American Express Platinum cardholders. Previously, members could bring two guests for free. The fees are waived if a cardholder spends $75,000 on the card in a year.
Those changes come as airlines see a new trend: Many travelers are willing to pay more to sit in business class or for other roomier seats to make flying more comfortable.
United, Delta and American executives said on earnings calls last month that premium-seat revenue has increased , outpacing growth from the main cabin. Airlines are racing to add roomier seats to cater to those free-spending travelers.
Retail’s reality check
While the airline industry has turned profitable during the post-pandemic travel boom, retailers have faced a host of new challenges.
Inflation has squeezed consumer spending, said Marshal Cohen, chief retail advisor for Circana, the market researcher formerly known as IRI and The NPD Group. As shoppers buy fewer discretionary and big ticket items, companies have taken a harder look at expenses, he said. If they can’t boost sales, they can try to impress investors with better margins.
“We are now living in an environment where growth isn’t going to happen by selling more product so easily and when you sell more product, it’s easier to cover the cost of getting those sales,” he said. “Retailers and brands have had to step back and look at all of their components of their business and decide which ones are working, which ones are not.”
When travel and events were limited during lockdowns, retailers saw a windfall. Now, they are also cracking down as higher costs for essentials and increased travel possibilities force consumers to get more selective with their dollars.
At many retailers, customers must now pay a return fee if they want to ship back unwanted clothing, shoes or other items. Urban Outfitters, the company’s chain Anthropologie, Abercrombie & Fitch and J.Crew are among the businesses that charge for sending back a return. Nordstrom‘s off-price chain, Nordstrom Rack, also added a $9.95 fee to ship back products earlier this year.
A pickup and returns counter at an Amazon Fresh grocery store in Schaumburg, Illinois, US, on Monday, July 24, 2023.
Christopher Dilts | Bloomberg | Getty Images
Even Amazon, the retail giant that pressured the rest of the industry to offer free shipping, has attached more strings. Starting this spring, customers must pay a $1 fee if they return a package at a UPS store, instead of at an Amazon-related store. The fee applies if the package’s delivery address is near a Whole Foods, Amazon Fresh or Kohl’s. Amazon owns Whole Foods and has a partnership with Kohl’s for receiving returns.
Yet all of those retailers allow shoppers to return items for free at a company store rather than in the mail — a move that not only can reduce shipping costs but increase the chance that a shopper may buy something else. The extra step may also make a customer think twice and decide to keep the item instead.
Some retailers have tightened return policies, too. In March, Macy’s shortened its return window from 90 days to 30 days. By making the change, the company said it can get products back on shelves more quickly when they’re still in season. The move also reduces the odds that merchandise winds up on the clearance rack.
Amit Sharma, CEO of returns technology company Narvar, said retailers have started to retrain customers on how to return items, much like grocery stores have gradually taught shoppers to employ reusable bags. He added that after the pandemic created supply chain headaches, shoppers have a clearer understanding that shipping and returns come at a price.
“To drive that online demand, free shipping and free returns were put in place, but now we all know it costs significant money,” he said.
In some cases, retailers are calling return fees “restocking fees” to refer to the extra labor involved in processing the item, said Heidi Isern, the head of Narvar’s design and research.
In other cases, retailers are offering customers more choice, she said. For example, Levi Strauss, Ann Taylor, Crocs and Brooks Brothers have a home pickup program in some cities, powered by Narvar, where customers can pay about $5 to $9 for a delivery person to retrieve a package.
Porous entry
As retailers make shoppers think twice about returns, Netflix and Costco have also cracked down. Both companies aim to make sure membership isn’t shared with people who aren’t paying, particularly as the companies chase new avenues of growth.
For Netflix, subscriber growth has stagnated as customers spend less time on the couch and more time out in the world. The streaming service responded by reining in password sharing and introducing a lower priced, ad-supported option.
Costco also noticed a trend of people using membership cards that belong to someone else. It is now checking photo IDs, even in self-checkout lanes, to verify cardholders.
For both companies, the moves could nudge freeloading customers to become paying ones — or create a sense of fairness for members.
Chasing big spenders
Airlines and retailers alike have taken a harder look at the customers they will try hardest to keep.
Simeon Siegel, a retail analyst for BMO Capital Markets, said the sudden halt in sales for discretionary retailers when the Covid pandemic hit, then the stimulus-fueled spending, gave companies a moment to rethink how they cater to shoppers — and if they’re giving away dollars for little loyalty in return.
That led some companies to take a new approach to markdowns. Certain businesses also became confident that they could tack on a fee without losing their most valuable shoppers.
“It does seem like the companies are doing this because they’re able to, not because they have to,” Siegel said. “From 2008 to 2020, consumers felt they were entitled to whatever they wanted and corporations would wait on them hand and foot and that changed during the pandemic.”
More companies from Target to Walmart and Best Buy have decided to push loyalty programs and offer the best perks only to the customers who shell out. The members can skirt delivery and return fees — or earn extra privileges.
For example, Macy’s announced this week that it would charge shoppers at its namesake store $9.99 for shipping back returns. But it will waive that fee for members of Star Rewards, its free loyalty program.
At Best Buy, shoppers only have 15 days to return most products. But if they pay a subscription for the company’s membership program, they get a longer return window of 60 days. Best Buy rolled out the three-tiered membership program in late June.
Delta earlier this year started rolling out free Wi-Fi on board for members of its SkyMiles loyalty program.
Even birthday gifts now sometimes have caveats to cater to shoppers who are bigger spenders or more frequent customers. Dunkin’ got rid of its free birthday drink last fall and instead, it gives customers triple the loyalty points for purchases during their birthday. Sephora customers not only have to be in the company’s loyalty program, but also must now spend at least $25 online if they want to get a birthday treat. (The giveaway is available in store without a minimum.)
Sephora and Dunkin’ did not respond to requests asking for the reasoning behind the changes.
Garfield of AlixPartners said perks sometimes inspire a drive-by purchase rather than lasting customer loyalty. He said some shoppers take advantage of benefits like freebies but ultimately prove unprofitable for the companies.
It’s a delicate balance.
“If the company loses the customer entirely as a result of this switch it may not be worth it,” Garfield said. “The flip side of that coin is that clever companies actually fire some of their customers deliberately.”