When frequent flyer programs were first introduced, they were a huge advance:
- More effective marketing than anything that had been done before
- More cost-effective, too.
That’s because they let airlines track individual customer behavior, and market directly to their customers. They replaced ‘take an ad out in a magazine and hope that it helps sales in a few months’ as a marketing strategy.
Frequent flyer programs weren’t just a cost, they were a cost savings. And that’s before airlines learned they could sell their miles to third parties at a profit.
Many programs began by rewarding distance flown with an airline. There’s nothing sacred about the distance you fly. Distance was easy to measure and indeed distance was more closely correlated with revenue than it is today. Total distance flown, though, correlated with the amount of your life you spent with an airline and was an imperfect proxy for wallet share, how much of your business you were giving to an airline.
For 30 years airlines have been claiming that the changes they make to frequent flyer programs have been to ‘better reward higher-spending customers. Yet not only did United, Delta, and American move to a revenue-based program they made the miles even high fare customers earned worth less by raising the number of miles it takes to redeem for most awards.
I’ve contended that the shift to revenue-based programs (earning based on cost of a ticket) combined with award chart devaluations (making the miles earned worth less) is about spending less on marketing, when planes are running full. There aren’t many incremental seats to sell, so they spend less marketing dollars to fill those seats.
But just as distance is an imperfect measure of customer value, the only way to call total revenue a good measure of customer value is to misunderstand the difference between marginal and average, and to fail to understand opportunity cost. (Unsurprisingly then Delta says this change doesn’t drive their revenue premium.)
The person who buys full fare tickets but doesn’t pick their own travel provider (either because they ignore it, their corporate travel department buys the tickets) isn’t going to spend more money on an airline because the loyalty program is slanted to high revenue travelers.
Yet a program can influence both choice of travel provider and total amount of travel. A business traveler is less reluctant to travel if she’s being rewarded for it. They may not fight against travel when they aren’t just getting their expenses covered but they have something to cash in later. Without a rewarding scheme, business travelers become more reluctant to travel.
- A high fare customer isn’t the same thing as a profitable customer
- You don’t want to “reward” a high fare customer you want to “incentivize” additional business you wouldn’t otherwise get. In other words you want to increase profit (or avoid loss).
It’s interesting that a $300 Los Angeles – Las Vegas fare is rewarded under a revenue-based system the same as a $300 Los Angeles – New York one (and the same as a $300 Los Angeles – Tokyo fare).
- A flyer may buy one expensive ticket with an airline because they’re the only one that flies non-stop on the route. Does it make sense to reward them, if the customer was going to buy the ticket either way?
- 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).
- 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 (priority boarding, seat assignments, extra legroom, checked bags etc). 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.
- The program needs to try to influence incremental business. An airline may reward a high spend customer but not get additional business from them than you would otherwise have gotten. They might be able to move the needle with some of your other customer segments.
All things equal, knowing nothing else about a customer, I’d guess that the higher revenue one is more valuable than the lower revenue one. But the whole point of the programs was to get better data on customers, to understand and reward them and market to them. They were early revolutionary efforts at big data. So ‘knowing nothing else’ isn’t ever a position a loyalty program should be in. And airlines should at least try to do better.
Ultimately if you take your business seriously, instead of just repeating platitudes, then frequency and wallet share matter — and especially driving greater frequency and increased wallet share — and not just total revenue.