Bricks of loyalty:
Despite the extant literature on customer loyalty, it is recognized that the psychological processes behind customer loyalty and commitment are still ill understood (Pritchard et al. 1999) (1). The fundamental guidance system for all human responses is powered by its emotional palette. Thus, to understand its underpinnings and moderate it to favor an organisation within limited extend, an deep understanding of human psychology is important.
Total customer-loyalty is the Holy Grail that all organisations seek in order to meet their business objectives and bolster financial bottom-lines. Every organisation has the fantasy that their customers would remain totally loyal to their business. If this could be achieved, they would remain profitable forever. This is a dichotomous thought because, if all customers would restrict their loyalty to a few organisations, then customer acquisition-the manna for business growth would grind to a halt, killing expansion and new initiatives. Thus, disloyalty within varying degrees is a reality and a necessary evil.
Reality is far from fantasy, and humans will keep shifting their loyalty at varying levels as they are by nature promiscuous in all their relationships. Their ability to think intelligently enables them to explore various combinations and permutations in every situation and choose what is most favorable to them.
The “sense” of loyalty seems be a part of the survival instinct. It helps people come together and live within groups & undertake tasks that would otherwise have been impossible to execute alone or in small numbers. This human tendency to cluster together is what marketing experts call “relationship-proneness”. In this clustering, the individual is willing to let collective needs predominate over his personal needs. This requires high levels of commitment that can only emanate from a strong, consensual and positive state of mind.
Among the various factors that affect customer loyalty, the sense of commitment comes across as major. In the literature on organizational psychology, Allen and Meyer (1990) distinguish between affective, continuance (calculative) and normative commitment. The differences between these three types of commitment reflect the psychological state that binds the individual to the organization. Affective commitment refers to the emotional attachment to an organization, while continuance commitment refers to the costs that individuals associate with leaving the organization and the normative component refers to individuals’ feelings of obligation to remain with the organization. They argue that a more comprehensive understanding of the link between commitment and loyalty will be achieved when all three types of commitment are considered simultaneously (5). Pritchard et al. (1999) argue that an analysis of commitment ‘should move beyond a general expression of attachment and incorporate an understanding of the psychology inherent in binding a person to that disposition’ (p. 334). They distinguish information processes, identification processes and volition processes as antecedents of commitment. (2)
Many organisations have spent valuable resources in implementing a loyalty program to retain existing customers and attain new ones. While many have succeeded, the others are still struggling recoup the expenses and to identify what went wrong in the whole process. A Loyalty program is not a one-size-fits-all solution. It should address the stimulus-response system of its targeted customers based on actual behavioural data over a period of time. People within different segments exhibit differing behavioural traits & the stimulus that elicits a desired response seems to be varied too. The variety of behavioural responses by same people within different groups is truly complex. Basic understanding of the human stimulus-response to emotional manipulations can be understood from the classic “Hawthorne study” & B.F. Skinner’s theory of “operant conditioning” and his proposition and exploration of possibilities of the “token economy”. The rewards offered through a loyalty program not only aim at eliciting the right behaviour, but also reinforce it so that it ultimately becomes the part of the person’s shopping psyche. Eliciting the right response is not just the function of the rewards offered, but all also includes a lot of other factors including the overall experience that has been nomenclatured as “experiential-marketing” in today’s parlance.
By being the member of a loyalty program, a subscriber by default becomes the part of a larger community. Like every group, this community is also guided by certain norms and rules-predominantly set by the principal organisation that owns the program. The acts of accrual and redemption forms the basic rules and constant tactical promotions that have a different set of rules forms advanced rules that form the part of the standard operating procedures that guide the members of the community. Community formation being the first step, successful conversion of the members into a “psychological-crowd” remains the key. Psychological crowds are by nature extremely prone to the power of suggestibility. This vulnerability towards suggestion can arguably be achieved by constant and relevant communication. In marketing terms the tactical and strategic promotions that are used to constantly communicate to the members serve the function of active suggestion. Physical and emotional proximity between the members can be achieved by creating activities specially created for them like a family day-out, movie premiere, tickets for a play etc. These activities re-assure each member that as there are many like them who think and act similarly thus, validating their membership to the group.
What applies to an individual applies to a group-successful loyalty programs are those that leverage the emotions that guide human behaviour and channelise them towards limited behaviour modification resulting in regular and incremental financial returns for the organisation. The human mind craves for routine and any incentive that allows one to profitably (by being rewarded) continue dealing with familiar organisations is a winner.
Loyalty programs are dictated by market dynamics. It is no longer a luxury but a necessity and a vital tool for survival for any business across industries. This is easy to understand when we realise that the market resides nowhere but in the collective consciousness of consumers.
Loyalty-the airline perspective
Like any business, the airline industry has organically grown to many times its size since the first commercial aircraft began operations. With almost every nation today owning a “national” airline and the numerous private airlines glutting the sky, the passenger has never been spoiled for choice. Air travel itself has come down from a few notches in its positioning with ticket prices hitting realistic levels and from a luxury, it has become a necessity.
The process of globalization has resulted in creating new inter-cultural and inter-national dependencies. In the new & bold “flat world”, political boundaries have become transparent. Business or personal travel has picked up and considering that today, time is perceived as more valuable, air travel has naturally become more popular. With conspicuous consumption attaining added respectability, even services are treated at par with products. It may be safely said that today the consumer has truly been crowned “King”.
According to a Datamonitor study, the global airlines industry generated total revenues of $318.6 billion in 2005, representing a compound annual growth rate (CAGR) of 2.6% for the five-year period spanning 2001-2005. Passenger volumes increased with a CAGR of 5.5% between 2002-2006, to reach a total of 2,490 million passengers in 2005. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 8.3% for the five-year period 2005-2010 expected to drive the industry to a value of $475.3 billion by the end of 2010 (3).
With demand reaching high levels, the battle has focused on cornering maximum business by individual airlines. Loyalty programs or frequent flyer programs as they are known within the airline industry have already proven its efficacy as effective marketing weapons helping the individual airlines and alliances differentiate their service features and reduce core marketing expenses. Since the target acquisition has changed from large groups to smaller demographic groups or even individuals, a shift in firing mode-from assault to precision is but a natural process.
Increased business opportunities have throw up its own unique challenges and airlines in their bid to maintain profitability has had no choice but revamp, invigorate and empower alternative marketing tools like FFPs. FFPs are psychological marketing initiatives that focus on the emotions of the target prompting a change that drives them not only in thought, but action as well. Which means, over a period of time, the target customer is encouraged to if not actually make a purchase, at least find out more about the offer made. This most of the times is the beginning of a transaction.
Like everything in the universe, Loyalty programs have gone through its share of evolution as well. From primitive stamp & other coupon based ones, it has come a long way and is today almost entirely software-driven offering better flexibility through intelligent automation. The transformation of frequent flyer programs, kick started by the deregulation of the US airline industry in 1978 and extensive computerization within the industry has been rapid in recent times.
The key to any successful business is informed investment. For effectively spend money to maximise returns, deployable data is a crucial component for any organisation. Like all businesses, the airline Industry too is bound by the Pareto principle of 80:20. Since all customers are not same, it becomes important to identify the most “valuable” customers. A sophisticated data-capture system as a part of the loyalty program helps in identifying these customers and their Life time value (LTV). By identifying wallet-share, the customers can be identified and incentivised. This narrowcasting also results in better ROI on rewards and communication expenses. FFPs like all loyalty initiatives is the result of a bargain. For repeat and consistent business, the airline offers rewards to the customer who in return gets a better ROI on his spend and responds by patronizing the airline.
The ultimate objective of FFPs is information. It is gathered through data collation and analysis and the success of a loyalty initiative primarily depends on it. It’s not just any data but the right fields that it captures and the customer behaviour patterns that it brings out which helps the airlines in fine tuning its strategies and fortifying its bottom lines.
In 1981, when AAdvantage was launched by American Airlines, it had a 150,000 best customer database. Today, the figures have swelled many times introducing new complexities. These huge databases potentially offer tremendous business opportunities if mined properly for information. Extracting precision information by slicing and dicing the available data require sophisticated technologies to manage and derive analytics that would ultimately help the airlines retain and obtain business.
The customer service expectations have undergone the natural evolution process and are at a higher plane today. They are conscious of the fact that their business is valuable to the industry and the individual airline. In order to meet elevated expectations, it has become essential to offer varied, exciting and obtainable rewards in two timescales-tactical and strategic. The challenge for the airlines lies in constantly identifying innovative rewarding methodologies that will keep the customer excited and participating without compromising on its financial bottomlines. Thus, apart from maintaining their own proprietary FFPs, most of the airlines have also become part of alliances like Star Alliance, Skyteam or Oneworld the three top alliances in the world or smaller regional groupings. Alliances promise seamless service to passengers across their joint networks with each alliance member giving the appropriate level of reward and recognition to each other’s members. Proportionate rewards are here to stay and there is no escape from it.
It is a tribute to the flexibility and appeal of FFPs that it has expanded and accommodated related but non-flying partners like rent-a car services, tour operators, hotels etc. Many FFPs have also successfully tied-up with natural transaction aggregators like credit cards to plug-in retail into the accrual eco-system. Though these businesses are in reality outsiders within the FFP environment, they present wider and accelerated miles earning pool for the members but also results in additional earnings for the airline that is used to subsidise the costs of its FFP.
Airline alliances have helped in selective aggregation of passengers as well as spread-out cost benefits for airlines. The success of these alliances is indicated by the statistics generated and is indicative of its popularity and the way forward for airlines. Among the top three alliances- Star alliance has 455.5 million PPY*, 912 destinations, 25.1% market share, SkyTeam has 428 million PPY, 841 Destinations and 20.8% market share and Oneworld has 319.7 million PPY, 692 destinations and 14.9% market share. One of the crucial factors that have played a role in the popularity and success of these alliances definitely has been the opportunity to earn miles seamlessly across them.
According to the Economist magazine, frequent flyer points are the world’s second largest currency. The total number of frequent flyer miles worldwide is worth an estimated $500 billion. (4) This indicates that miles collection remains a constant done either deliberately or as a normal process. It has become an alternate currency whose potential exchange value is used to attract customer attention. Redemption offers being important tools that can be used to make customer transact with the miles ecosystem and used to sell perishable commodities like seats on aircraft or hotel rooms during off-season periods. The large miles pool thus presents a real opportunity than threat to the airline industry and indicates that along with constant accrual, periodic redemptions are critical to demonstrate the value of miles earned.
* Passengers per year
It seems that what makes loyalty programs attractive (from the consumer standpoint) and effective (from the airline standpoint) is the reward side of the equation. FFPs work because there is a balancing of consumer and airline interests. From the airline standpoint, the generous awards can be justified because average award costs are closer to the direct costs of carrying a passenger (an extra meal, extra aircraft fuel, etc.) than to the actual cost of purchasing a comparable ticket. That’s because award seats are limited, thereby reducing the likelihood of an award passenger displacing a revenue passenger. The real advantage for an organisation in giving away loyalty points lies not only in creating a sense of loyalty, but in the millions of data points collected about customer behaviour. This data is analysed and used for inside-out marketing communications. As FFPs allow targeted communications with the airlines’ proven customers, it is not necessary to spend as much on expensive (and inefficient) print and broadcast advertising to maintain the interest and loyalty of current customers. The dollars “earned” through these savings run into the millions. A combination of sophisticated yield management techniques and frequent flyer programs has helped the airline industry consolidate its profits.
FFPs at crossroads:
Frequent flyer programs as revenue consolidators & generators have remained a constant within the airline industry but it is the needs of the customer that have undergone a sea change. In order to accommodate the changed needs of the customers, many FFPs have gone through an inevitable metamorphosis into sophisticated programs playing a vital role in customer relations management (CRM). In the process of maintaining the relevance of their FFPs as brand differentiators, airlines today are compelled to upgrade their programs with new generation functionalities. But the greatest impediment towards this transformation has come from inside-system constraints. Most of today’s loyalty systems were developed in-house in a reactive fashion. They were predominantly built on legacy systems that have limitations when it comes to up gradations. While the basic debiting and crediting of points, additional promotions, tier based differential accruals etc work reasonably well with the old system, complex offerings exposes, the limitations of these systems and a lot of manual processing is required to support these activities
Some of the weak points of legacy systems may be summarised here:
Lack of flexibility- In most systems it is extremely difficult to make changes-changes like new promotions, new programs or even smaller things, like what data gets stored for each customer.
Expensive to Maintain- In order to accommodate enhancements within the legacy systems that are inherently difficult to make, a lot of coding is required. Coding exercises being manual intensive are expensive by nature. Built predominantly on custom-made systems, there is poor interoperability between alliance partners. Thus, the opportunities to share opportunities & costs that come with economies of scale are diminished thereby pushing up the costs.
Little or no access to customer data for analysis- Despite accumulating customer data, many airlines are constrained by their inability to derive deployable information through data mining and analysis. Such information is valuable in understanding customer behaviour patterns, calculating ROI, make any necessary course correction or most importantly, to directly communicate with valuable customers.
Lack of customer information flow between systems: For enhancing the travel experience for the passenger, the airline staff needs to treat them with familiarity and based on larger business, treat them as special. Unless the information regarding the customer is accessible through their system, this cannot happen. In legacy systems, actionable customer information cannot be pushed out to customer contact employees at the appropriate time.
There are also other constraints like inability to offer complex tactical promotions, Inability to effectively handling large databases, lack of multi-channel support, non-integrated and non-automated marketing functions etc restrains an airline from exploiting the true capabilities of a frequent flyer program. Thus faced with FFPs on state-of-the art loyalty platforms, these airlines lose the opportunity to convert their loyalty programs into true tools of competitive advantage, attracting, retaining and expanding business with high-value customers. In a different period, the legacy systems have served the airlines well. In the more demanding circumstances wherein the value-proposition of an FFP has changed, the passenger’s loyalty has become all the more determining factor that has a direct effect on the operational efficiencies and profitability for an airline. Legacy systems are well past their prime and the airlines are left with no choice but upgrade their FFPs on enterprise systems.
Comparison-legacy system & new loyalty solution.
Legacy/ custom built solutions
Expensive to maintain
Strategically lower maintenance costs
Lack of over-all flexibility
Flexibility to handle multi-faceted loyalty functions
Manual intervention intensive
Low manual intervention
Difficulty in offering complex rewards
Multiple rewarding options
Cumbersome to handle large databases
Easy to handle large & multiple segmented databases
Inability to analyze accumulated data
Developed for complex data analysis
Lack of customer information flow between systems
Access to real-time customer information at all customer touch points
Lack of Multi-channel support
Integrated with multiple channel ability
Poor inter-operability between alliance partners
Designed for seamless inter-operability between alliance partners
Marketing communication is a separate & manual function
Marketing communications are automated and seamless
FFPs are workhorses for airline industry having proven its effectiveness over 27 years. The role of FFPs & expectations from it has changed. The next generation loyalty solutions need to be adopted within the industry to continue harness the power of FFPs. Some highlights of the new loyalty solutions are:
Viable and inevitable migration option from the current legacy system.
Pre-built analytics solution that can throw-up obtain customer behavioural/purchase patterns.
A flexible rules engine that can accommodate multiple rules to run the loyalty program.
Empowers the airlines to design and effectively execute and manage loyalty campaigns and ability to offer complex rewards.
Flexible design supporting innovative airline business models and enables them to respond efficiently to the ever changing demands of the air travel industry.
Enable seamless customer information flow between systems. The touch points where customer is serviced should have the capability to access important information that can transform the flying experience.
Marketing communication should be integrated with the FFP system rather than being a separate activity.
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