You don’t actually want to ‘reward your highest spending customers’ through a marketing program.
- You want to ensure you don’t lose spend, and you want to incentivize more spend. In other words you want to influence behavior at the margin. Spending money that isn’t necessary for revenue you’re going to get anyway isn’t good business strategy.
- If someone flies you because you operate the only non-stop flight on their route or have their corporate contract, you’re going to get the business either way, spending more money on those customers reduces your profit rather than increasing it.
- And the highest spending customers aren’t necessarily the most profitable. A customer buying the last seat on a flight that would have been purchased by someone else doesn’t provide you with additional revenue or profit on an opportunity cost basis. Someone filling a seat that would have gone empty is revenue which goes straight to the bottom line.
That doesn’t mean low spenders are more profitable than high spenders, but it means simple slogans like ‘reward your highest spenders’ are sloppy thinking.
Still, the revenue-based programs that have been designed by Delta and more or less copied by United and American don’t actually reward high spenders more than before. They do, however, punish high spenders less.
Let’s look at American Airlines program changes purely on the earn and burn side of the program.
- An Executive Platinum has to spend 18 cents per mile flown to earn as many miles as they did before under the old mileage-based system. That’s hard to do because it’s higher than the average airfare, and indeed fares are falling.
- The price of first class saver awards have gone up 20% – 69% thanks to award chart devaluation. Devaluation of business class awards was more modest, topping out at 28%.
- However if you were going to use your American Airlines miles to redeem for travel on American — let’s say international business class — saver awards virtually no longer exist except for a few days a year when space is briefly made available.
- And getting extra award space no longer costs double miles. Without notice American added award tiers making ‘AAnytime awards’ frequently triple the price of saver (sometimes more, sometimes less).
American Airlines Business Class Boeing 787-9
Customers are earning fewer miles from flying than before, and awards cost more miles than before. Let’s look just as those high revenue customers.
- In fairness to American let’s just take triple miles and not worry about the devaluation.
- Break-even spend is 18 cents per mile flown on the earn side, to have the miles needed for an award you’d have booked before you actually need to spend 54 cents per mile.
- That means you need to spend $54,000 flying 100,000 miles just to break even. Put another way, far from coming out ahead, some Concierge Key members earning that status based on spending aren’t even breaking even.
To come out ahead you need to spend more than $54,000 per year flying 100,000 miles. If you fly 150,000 miles you need to spend materially more than $81,000. It’s those $100,000 a year ticket purchase customers flying 150,000 miles who are actually coming out 25% better off than before.
Some great reward for high spending customers, huh?
Meanwhile over 3/5ths of miles continue to be earned through partners, which means it’s still Citibank and Barclaycard customers who are earning more miles than the highest spending flyers.
American was candid speaking to me two years ago about their revenue-based changes, that they would mean fewer miles for flying awarded year-over-year. Alaska Airlines, which still awards miles based on distance flown, said that on the earn side alone only about 5% of customers would be better off with revenue-based changes and Delta, United, and American all chose to make the miles being earned worth less, too.
To be clear planes are largely full and Delta, United, and American don’t need to spend as much on customers to fill incremental seats. Alaska on the other hand has faced tremendous new competition out of its Seattle hub and is unlikely to choose to devalue while it’s in the process of merging with Virgin America.
There may or may not be a right level to reward customers given particular business needs. However the notion that most high revenue customers are somehow better off is one of those things that gets repeated enough that people assume it’s true when it doesn’t even come close.