Sunday, October 6, 2013

How much is loyalty worth?

Have you ever wondered how much is loyalty worth? Ever since the beginning of business history, business owners have tried to reward their best customers to entice them to continue to do business with them. The practice definitely got more popular when American Airlines launched their AAdvantage in 1981, establishing a competitive differentiation for the airline.
Let us explore why loyalty programs were such a game changer in business. If you think about it, most of the items and services you buy are considered commodity (e.g. they can be acquired from more than one service provider or manufacturer with very little differences between the two (or more) companies that provide that service or product). The airline business truly reflects this, if you are traveling from LA to New York, you will get the same if you fly airline A, airline B or airline C. All the planes travel at more or less the same speed, leave and arrive at the same airports and offer similar amenities (or lack of these days). So if three airlines fly the same route, you will always pick the one with the best price right?
Well, here is where things start to get interesting. The best loyalty programs not only give a kickback (or reward) with every purchase, but they are designed in such a way that the more you consume that product or service, the greater the rewards become. Going back to our airline, all the three airlines give you “miles” when you fly with them, but the differences are significant for people who fly them occasionally to people who fly them more often. More frequent flyers start to move up in tiers that offer additional perks such as “priority boarding”, “free bags”, “upgrades”, “better availability of award tickets”, etc.
If you are thinking that these perks hardly matter, think again, these so called perks influence millions of people to acquire products or services from a particular provider just to maintain or attain a particular tier or milestone in the program. In fact, many travelers will choose a particular airline for a route even if the price is higher than competition because of their status in the loyalty. Before you start thinking that these people should be criticized for letting airlines get away with higher fares, let us analyze the reason behind the behavior and what these travelers get in exchange for a few(or a lot) extra dollars: Most people think that if they travel a particular airline often enough they will get upgraded to first class. For good or bad this is true, most (if not all) airlines allocate unsold first class tickets to their most loyal customers often times as a free upgrade. Not to mention that frequent travelers enjoy priority lines and other benefits that do not cost the airline anything extra but they make the traveler feel important and do provide some additional comfort.
So far so good, it seems that users are willing to stick to a particular service provider in exchange for perks even if the price is a little higher for a commodity like service, but what happens when something does not go according to plan? Let us stick to the airline examples and revisit a real life scenario that happened recently in an American Airlines flight from Charlotte to Dallas. The next flight to Dallas had an empty seat that was allocated to the people on stand-by, one executive platinum (the highest American Airlines tier level) got the seat (even though his confirmed flight was four hours later) and boarded the plane early as per the airline policies. When he boarded the plane he noticed that a seat was broken and it was marked with masking tape, because the seat was not assigned seat he did not think much about the issue. Fast forward 20 minutes later when boarding was almost complete and surprise there is a person standing because she got allocated the seat that was broken. Given that no other seats are available the airline personnel needs to make a decision to ask one person to leave the flight.
If the airline truly valued the customer loyalty, who do you think they would asked to deplane? The last person who bought the ticket? The last person who checked-in? The person that got assigned the broken seat? Maybe the person who had the least miles in the airline loyalty program? Well no. By federal law when bumping a passenger from a flight for mechanical reasons (e.g. a broken seat), a confirmed passenger is entitled to compensation, which typically varies from 200 to 400 USD travel voucher for a domestic flight. So in order to minimize the expense the local airline supervisor decided to ask the Executive Platinum passenger who got the stand-by seat to deplane as this passenger was not entitled to any compensation because he did not hold a confirmed seat.
You must be thinking hum, so the loyalty program is good and valid only when the marginal cost to the airline of providing those “benefits” is marginal, when there was a real cost involved the loyalty of this frequent traveler was not worth as much as compensating a confirmed passenger for the next flight… So going back to the original question that this blog posed, how much is loyalty worth? Certainly for American Airlines it was worth much less than a couple of hundred bucks. Do you think the local supervisor made the right decision? What would you have done in his place?
More importantly, while this example applies to a particular airline, what greater lesson can we derive from this experience? My recommendation: be sure that you have a good way to measure the benefits (consumer) and cost (business) of the loyalty program, so the effectiveness can be objectively evaluated. And most of all, keep in mind that even the best loyalty programs will require trade-offs at some point in time and most importantly define that loyalty cannot be taken for granted. It gets renewed with every iteration consumers and business and it gets define over time taking into consideration all the acceptable alternatives.
In conclusion, like it or not, loyalty programs are here to stay. They provide a systematic way to influence consumers towards a particular brand and have proved to be extremely successful in encouraging repeat business. However, we need to be aware that everything comes at a cost for both consumers and business and that as good as the programs might or might not be, at the end is the people element that will make a lasting impression and determine the memory of the experience.

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