Surviving loyalty programs

American Express recently launched a “Powerstop business center” at La Guardia airport in partnership with Delta Airlines. Equipped with computers, fax machines, Internet and conference facilities, the Powerstop is an innovative upgrade that will benefit Delta shuttle passengers.

Loyalty programs have come a long way..

On May 1st, 25 years ago, American Airlines launched AAdvantage and made history – the frequent flier program has not looked back since then. Today no airline or hotel can hope to compete without offering their repeat customers points which can be redeemed for free upgrades, hotel stays and other privileges.

Loyalty as a managed asset arrived with the frequent flier program. Co-branded credit cards and proprietary credit cards have also successfully extended the frequent customer concept (by not requiring card-holders to even spend on an airline ticket or a hotel room to enjoy points).

The downside – loyalty programs have also become a commodity not much unlike the discount coupon issued by the neighborhood grocery store. Points have become a necessary evil for companies and a run-of-the-mill “benefit” for customers. When was the last time a customer switched companies for a better affinity program? Companies have learnt to live with the loyalty program syndrome – you lose if you don’t. And you lose if you do!

The success of a loyalty program is measured by the increase in business as a result of marketing to the frequent customer base (value of repeat transactions, referrals, most-redeemed point levels and the most preferred rewards). A Bain study showed that improving customer retention by as little as 5% can yield an increase in customer net-present value by 35-90%. Loyalty obviously pays but it comes with a price tag to companies that can’t pull it off.

Learnings from other industries
– Expanding partnerships and multiplying opportunities for rewards. A case in point is AMEX, the leader in credit card loyalty programs with more than 140 partnerships and countless redemption choices.
– Rewarding everyday activities by offering double points for mundane purchases (thus making the co-branded card the preferred card).
– Storing value. Customers are quick to lose interest when points have an unreasonably short shelf-life and must be used up quickly or lost forever.
– Making it worth the effort. A $10 gift card for 5000 points is a non-starter. People are quick to see “value” where companies don’t and will pass up benefits not worth their time and investment.
– Managing the relationship growth curve: Upgrade the customer to new levels of benefits and privileges as the credit lifecycle matures. Big brands like Shell have perfected this with their family of cards (an introductory gift card, a private label card, a preferred card and so on).

The most successful loyalty marketers are those that have continuously redefined value from the perspective of the customer and broadened the range of benefits and partnerships – like Amex. Loyalty programs cannot work as differentiators for hotel chains unless they have a dynamic, innovative element to them (good example – Hyatt offering the registered traveler pass to its frequent guests).

As Steve Groswald (United Airlines) put it “If loyalty existed, you wouldn’t need these programs.”

Published by

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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