Driving Retention and Returns from Loyalty Programs

I gave a speech at the Airline Ancillary Revenue & Merchandising Conference in Shanghai on the importance of loyalty programs in reaping the benefits of ancillary revenue programs and shared some of the key best practices in loyalty management.

Airlines are amongst the most difficult businesses to run. Fixed costs are high, competition is intense, the product is commoditised and pricing is transparent. On top of that, regular demand shocks create an environment in which it is very hard to make money. Historically, Total Shareholder Returns for the major Chinese carriers has been break-even at best despite very high growth rates in air travel.

Why Loyalty?

Recent years have shown that US carriers are now very profitable and have been consistently so for over 5 years. To trick to making money in the airline industry is to get 3 things right:

1. a relentless focus on operational excellence to drive efficieny and minimise costs;
2. an attractive suite of ancillary products and services that generates incremental revenue streams and drives profitability;
3. an effective loyalty and customer satisfaction program that generates repeat purchases and forms an important foundation for the ancillary revenue program.

Historically, Chinese carriers have predominantly focused on safety and operational issues and in more recent years have started taking small steps in offering ancillary products and services. But as a % of total revenue, the share of ancillary revenues is still relatively small compared to international best practice. There is a lot more upside for Chinese carriers here.

In addition to further rolling out their ancillary revenue offering, Chinese carriers need to place a lot more emphasise on upgrading their customer loyalty and satisfaction programs as this is required for sustainable high growth and profitability: loyal customers buy more, they buy more frequently, they buy more expensive items and are more likely to make recommendations to friends and families. Research shows that the companies with the best loyalty programs grow twice as fast compared to average companies.

And the importance of loyalty programs is increasing: Millennials are more driven by the status in their loyalty program than non-Millennials and they are also more willing to go out of their way to engage with their loyalty programs than non-Millenials.

Loyalty Economics

What should be the objectives of a loyalty program? First, like any investment and strategy we need to look at the economics and ensure these are attractive. In loyalty management we look at the 'loyalty margin': the value we provide to the member (e.g., a free flight) versus the cost to deliver this (e.g., the costs of the meal and drinks on the flight). The travel industry (air and hotel) enjoys high loyalty margins due to the perishable nature of the inventory and high value of the benefits.

But in offering the benefits do we get incremental share? What is the total spend of the passenger versus how much that passenger would have spend without the loyalty program? The incremental profit generated from the program needs to be larger than the cost of delivering the benefit.

Let me give a personal example from my time in China. I got a mobile-phone plan with China Mobile when I moved to Shanghai in 2006. Having used their service for many years, at some point I needed to sign a pile of paperwork at one of the branches to activate my 4G service. A random person was hovering behind me and suggested me to exchange my 'points' for three low-end smart phones which he then offered to buy off me for something like RMB200 a piece. Unaware I even had accumulated all these points I went ahead with 'the deal' and pocketed the cash. The point here is that China Mobile is incurring real costs for it's loyalty program but there was never any change in my behaviour over the years I was their customer. There was no incremental share to China Mobile and therefore no economic value. This form of ineffective marketing is prevalent with many loyalty programs in China, including the airline programs.

Beyond Economics: Other Loyalty Objectives

Besides generating attractive economics, what are some of the other key objectives of a successful loyalty program?

1. Brand Differentiation. Airlines are at great risk to being relegated to commoditised infrastructure providers that compete mainly on costs and offer little differentiation. Loyalty programs can help differentiate the brand and build a coalition of lifestyle partners. Loyalty programs go hand-in-hand with and ancillary revenue programs by sharing business partners to develop compelling ancillary services and earn-and-burn loyalty points. These programs can help fight the inherent commoditised nature of air travel by making the airline more relevant to its passengers, enhance loyalty and stickiness, and reduce somewhat the reliance on price competition.
2. Drive Valuable Activity. As mentioned, loyalty programs play a key role in increasing the frequency, scale and price-points of purchases by its members and this should be a key objective of any loyalty program.
3. Expand the Base. A further objective for the program is to expand its membership base. Initially this should be focussed on it's home base(s) from where it offers most flights and where the relevance is highest for local passengers. But the membership drive should be expanded to locations outside its hubs where there are frequent travellers, think for-instance students in Australia or businessmen in Japan or South Korea.
4. Big Data Mining. A fundamental component of a successful loyalty program is to build a capability to generate and analyse detailed customer data to ensure the (ancillary) services offered to the customer are highly relevant and attractive and as a result increase the likelihood of a purchase.

Loyalty Best Practices

So if we want to reach these objectives, what are some are the best practices from China and around the world to ensure success of a loyalty program? Here is my personal top-10 based on experiences with some of the leading players in the industry:

1. Identify and understand your most loyal passengers. The first step in building an effective loyalty program is to get a detailed understanding of your most loyal customers today: What are their characteristics? What are there needs and unmet needs? How do they shop for flights? Does their purchasing process differ depending on the type of trip they are making (i.e., a family vacation versus a day-trip for business)? By answering these an many more questions we develop a much better understanding of our most loyal customers and what drives their loyalty.
2. Fine-tune your offering to your most loyal passengers. A characteristic of successful loyalty programs is their ability to be highly targeted in making the right offer to the right customer at the right time. This requires having a suite of relevant products and services but equally important is to develop the capability to make sure the right offer is made to the right person at the right time. A hotel offer is not relevant to a business-person on a day-trip but a car with driver for the day may be very relevant, particularly if that is something regularly requested by this person. If we are able to line up the customer's favourite driver and some coffee-on-the-go, the chances of a purchase are increased significantly.
3. Make it easier for customers to buy more. During a typical flight a passenger is exposed to up to 28 touchpoint with the airline. Many of these touchpoint are potential opportunities to provide ancillary products or services. But most of the time, airlines miss the opportunity to provide what passengers really need or simply don't recognise the opportunity. Key to a successful loyalty program is to make it easier and seamless for customers to buy more from you. Technology can play an important role but as a first step it is critical for airline management to recognise the opportunity ahead.
4. Create a fuzz-free communication platform. Loyal and happy customers are often happy to share their good experiences with friends and relatives. And Millennials in particular are very comfortable to engage with brands on-line and share with their friends via social media. Airlines need to make it easier to make this happen by enabling their platforms to do so as well as create easy-to-share communication formats for instance elite tier upgrades including a personalised message from the Chief Pilot or a photo message from the crew.
5. Have measurable success metrics. Successful loyalty programs have a set of measureable KPI's that track whether the program is delivering against its objectives. We need to know whether the incremental share and profit generated by the program exceeds the costs of delivering the programs. We also need to make sure we are delivering on the other key objectives, such as enhancing the brand and customer experience and building our big-data capabilities.
6. Minimise complexity. A challenge many loyalty programs run into is the ever expanding complexity as the program matures. Tiers are too frequently introduced or redefined. There is no transparency in how benefits are awarded and an elaborate spreadsheet analysis is required to make sure hard-earned points are spend in the most economical manner. Earning points is subject to a long list of terms and conditions and members are frequently disappointed for not getting points that thought they were entitled to. This is not the way customers want to engage with brands or how to incentivise them in becoming more loyal customers to the company. Customers want a transparent system with clear rules that provides a seamless experience. The best loyalty programs are designed with the principle in mind.
7. Identify the preferred customer behaviour. The loyalty program needs to be designed with a clear understanding about the desired customer behaviour we are looking to incentivise: Do we want passengers to upgrade from economy to premium economy? Do we want to promote new destinations in the network? Do we want people to fly during specific days of the week? Do we want to promote ancillary services? The loyalty program needs to have the functionality and flexibility to identify and nudge towards the preferred customer behaviour.
8. Provide benefits that members value. Only if we provide benefits that are valued by the members do we have a chance in soliciting incremental spend over and above what they would have otherwise done. The benefits provided by many mobile phone and credit card companies in China are not compelling and people tend to just accumulate without any motivation to convert the benefits. At some point I had enough points on my credit card to exchange into 15 rice-cookers. The lack of attractive benefits means there is no incentive to engage more actively with the brand and the loyalty program has become an ineffective marketing spend.
9. Apply big-data analytical capabilities. Developing a deep understanding of each customer is becoming increasingly important as the number of ancillary services and products expands. A mum travelling with kids has very different needs compared to a mum on a business trip. Successful ancillary revenue programs tailor what they offer specifically to individual passenger needs and occasions. If you provide the right offer at the right time it is highly appreciated. But if you offer the wrong products at the wrong time it leads to a lot of frustration and impacts the brand negatively.
10. Develop a state-of-the-art mobile app. Today's expectation on the travel experience is shaped by our ever increasing affection to our mobile phones. People want seamless and hassle-free travel. And they want to engage with the airlines in the same way as they download instructions on how to make ravioli on a media streaming platform or order a supply of diapers on T-Mall: instantaneous, seamless and intuitive. Most airlines don't 'get' mobile technology and how to engage effectively through digital channels. Airlines are a risk of being disintermediated by on-line travel agencies such as C-Trip that offer a much better mobile experience. This will greatly impact the effectiveness of their loyalty programs and can fundamentally undermine the long term performance of the airline.

Chinese airlines have a long way to go before they reach the sustainable profitability levels now being achieved by their US peers. Booming demand for air travel in China is of great help but will only translate in attractive returns if Chinese carriers can upgrade their loyalty programs to improve customer satisfaction and stimulate incremental demand.

Michel Brekelmans is Managing Director at SCP/Asia, a consulting firm that supports business executives and investors in business intelligence, growth planning, M&A support and organisational performance improvement across the Asia Pacific region. With over 20 years experience in strategy consulting, and based in China and Singapore since 2002, he is highly experienced in solving complex management issues regarding the growth path of their business and major investments. www.scpartnersasia.com