The Loyalty Paradox

Airline loyalty programs are being rewritten to provide the most benefits to those who spend the most. Leading the charge in that direction last year was United's Mileage Plus program which explicitly sought to give more rewards for those who spent more money followed by a somewhat complicated update this year that gave more miles for the same fare and flight to those higher up on the mileage totem pole and another set of rules on miles required to climb up that ladder.

Hotels too have been making changes to the rewards programs by making rewards proportional to the average daily rate as happened for Marriott and Starwood recently although Starwood's teaming up with Uber to offer points to those who use the app based ride-hailing while staying at one of their hotels takes some of the sting off of the changes.

However, a Harvard Business Review paper by MIT researcher Michael Schrage has a cautionary note for service companies that look to reward only the fat cats. Entitled "Why Your Customer Loyalty Program Isn't Working" the blog post notes that "the rise of social media platforms such as Yelp, Facebook, Twitter, and TripAdvisor guarantee that customers will get a global say on what loyalty should mean and who “loyal customers” really are. They’re rewriting the economic rules about customer value. Who is truly more valuable to an airline or hotel chain? A profitable repeat customer? Or a two-thirds as profitable customer (emphasis added) whose comments and critiques on Twitter and Yelp influence hundreds of prospects?"

The Harvard paper goes on to ask  "how valuable is a “typical” customer who makes suggestions to a hotel — or retailer or software developer — that can be worth hundreds of thousands in insight? When loyalty can be defined as innovative contributions and influential word-of-mouth as opposed to repeat high-margin business, traditional measures and metrics for loyalty decay into anachronism." That insight perhaps prompted Hilton to radically change their Honors program to offer free WiFi not only to all members but also enable points when booked through sources other than the company, a key differentiatior, thus far, from its competition.

The HBR paper ends by noting an apparent paradox in structuring loyalty programs "loyalty here is as much about ethics as it is business. Loyalty shouldn’t be a data-driven gimmick for capturing customers and market share. It is one of those rare virtues that can be both a means and an end for new value creation in healthy relationships between consumers and companies."  Perhaps airlines and hotels should settle down to the idea that the benefits do not always have to be tangible and immediately realizable.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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