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Loyalty — What Exactly is a “Revenue-Based Program”?

David Feldman | May 11, 2017 63 views No Comments

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In our previous articles exploring Loyalty Myths, we took a look at whether programs should be concerned about large points liabilities sitting on the balance sheet.

We also took a deep dive into “Breakage”, and the role it plays in loyalty program management.

Credit: Pixabay

Credit: Pixabay

In this article — we’ll take a look at just what is a “Revenue-Based Loyalty Program”, and what exactly do people mean when they use the term “Revenue-Based”…

WHAT IS “REVENUE-BASED”?

The biggest loyalty shift in recent years has been the changes to the loyalty programs of Delta, United and American Airlines, who have changed to a “revenue-based model”.

American, United, and Delta now award 5 frequent flyer miles for every dollar spent on base fares, with additional miles being awarded to customers who hold elite status.

Unfortunately — the term “revenue-based” has been somewhat corrupted by repeated misuse.

Some of the fault lies with the poor state of journalism, with many commentators simply parroting the term without actually understanding it.

And some of the fault lies with “loyalty insiders”, who through careless or misleading commentary, end up conflating many different issues and confusing everyone in the process.

REVENUE-BASED — A DEFINITION

At its core, a revenue-based approach simply means:

‘Those who spend more — should be rewarded more’

So… to qualify as “revenue-based”, the program needs to provide more rewards to those who spend more.
The concept seems simple enough to understand, right?

Spoiler Alert: Of course — this doesn’t explicitly require “dollars spent” to be the actual method of measurement. There are multiple ways to measure and reward those who spend more.

REVENUE-BASED — THE MYTH

Commentators routinely describe the Frequent Flyer Program as moving from “distance-based” to “revenue-based”.
These are actually highly-nuanced terms — which unfortunately, have been misinterpreted.

There are a number of myths that have become commonplace.

The biggest myth — is that under a “distance” or “mileage” based program — all frequent flyers are rewarded the same, regardless of the fare they purchase.

According to folklore — under the old American Airlines program, frequent flyers were awarded based on the mileage flown, and all passengers received the same rewards. This myth posits that under the new system — everyone is rewarded based on how expensive their fare is — those that purchase a higher fare receive more miles.
But did the old American Airlines program really reward all flyers the same number of miles?

In short — NO.

Credit: American Airlines

Credit: American Airlines

This is the old American Airlines earning table that was in effect before they changed over to the new “revenue-based” system.

The reason this was referred to as a “distance-based” system, is simply because the ‘starting point’ for calculating frequent flyer miles was the distance of the flight (referred to as “Base Miles” in the table above).

But you can see that customers who purchased Business or First Class fares actually received a Class of Service Bonus of 50% additional miles, over and above what Economy passengers received.

Without getting into a discussion of whether the old system adequately rewarded those who purchased more expensive fares, we can see that it simply isn’t true that ALL passengers were awarded the same number of miles.

Now that we’ve busted that myth — let’s explore the different ways that a program can be “revenue-based”…

REVENUE-BASED — OPTIONS

It’s important to make a distinction at this point between:

– the Award-Mileage Program (which awards passengers with “miles” which can then be redeemed for free flights, these miles can also be earned via credit cards, hotel stays, rental cars and so on); and

– the Elite-Status-Program (which rewards an airline’s most frequent and premium passengers with recognition and benefits such as free baggage, lounge access, upgrades, and VIP treatment).

The distinction between the two programs is a critical one that is often lost on some observers that only focus on a single dimension of the program such as award miles, whilst failing to recognize that an airline’s top customers are also rewarded by the provision of elite benefits.

The Award-Mileage Program can itself be divided into two components:

– Miles/Points Earning; and

– Miles/Points Redemption

So, together with Elite Status Earning, we actually have three distinct aspects that can be designed with a “revenue-based” structure.

Let’s explore these in more detail…

1 a— REVENUE-BASED AWARD MILE EARNING

This is the big one, the area that has been the focus of discussion and debate.

Credit: American Airlines

Credit: American Airlines

The new American Airlines program (which is identical in earn rates to United and Delta), can be seen above.

You earn 5 miles per dollar spend (excluding taxes and government fees), plus an additional bonus if you hold elite status.

This is what people in the United States usually mean when they refer to “revenue-based” earning. They really mean “the earn rate is calculated on your exact dollar-spend”.

Do revenue-based programs truly reward our best customers?

However — the earning is capped at 75,000 award miles per ticket.

This means that a top-status Executive Platinum member buying a $15,000 First Class airfare only earns the same number of miles as that member buying a $6,818 Business Class airfare.

Wait! Hang on!! Didn’t American, Delta, and United all tell us that the whole point of the new programs was to reward more miles to those who spent the most??

And herein lies both a dirty little secret, and an inconvenient truth.

Firstly — don’t believe everything you read in a press release

Secondly — an important question to consider — is whether top-spending passengers are significantly motivated by the marginal increase in mileage earning provided by the revenue-model of American, Delta, and United?

Thirdly — remember that top flyers are not just rewarded with more award miles, but more importantly to them, with elite status benefits such as priority check-in, security, and boarding, as well as lounge access and complimentary upgrades.

– American, Delta, and United recognize all of this, which is why the 75,000 award mile cap exists — to minimize unnecessary marketing expense.

1b— REVENUE-BASED AWARD MILE EARNING — BY FARE CLASS

Alaska Airlines provides an example of revenue-based earning using distance and fare class as the measurement.

Credit: Alaska Airlines

Credit: Alaska Airlines

You can see that Alaska Airlines recently improved their award mile earning table to better reward those passengers who bought more premium fares, such as First Class or expensive Economy tickets.

A Discount Economy (Low Yield) fare will earn by distance with no bonus structure, whereas a First Class ticket will earn a 75% bonus premium.

Additionally, there are elite status bonuses that apply.

Now of course — at any given price point on any given route — you can pick and choose examples that would show one model is more generous than the other.

But the point to absorb here, is that despite one model measuring distance flown, and the other measuring dollars-spent — BOTH are revenue-based models that reward higher spenders more than lower spenders.

Now that we know using ‘distance factored by fare class’ is a reasonable way to implement a revenue-based program, why didn’t American Airlines implement that system?

I’m glad you asked…

Credit: American Airlines

Credit: American Airlines

This is the distance x fare class chart that American Airlines uses to credit flights such as bulk fares, consolidator fares, vacation packages, and other fares for which it doesn’t have detailed fare information.

If you were to fly on a partner airline, such as another Oneworld airline, you would also find that your AAdvantage miles are credited according to distance x fare class.

So despite all the public fanfare about award miles being based on dollar-spend, the American AAdvantage program still embraces distance x fare class as a method of revenue-based earning.

2 — REVENUE-BASED ELITE STATUS QUALIFICATION

So what options are available to incorporate a “revenue based” structure in your elite status earning?

Let’s look at American’s Elite Status Requirements…

Credit: American Airlines

Credit: American Airlines

To qualify for elite status on American Airlines — you need to fly a certain number of physical miles, or fly a required number of sectors PLUS spend a minimum amount of money through the year (which doesn’t include taxes and government fees).

Credit: American Airlines

Credit: American Airlines

As this table shows — higher, more premium fares earn higher rates of EQMs (Elite Qualifying Miles).

It’s a confusing, and inefficient system due to clumsy attempts to incorporate a revenue requirement.

Better systems exist.

Many airlines use a Loyalty Credit type system, which may be called Status Credits, Tier Points, Club Points or similar.

If we look at Virgin Australia for example — you need 250 Status Credits for Silver Status, 500 Status Credits for Gold Status and 1000 Status Credits for Platinum Status.

Credit: Virgin Australia

Credit: Virgin Australia

And the Status Credit Earning Table shows that both longer distances AND more premium fares contribute to faster status accrual.

Whilst it is ‘possible’ to achieve high-status solely on cheap fares, it would take a significant amount of total spend to achieve.

Both methods provide a revenue-based structure to elite status qualification.

3— REVENUE-BASED REDEMPTIONS

The final aspect of revenue-based programs is in relation to redemption.

Some commentators believe that the ultimate goal of programs should be to have 100% revenue-based redemption in a manner that simply attributes each point/mile with a value, for example, of 1 cent each.

These points/miles can then be redeemed for any available fare, and are converted into cash value at the set rate.

This method works well for Southwest, but fails to provide any “aspirational value” to the points currency.

The traditional method utilizes “charts” which set a fixed mileage-cost for a redemption. For example, a typical roundtrip domestic economy redemption within the United States on American, United, or Delta requires 25,000 miles.

The problem with this method is that it relies on the airline making award space available.

Almost all frequent flyers have encountered the frustration of struggling to find award availability.

Other airlines, such as Qantas, have a hybrid structure.

Qantas has published award charts that allow frequent flyer program members to both dream, and to plan for the number of points required for their desired redemption.

But for times when there are no award seats available, Qantas allows customers to use points for an “Any Seat Award”, which requires more points, at a dynamically priced level (which may be relative to cash prices for seats, or may be more closely related to the cosmic alignment of planetary systems).

Lastly, Qantas also allows members to redeem using a mix of points and cash.

SUMMARY

As you can see, revenue-based programs aren’t as simple as they may initially sound.

More importantly, whilst it is definitely a sound strategy to give more rewards to those who spend more — there are multiple strategies and structures available to accomplish this.

This article has not been intended to provide a full critical analyses of the benefits and weaknesses in the program designs of American, Delta, and United.

Rather — it has been intended to dispel the myth that all flyers were equally rewarded under the old programs.

Additionally, we have highlighted further questions to be considered, such as the mix of rewards between miles and elite benefits, as well as the differing efficacy of miles as a motivator for different customer segments.

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