I moderated an interesting panel this morning at a loyalty industry conference. We had a technology provider talking about the different ways to engage customers well, a survey specialist talking about who loyalty members are and where to find them (programs are often surprised at how many programs their own members belong to, it’s easy to think members pay attention to all of your messaging rather than being busy and inundated with multiple messages) and loyalty executives from a hotel chain and an airline.
While taking questions from the audience, someone from a credit card issuer asked the panel about Delta’s move towards a more revenue-based program (next year miles will be earned based on the cost of a ticket rather than distance flown, and already earning elite status requires a minimum amount of spend with the airline).
The question was directed at United’s David Oppenheim, who manages United’s partnerships — including their credit card partnership with Chase (United Explorer card and others) and with other card companies around the world.
David wouldn’t answer about United’s plans specifically, but did offer a really cogent explanation of why the simple formulation of ‘the customer that’s paying more is the better customer’ or the one you want to reward doesn’t always hold.
In each case here I’m characterizing and expanding on what David was suggesting, and I’m sure he wouldn’t offer these explanations the same way, but he did provide outstanding food for thought.
- A flyer may buy one expensive ticket with you because you are the only airline who flies non-stop on the route. Does it make sense to reward them? You’re essentially just lighting money on fire if they’re going to pick your airline anyway.
(This didn’t come up, but the same point holds for business travelers who are part of managed travel programs, if they aren’t choosing their airline then what are you rewarding?)
- In general a high revenue passenger is probably better for an airline than a low fare one.
But a high fare passenger may trade off with another high fare passenger (for instance they both buy the last seat available on a flight). That high fare customer wouldn’t actually be profitable in an economic sense (opportunity cost basis).
- On the other hand a low fare passenger may fill empty seats and be pure profit — or they may ultimately displace a high fare passenger and be very costly if the airline didn’t get their revenue management right.
- Low fare customers may also engage with an airline’s ancillary products. Base airfare isn’t the only contribution to revenue that matters, and other products are often higher margin than the actual airline seat.
- Meanwhile third party partner customers are profitable too. A member who carries an airline’s credit card and uses it, credits points for their non-air travel to the program, and uses their shopping portal may be a profitable customer.
- And ultimately the program needs to try to influence incremental business. You may reward a high spend customer but not get additional business from them than you would otherwise have gotten. But you might be able to move the needle with some of your other customer segments.
So despite Delta’s big move, frequency matters and wallet share matters. And we shouldn’t be so quick to assume that the simple model of rewarding high spenders is all there is in the future.
That doesn’t mean there won’t be more of it, but it’s not all we should see.
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Seems a rather Panglossian view of what the UA rep said, and somewhat counter to other reports which have him stating that UA is “very interested” in Delta’s move. Of course, I didn’t hear the presentation, there may have been more said.
It sounds like Mr. Oppenheim is just stating that the highest value customer is not, in every instance, the one paying the highest ticket fare, not that they’re out to reward low value customers. Sure, they may not want to penalize a normally high value customer on the occasional low priced ticket, but there’s nothing to indicate they have any interest in rewarding the typical low-value customer (eg, me).
I thank DL for their move. I spend $8000 in paid tickets annually – roughly $7000 loyal to one airline and another $1000 kayaking around.
Before I’d always pick DL over B6/VX if price is equal given that their skypesos are still worth a bit more than revenue based ones. In Skymiles2015, VX is a 8.8% cashback while DL is a ridiculous 4.2% (5% of base fare but 4.2% of total price).
DL is so profitable that they won’t appreciate my $1000 anyway, so no point giving to them.
Any reason why more proper nouns cant be used? As written this sounds like the Illuminati meeting to decide the fate of us serfs. Maybe I am not too far off.
If someone at UA actually believes this, then what’s with the PQDs?
DL won’t get a penny out of my wife or me except the $10 for FF tickets untill we use up our 550K FF miles. We’re using them to position for flights on AS and AA.
Sounds like he was just giving some talking points on the move to PQD. It makes sense – the credit card is the cross-sell.
Funny stuff, David Oppenheim was my college roommate. I knew he worked for United but I didn’t know how close he was to our little world.
They were looking at what Delta did before Delta did it. This wasn’t meant to suggest that they wouldn’t follow suit, just highlighting the complications side of things that were noted.
Hey Gary–
You’ve made the below argument a few times on this blog…
“But a high fare passenger may trade off with another high fare passenger (for instance they both buy the last seat available on a flight). That high fare customer wouldn’t actually be profitable in an economic sense (opportunity cost basis).”
I think your scenario (which I’m pretty sure only applies to coach) is pretty rare compared to the scenario where an airline continues to oversell ‘Y’ fares on a flight, figuring they can just IDB low-revenue flyers with no status if people don’t voluntarily accept whatever compensation they choose to dole out for said flight. I’d argue that this high fare customer would actually still be quite profitable in this scenario.
Far more costly to an airline, IMO and IM(limited)E, are when high-revenue flyers have a choice of airlines and see premium cabins zeroed out prior to booking their tickets. In the transcon market, with which I’m pretty familiar, empty C cabins can easily drive someone from UA to AA to DL (you can pick the order). When a low-rev flyer is sitting on an upgraded C seat SFO-JFK, the airline can’t simply downgrade him/her to accommodate the high-rev flyer. Judging by advance-upgrade space in the SFO-JFK market (one I’m pretty familiar with), they’re trying pretty hard to minimize this risk.
I think rewards programs are going to continue to get more complex, they’ll then hit a tipping point once these exec’s realize that consumers want an easy to understand loyalty program.
Its probably more important to look at these customers in aggregate, by revenue per mile, rather than by ticket price on a single flight. A Flyertalker that only flies at 2cpm overall is probably a net loser after benefits. But a 10cpm flyer is better, and a 25cpm flyer is certainly better.
Imo, it’s primarily upgrades and fee waivers via status that drive future ticket purchases for frequent flyers, rather than miles earned or award pricing,