CEO Blog

Loyalty beyond the obvious

Written by Ravindra Bhagwanani on . Posted in CEO Blog

ME302 August 2017

Well-designed loyalty programs should manage to increase revenues, through increasing revenues with existing customers and/or through reaching out to new customers. But many programs fail to do so – and might still be considered successful.

The other day, I was at an airline in the process of launching a Frequent Flyer Program for the first time. And I had to raise a flag about not misinterpreting signs of presumably early success. But as a matter of fact, even many established programs might not really look at those truly critical factors.

Measuring success is often reduced to basic aspects such as looking at the amount of revenues generated through the sale of miles. That is a nice side effect, but in my more conservative thinking, loyalty programs should primarily do something else: create loyalty.

Anybody ever having launched a loyalty program – in whatever industry, by the way – is likely to have fond memories of the early stage with impressive numbers of members rolling up, often beyond projections, and taking this as confirmation of its achievements. However, I would actually even call these early enrolments undesirable, while inevitable. Why?

As a matter of fact, each established business has an existing customer basis before the introduction of a loyalty program. Unless you call yourself SaudiGulf Airlines, of course, which entered into history last year by launching its FFP before its operations… This means that you have, often loyal, customers choosing your company for a range of reasons other than your loyalty program. This can be price, schedule, location, service, corporate agreements, referrals or anything else. However, these engaged customers are likely to be the early adopters of any new product offering, including a loyalty program. Considering a loyalty program ultimately a discount you grant, you actually lose revenue in the early stage of introducing a program with such existing customers – beyond the direct costs related to its introduction. This phenomena is often overseen. Unlike with many other product enhancements – from apps to new product lines -, you should actually not target your existing hardcore customers with a loyalty scheme.

But where a loyalty program has to prove its effectiveness is actually in two other areas, where you can ask yourself two simple questions.

First, does your program manage to increase revenues with your existing customers? This can happen through an increase of yields (upselling to higher fares, more ancillary services) or an increase of the share of wallet/frequency of purchases. There are fair reasons to believe that this works with many programs, at least to a certain degree – but is not necessarily exploited strategically and actively at a CRM level by many programs.

Secondly and at least as important, does your program manage to reach out to new customer groups? This might include previous customers, which have happened to try your product, for instance because you were the cheapest one, without showing any signs of loyalty though. But this should especially be customers having used your competitors until now and not considering you because you did not have a loyalty program. Here is the area where a program can and should make a difference and where it can generate a dramatic impact to the bottom line of your company.

While the luxury of such a blank sheet contemplation is indeed reserved to new program operators, also existing operators should regularly check the true effectiveness of their schemes in terms of loyalty creation. If you belong to those numerous companies knowing or having at least the strong feeling that your customers turn away to a competitor as soon as they are offered an insignificantly lower price by somebody else, you may have some customer-facing points scheme, but you shouldn’t call it loyalty program as it fails to create any loyalty.

The price sensitiveness is indeed often reduced for elite customer as the lock-in effect of the programs is bigger here – but also at higher costs. So in a self-critical contemplation, you should not stop either at simply stating an increased loyalty with these customers, but compare this reduced – not eliminated – price sensitiveness to the price you pay to achieve this. Many elite benefits such as waived ancillary fees, bonus miles or lounge access all come at a cost – and often actually exceed what your customers pay more to you. You just take this whole corruptive loyalty game to a higher level in terms of revenues and costs, but not necessarily with a given better outcome.

Good news is though that academic researches show that loyalty programs tend to pass such revenue tests. But program operators are nevertheless well advised to ask themselves those uncomfortable questions for different customer segments in regular intervals and to understand what corrective measures they need to take. This risks embracing quickly CRM components.

Resting on its laurels (or rather on the laurels of your colleagues contributing to an overall positive customer experience) has never been a good advice for loyalty managers. The permanent enemy of each loyalty manager, disloyalty of its customers, is ready to hit you at any time. So rather assume an active role and look for that additional loyalty beyond the obvious.

And only then move on to tasks with less value creation, such as signing off the monthly invoices for your earning partners. Such redirected focus will pay off.