Five Challenges for Loyalty Programs

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I recently had the pleasure of giving a keynote presentation at Unisys’ Air Transportation Conference at St Paul de Vence in Southern France. My presentation on ‘The Value-driven Airline’ in a Customer 2.0 world triggered some lively discussion amongst the airline loyalty executives present.

Airline frequent flyer programmes, like other loyalty programmes, face a number of challenges which will decide which of them create value in the future and which don’t.

CREATING A PLATFORM FOR COMMERCE



Join your typical airline frequent flyer programme, like American Airlines’ AAdvantage, or supermarket loyalty programme, like Tesco’s Clubcard, and one of the first things you will see is that there are many ways in which you can earn or use your accumulated points. And not all of them will be connected to the programme’s core business. Programmes are slowly becoming a platform over which sellers can offer their wares to members (usually with points for buying too) and buyers can search for products (and can pay with their accumulated points too). Leveraging this commerce platform effect both drives profits through the ‘haircut’ taken on each transaction and reduces the accounting liability of unused points.

EXTENDING OUT TO CUSTOMER COMMUNITIES

Most loyalty programmes are managed as though they were just a valued part of the corporate marketing mix. Their real value isn’t in the spurious loyalty created by giving points away, but in the millions of data points collected about customer behaviour. This is analysed and used for inside-out marketing communications. But times are changing. Customers increasingly rely upon word of mouth recommendations from other customers to drive their purchasing behaviour. Some loyalty programmes recognise this and are starting to create communities for members to start a conversation with each other about particular interests. For example, KLM’s Blue Golf Club provides a community for members to talk about golf, to organise golf games with other members when abroad and to generally relieve the stressful solitude of the road-warrior’s lifestyle.

HARNESSING THE LONG TAIL EFFECT

Much as been written about Chris Andersen’s long tail effect. But how does it apply to loyalty programmes? Most programmes offer a standardised ‘take it or leave it’ proposition. Everybody gets the same benefits at the same tier-level of the programme, irrespective of their needs. The long-tail shows how the programmes can mass-customise their benefits to exactly meet members’ needs. At the fat-head end, this probably means adding additional products & services that enable better outcomes for members. For example, a menu of concierge services for elite level frequent travellers that complement their individual journeys. But the biggest impact is going to be on the long-tail, where the programmes should be unbundled to offer individual benefits as and when required. Want to take all your family into an airline lounge on summer vacation, sure, that will cost a little bit extra. Don’t want the car-hire deal included, that will save you a little bit. Some credit cards like those offered by Turkey’s Garanti Bank
have already started to unbundle their offerings in this way.

MANAGING ALLIANCE-WIDE MARKETING



Loyalty programmes are very attractive for affinity marketers, particularly those in related businesses. This can very easily lead to points statements bulging with often irrelevant co-branded stuffers. I did an analysis of a year’s worth of my own Lufthansa Miles & More mailings a few years ago; although I received literally dozens of offers with my Senator miles statement, not a single one was relevant to me. As loyalty programmes become commerce platforms, managing the marketing communications from the many more partners involved requires industrial-strength Enterprise Marketing Management tools like Unica’s Affinium. But that is not enough, programmes also need a Customer DNA approach powered by a business-rules engine like Haley Systems Authority to manage the blend of communications pushed out by the programme with pulled communications triggered by the customer’s own behaviour.

TREATING CUSTOMERS FAIRLY

Loyalty programmes are under attack from all sides. Some of the most vehement attackers are customer-centrists who think they are not customer-centric enough. They do have a point. Most programmes base the valuation of members on their expected future behaviour. Their past behaviour is just seen as a predictive guide to the future. But most customers base their own valuation on the length and volume of business with the company in the past, not on what they expect to do in the future. This fundamental disconnect is often made worse by airline, railway and hotel yield management systems which try to extract the maximum payment for a seat or bed at a moment in time, irrespective of the customers past behaviour or their expected future behaviour. Supermarket programmes like Tesco’s Clubcard perhaps do the best job of bridging this divide, reputedly paying out over $900 MILLION in vouchers to customers as a thank you for their custom.

These are not all the challenges that loyalty programmes face in the future, but they are certainly key if they are to create more value for customers, to reduce programme costs and thus to create more economic value.

What do you think? Will loyalty programmes continue to add value? Or are they not going to survive in a Customer 2.0 world?

Post a comment and get the conversation going.



Graham Hill
Independent CRM Consultant
Interim CRM Manager

4 COMMENTS

  1. James

    Thanks for your comment. It is much appreciated.

    I think you are most certainly right. I worked with Lufthansa Miles & More over 10 years ago and they were already very busy mining their flights data warehouse for insights that could be turned into customer management and other actions.

    One of the key analytical challenges for loyalty programmes is to start to analyse customer behaviour not as solitons, but as networked members of communities of behaviour, or interest, within the programme. Some of the smarts at the Social Network Analystics consultancy Xtract (http://www.xtract.fi/) are already doing this with on-line loyalty programmes.

    Great blog too James.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  2. Mei Lin Fung

    I came into this discussion because the title was “Thinking outside of the organization” and I’m not sure that loyalty programs are doing enough of that – what emerges from analyzing the data of customer behaviour is akin to what happened with US car manufacturers in the 50’s, 60’s and 70’s who analyzed their customers and found that they were asking for more fashionable, bigger vehicles: tail fins in the 50’s, station wagons in the 60’s and 70’s, SUV’s in the 80’s.

    Meanwhile Japanese manufacturers like Toyota and Honda were thinking about how to make inexpensive reliable cars. This turned out to be a powerful unexpressed need and resulted in huge market share gains over the last 20 years.

    Airline loyalty programs need to earn “airtime” with their customers – provide value to them in new ways. A great example is KLM’s China Club.

    Paul Greenberg first alerted me to this in his talk at the SAP conference in Singapore in July – China is an exciting new market and yet initimidating for the first time traveller.

    KLM whether by design or by accident created a club with a lot of pull:

    http://clubchina.klm.com/

    People wanted to know what the experience of going to China was like, and to get tips from those who had gone before.

    The site offers a specific value:

    “KLM Club China is an exclusive network for people doing business with or in China. Becoming a member of KLM Club China gives you an instant network of useful contacts. A network with clever features allows you to select those contacts and find the ones you need to successfully do business in China. ”

    Its an example of looking outside the organization to understand what your customers are doing when they are NOT on your site or talking to your call center. And helping them meet a need that increases their perception of the value of KLM.

    Insight and understanding by KLM employees willing to innovate provided the opportunity to develop a new kind of loyalty program, not only for their existing customers, but also prospective customers!

    Great job KLM Club China!

  3. Mei Lin

    Great to hear from you. I agree with you entirely. Indeed, the KLM Blue Golf Club I mentioned in my ‘Extending Out To Customer Communities’ paragraph is the second of the three communities that KLM has so far provided for customers. The third is a community for customers travelling to Africa, another no-mans land of other-worldly business values.

    KLM is by no means alone in the travel industry in working on comunities with customers. American Airlines has partnered with Affinity Circles to develop a community for student travellers and Orbitz has developed its own community for travellers.

    Expect more like communities like these as companies look to enable customers to have a loosely-managed dialogue with each other in order to learn from the conversations they have.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

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