Over at Skift, contributor Brian Summers examines an age-old question of loyalty marketers around the globe: Do loyalty program changes that benefit the bottom line automatically make the program less valuable for members? Is loyalty program profitability a zero-sum game, in which either the operator or the members lose out? Or is there some Venn-diagram overlap, in which changes to improve your program's profitability can also benefit your best customers? Recent comments from Delta Air Lines CFO Paul Jacobsen put the debate into perspective - and no matter your industry, the recent evolution of airline loyalty programs from mileage- to revenue-based earning has lessons for us all. The most important lesson: if your loyalty program caters solely to the one percent, you may be fomenting revolution.
By Rick Ferguson
In 2015, Delta Air Lines became the first major US carrier to evolve their loyalty program from a mileage- to a revenue-based model. We have long argued that the move was necessary both to the long-term financial health of these programs and to build long-term relationships with the airlines' best customers. Speaking at the Bank of America Merrill Lynch 2017 Transportation Conference as quoted in Skift, Jacobsen argues that the move worked exactly as we said it would. Money quote:
"'I think loyalty really took off when we ultimately made the conversion away from miles-based program to a dollar-based program. The miles-based program was an antiquity out of deregulation and really didn't have a practical application in a world where pricing is set...irrespective of distance.'"It was an obvious decision for Delta, Jacobsen said, because it keeps the airline from awarding too many miles to customers who fly long distances but do not create much revenue for the airline. Now, he said, Delta is less worried about how customers redeem miles, because travelers who have earned them are valuable for the company.""'We can get into different options for our customers where from a revenue perspective we truly are indifferent, whether someone spends a dollar or a mile,' he said. 'We know what the cost is, and we know what the whole pool looks like versus somebody who gets the same amount of miles when they pay 10 percent of the ticket cost that somebody else did,' he said."
As Summers points out, however, the problem is that, thanks to the original frequent-flyer model as pioneered by American Airlines in 1981, an entire global culture of road warriors arose who believed the airlines when they told them that their value was based on the number of miles they flew. When Delta changed the rules, those mileage hounds were suddenly being told that their loyalty no longer mattered. Delta was breaking up with them, and they would have to adjust to their new life in the friend zone whether they liked it or not.
With American and United soon following suite, airline loyalty programs are now focused where they should have been all along - on those customers who delivered the greatest impact to their bottom line. One of the fundamental axioms of loyalty marketing is that some customers are indeed more valuable then others, and are therefore deserving of reward and recognition beyond your core product/service offering. Every business gets to define what a "best customer" looks like to them, and act accordingly. Delta did so, and now they are reaping the rewards of building mutually-beneficial relationships with the customers who mean the most to them.
So why are customers and the media generally so critical of these moves? The problem lies not in the changing definition of a best customer, but in how the airlines treat those passengers who have yet to, or who never will, rise to the level of an elite frequent-flyer. Whereas airline programs used to be aspirational - providing a beacon of excitement to encourage flyers to consolidate their air travel - they have now become elitist. Airlines now cater solely to lucrative business travelers at the expense of everyone else.
Everyone who has ever reached Platinum status in a major carrier only to lose that status due to a job or lifestyle change knows what it feels like. Suddenly you're a chump: you board last, you pay $50 to check your bag, there's never any room for your carry-on, the flight attendants treat you like a circus monkey, and every time you get on a plane there's less leg-room available than the last time you flew. And if you change airlines looking for a better experience, you find that no other carrier wants you. Unless you book $3,000 last-minute business trips to LaGuardia every other week, the airlines would like you to rub salt, thank you very much.
In other words: When it comes to the flying experience, the rich keep getting richer. The elitism now extends even to valuable flyers, as Delta has become notorious for devaluing their miles by raising redemption costs with no forewarning. If the devaluing bothers you, Delta seems to be saying, then you obviously don't have enough miles in your account to matter.
The elitist attitude has resulted in an erosion of trust, in which every move the airline makes is viewed with suspicion. Summers highlights recent moves by Delta to expand redemption options beyond flights. These are emminently sensible moves designed to expand opportunities for Skymiles members to use miles to design their own flight experiences. To suspicious industry observers, however, the moves are viewed with pronounced side-eye. Money quote #2:
"In an April post, Gary Leff of ViewFromTheWing, wrote that... 'The biggest problem SkyMiles faces is their trust deficit. You don’t get information to understand what miles are worth, and when they make changes Delta doesn't play straight with what they're doing with your miles or how that will affect you.'"Bloggers have also criticized Delta for pushing customers to make redemptions for items other than airfare, like champagne in a lounge, or upgrades to premium economy. But they argue customers receive far less value if they redeem for anything except airfare. A bottle of Dom Perignon in the lounge might be free for a frequent flyer, they say, but because Delta sets the prices in miles, it’s rarely a good deal."
Of course it's not a good deal! If you're looking for a good deal on a bottle of Dom Perignon, then you are not, shall we say, in Dom Perignon's target demographic - nor Delta's. These redemption options are there for the guy with so many miles in his Skymiles account that he can blow them on a bottle of Dom without thinking twice about it.
Again - if you're in, say, the top 20 percent of Diamond Skymiles members, then the Skymiles program gets better for you every day. If you're a lowly Platinum member, however, you're probably noticing a subtle erosion of your status. And if you're a Silver member - well, what reason have you to go on, really?
That's the problem with the modern airline loyalty program. It isn't that they've changed the programs to cater to their most valuable customers - that's what they're supposed to do. It isn't that they continue to gear these programs more and more to an ever-shrinking cadre of elite passengers - they're supposed to do that too.
The problem is that the airlines themselves have decided that loyalty is a zero-sum game: they extend these benefits to elite flyers at the expense of the rest of us. And the danger, should they continue down this path, is that the revolution will come. Why keep paying for every Soy Chai Latte on your Delta Skymiles Gold American Express card when those miles won't get you anything? Why fly Delta to Ft. Lauderdale when you can fly Frontier and have the same lousy experience for a third of the price?
Like the stock market, the market for airline miles is built largely on a shared belief in their continued value. Should airlines continue to cater solely to the one percent, then that bubble could burst - and the immense profitability of airline loyalty programs could burst along with it. The solution to avoiding this scenario may be to reinvest in making the flying experience better for everyone. Make flying aspirational again - or airline executives may find themselves headed for the Bastille.
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer Group.