In a world where brands tout the virtues of loyalty, many consumers are waking up to an uncomfortable reality: often, loyalty comes at a hidden cost. This cost—dubbed the “loyalty penalty”—is a phenomenon where long-standing customers end up paying more than new customers for the exact same products or services. While brands talk about reward and appreciation, the loyalty penalty is eroding trust and hurting the very communities brands claim to serve.
The loyalty penalty arises when businesses offer better deals to new customers while quietly increasing prices – or scaling back perks – for their most loyal ones. This is especially prevalent where switching isn’t easy, such as with banks, insurance, utilities, telecom providers, or even subscription services.
For example, research in the UK insurance market found that households paid billions in loyalty penalties every year—sometimes elderly or vulnerable customers paid nearly 70% more for identical coverage than a new customer. Broadband, mobile, and even health insurance providers follow a similar playbook: lure customers with introductory rates, then hope they renew without scrutinizing creeping costs.
From a purely financial perspective, the logic appears simple: acquiring a new customer costs more than retaining an old one. Yet instead of rewarding the loyal, many brands optimize short-term profits by quietly imposing higher prices on customers deemed “less likely to switch.” Advanced algorithms flag “inertia-prone” or busy customers—and target them for premium pricing, while discounts are poured into acquisition ads and sweeteners for new joiners.
This revenue management approach can even subsidize deep initial discounts for new users: the loyalty penalty subsidizes the cost of acquiring new business, creating an upside-down world where loyalty is punished and churn is inadvertently incentivized.
For consumers, the financial impact is stark. Analysis across markets suggests that loyal customers collectively overpay by hundreds of millions—or even billions—each year. It’s not just a few pounds, dollars, or euros here and there: in sectors like insurance, internet, and financial services, these penalties fall most heavily on the vulnerable—elderly, those with less digital access, and the time-poor.
But the longer-term cost is to trust, brand reputation, and community. When loyal customers discover they’ve been overcharged, the sense of betrayal is real—and often shared on social platforms, sparking wider backlash. Public awareness is growing worldwide and regulators from the UK to Australia are stepping in with new rules to limit price discrimination based on tenure.
At TYB, we serve the next wave of Gen Z and community-driven DTC brands—brands built for advocacy, authenticity, and meaningful engagement. For this new cohort of shoppers, value isn’t just about price; it’s about relationship, inclusion, and recognition. The loyalty penalty runs counter to this ethos.
Community commerce platforms don’t thrive on one-time transactions or trick pricing. Instead, they flourish by building durable relationships, creatively rewarding engagement, advocacy, and long-term contribution. In these ecosystems, loyalists are brand builders, storytellers, and micro-influencers, not just “repeat buyers.” Penalizing their loyalty makes no strategic or cultural sense.
What does it look like to break the loyalty penalty cycle and create value for every customer, especially the loyal ones? Here are five key practices for brands who want to reimagine loyalty for the community commerce era:
Some best-in-class brands are already flipping the “loyalty penalty” on its head. They surprise loyalists with thank-you gifts, offer “members fam pricing,” or ask for community input on what true rewards should look like. Others, like REI or Patagonia, cultivate community through events, activism, and shared purpose—building a network effect that transcends simple discounts.
Regulators globally are now forcing incumbents in banking and insurance to end the practice of charging loyal customers more. But innovative, community-minded brands won’t wait for the law—they’re building systems in which every advocate is genuinely valued, every transaction is fair, and every voice has the power to shape the future.
If brands want to keep the trust of their communities and stand out in competitive marketplaces, the solution is clear: end the loyalty penalty. Acknowledge its harm, be transparent, and show real commitment to longtime customers. In the era of community commerce, those that lead with fairness will win the biggest prize of all: lasting, earned loyalty.
It’s time to reward commitment rather than exploit it, and to build loyalty programs—and brands—that truly serve everyone.
