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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[…] Two months before United announced its foray into becoming a revenue-based program, then-Managing Director in charge of MileagePlus co-brands (and now IHG Senior Vice President of Global Insights and Analytics) David Oppenheim laid out the reasons this was a bad idea. […]