As US airlines move towards revenue-based frequent flyer programs, they’re taking the most successful marketing innovation in history that managed to turn a commodity product (a seat that takes you from A to B) into something consumers had a strong brand preference for and they’re re-commodifying it.
I’ve remained genuinely surprised at the rush to do this given that the programs as they’re currently constituted are wildly financially successful. They’re billion dollar standalone businesses. It’s rather amazing, because for almost every other industry marketing is an expense line not a profit center. And they’re very much risking that.
Peter Sheahan, author of Matter (and a United Global Services member), thinks companies are missing the boat on loyalty program design.
I think we should be questioning what a loyalty program is and isn’t. More specifically, if the only value of “loyalty” is discount product, then you don’t need a loyalty program to compete with that. You just need cheap prices. In a way, we’ve kind of created a really objective measure of reward and a less branded and aspirational one. So I think true loyalty has to go beyond discounting. True loyalty has to move to the level of affinity and identity and brand. I think that’s part of the challenge.
In other words if you want to create loyalty, do more for your customers.
Revenue-based frequent flyer programs the way that Delta started, United copied, and American is about to implement reward the most loyal price-insensitive customers with the biggest price rebates.
Customers dedicating their flying to one carrier more than double the points earned per dollar spent. At Delta – and perhaps soon at United — redemptions are becoming more revenue-based as well.
That may work for Delta, who believes their airline itself is so good that marketing spend is unnecessary (except they spend a lot on marketing, like television commercials targeted at Seattle). Delta seems to think they can do it without a frequent flyer program. (They’ll tell you that their revenue-based program doesn’t contribute to higher revenue, and it isn’t designed to.)
Delta’s planes are older, but their on-time performance is the best in the US and they’re ahead of the curve ordering faster inflight internet that we’ll start seeing in a small subset of the fleet this year. Delta has a marginally better airline operation than their largest competitors, but I don’t think they’re as good as they think they are.
Nonetheless, in an environment of falling revenue per available seat mile, and for airlines not named Delta, that’s a harder proposition to argue.
And Sheahan worries that Delta, United, and American are destroying the value they’ve created by going revenue-based.
I think it makes sense to incentivize the behavior you want to encourage. … But they run the risk of losing the bread and butter of the airline – the people who fly every day and schlep it down the back and pay the cheapest possible fare. The risk is that the economics of the whole model starts to disintegrate if they lose any of that loyalty and they find themselves deep in a price war with other airlines.
It’s that price war — declining passenger revenue per available seat mile — that’s exactly the place they find themselves.
Sheahan also thinks that the trend towards low value, instant gratification awards isn’t just a nice add-on but a dangerous undermining of aspirational loyalty.
Real-time rewards make a great deal of sense because the user sees instant gratification. However, over time, what does it do to the true loyalty that you are trying to engender? How hard is it to replicate cheap prices? Is an immediate discount applied by United going to make you cheaper than Southwest, Jet Blue, Virgin and Frontier? I worry about the potential of eroding the underlying value of loyalty. Like, “We enable your dreams. We understand who you are. We create experiences that help you become more who you want to be, because we’re in partnership together.” In contrast, instant rewards create more functional loyalty and less emotional loyalty.