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Loyalty and Lifetime Value

by Leigh Duncan-Durst  |  
November 19, 2008

I recently began to wonder how many of the airlines and hotel chains have really considered "Customer Lifetime Value" in the creation of today's largely calendar-driven loyalty programs. Beyond the motivation to examine year-over-year performance, how was it decided that one year is an adequate period over which to "judge" and reward a customer's loyalty?

How do these programs take into consideration longer-term customer behavior, patterns, and brand interaction in a market where acquisition is costly and retention is essential? Is it time for change?
Here's what got me thinking: After almost six years of being on the road full-time, I entered into a reduced travel cocoon in order to focus on my personal life. I transitioned from almost weekly business travel to making trips every 6-10 weeks. Therefore, I wasn't particularly surprised, two years later, to find that my hard-earned status with almost every major air carrier and hotel chain had expired.
I tried not to think about the years I spent in hotels and the months I spent in the air, as I anticipated this new reality. I emerged from my cocoon and began to travel again and naturally obtained fewer "free" perks and upgrades. Hitting the road as "every day Jill" was great on some levels, because it allowed me to shed my status and (at least in part) experience travel from a different perspective. This has prompted me to question many things: from what the baseline experience "should" be in the air and on the ground, and how the airlines and hospitality industry view customer loyalty as a whole.

Focusing on Frequent Travelers.
For the airlines, frequent fliers with "premium" levels of status represent a small percent of total customer base. However, they contribute the most in revenue .... hands down. In fact, according one major (anonymous) airline, frequent flyers with "premium" status are worth eight times more than flyers without status. I understand that to a large extent these dynamics apply to frequent travelers in the hospitality industry as well. As such, investing in the retention of frequent travelers is where these companies get the most bang for their buck.
Differentiation in loyalty programs. We know that over time, experiences can become commodities. This is true also for loyalty programs for the major hotels and air carriers, where there is currently little differentiation between programs. As points, miles and pre-boarding have become commodities, many major airlines, like United, have launched new "products" tied to premium seating (read: legroom at front of plane). Passengers with status are given automatic upgrades to premium seating based on availability. Other passengers may purchase upgrades to premium seating for an additional fee. It is significant to note, however, that we are beginning to see seating as a commodity, as well. Airlines like Jet Blue boast more legroom for everyone. Beyond the airlines, hotels like the Holiday Inn Express, offer "perks" like continental breakfast free to all hotel guests.
As benefits become commodities, the next question is, "How can hotel and air carriers capture the affinity of increasingly "flighty" customers?" Perhaps the next field for differentiation will focus on Customer Lifetime Value.
It is only logical that customer patterns do not always play out neatly within the constraints of an organization's "calendar year. Beyond this, research shows that customers who travel frequently are known to take periodic "breaks" from travel. Therefore, why wouldn't it be logical for companies to build mechanisms in to the customer experience that respond to such trends and usage patterns?
For example, if at mid-year, a customer commences full-time travel, perhaps it would be logical for an airline or hotel to recognize this pattern and leverage an offer that will help "capture" as much of that customer's travel business as possible.
Sadly, the fact remains that with most major airlines and hotels, unless a customer accumulates a ridiculous number of points beyond the calendar year, s/he runs the risk of a status downgrade at the turn of the calendar year. From a business and cost management perspective, this may be necessary at some level. However, on a psychological level, what this may communicate to an otherwise "loyal" customer is,
"Sorry. We only care about what you've done for us lately."
Should you say this to a frequent traveler who has slept in one of your properties for over one year? Should you say this to a customer who has chosen your airline consistently for a decade of travel? The seasoned road warrior doesn't need a study to tell us that this type treatment may feel slightly punitive in a manner that goes far beyond the color of the membership card.
Unfortunately, most travel and hospitality loyalty programs fail to take the natural patterns of people into consideration. Beyond this, it isn't evident that these companies actually forecast customer lifetime value or take into consideration a value a customer's accrued value in the establishment of loyalty programs. Unless of course, those customers accrue an incredibly high number of points....
Of course, there are some exceptions. I have to give props to Northwest Airlines and Starwood Hotels Last year, both offered to extend my hard-earned status for a year in exchange for a single flight or stay within a specified period of time. In doing so, these brands behaved as customer advocates .... doing what was right for me .... and not just what was right for the "business." The emotional impact of the approach cannot be understated, and I did attempt to retain my status as a result. These relationship tactics made me feel appreciated and made me want to be more loyal to both companies in return.
Beyond rewarding "loyal" customers, hospitality and air travel industries will need to focus on two things in the future.

  1. Offering a baseline experience that fosters repeat usage (on time delivery, guaranteed reservations, legroom, food)

  2. Developing loyalty schemas that reward both short and long-term customer loyalty in a meaningful way

In the mean time, something is better than nothing. I still have some status, and I still have my points. Ultimately, the challenge remains, (especially in this tight economy) that as companies have less to give away, they must focus on rewarding "loyal customers." Moving beyond the narrow view of a customer's true value and taking a more comprehensive approach to follow lifecycle trends and CLV will play an important role in the evolution of the next-generation of customer loyalty programs.

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Leigh Duncan Durst (leigh at livepath dot net) is a 20-year veteran of marketing, e-commerce, and business and the founder of Live Path (

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  • by Nick Stamoulis Wed Nov 19, 2008 via blog

    I think it is a deterioration across the board. Majority of companies I deal with on a daily basis seem to care less and less about everything.

  • by Paul Barsch Wed Nov 19, 2008 via blog

    Leigh, thanks for tackling a non-social media post! Let me provide some color commentary and see if you agree. 1) Many companies don't have the proper analytics (infrastructure and applications) to gauge and actively measure things like customer profitability, CLV 2) Companies that do have such an infrastructure are often hard pressed to find reasons to keep long term historical data available for analysis. Oftentimes, data after a certain period (say 24 mo for example) are shuttled to tape and never seen again. Of course this policy is different for every company and industry, but you have laid out a great business case as to why such historical data needs to be kept available for marketing analysis. 3) Companies would be well served to consider situations like yours among myriad others, as to why they should keep an active and historical "corporate memory" of customer transactions and profiles. Think of all the questions that can be asked--and answered with a long term historical record of transactions! Sometimes companies give up "mining" just before they hit the motherlode.

  • by Leigh Duncan-Durst Wed Nov 19, 2008 via blog

    Paul - I think what you've said is VERY true. What gets me is that the behavior of "limited backup" is a legacy of a day and age where memory was expensive... Today, it's cheap, and the technology is at our disposal to leverage historical customer data. This is especially true if companies extract the RIGHT data... It would seem that this type of business intelligence within the organization would empower companies with a totally new level of understanding of customer behavior and patterns. Alas, especially with the airline industry, their ability to access this through main systems (e.g. Sabre) is very limited...The strategy would have to be well thought out. Thanks for that insight! Leigh

  • by Colin Hatch Tue Dec 9, 2008 via blog

    Leigh .... I've never posted on a blog before but I thought this was an interesting topic and I enjoyed your write-up and perspective regarding airline loyalty programs. I believe that airlines consider long-term customer behavior, patterns, and brand interaction when designing their loyalty programs, but several strategic factors dissuade them from acting upon their considerations: 1.) Cost. Loyalty programs are very expensive to manage and maintain which can minimize their effectiveness .... particularly now with the state of our economy and the general business environment. 2.) Lack of differentiating power. Due to the visibility of loyalty programs, they cannot be a truly differentiating factor within the airline industry because competitors cannot easily prevent other airlines from simply matching offerings. In other words, when one makes a change, they all make a change and the essence of strategic positioning is to choose activities that are different from rivals. 3.) The great unknown. Airlines which deploy loyalty programs don't actually know if the program encourages spending or, alternatively, whether frequent flyers are simply more inclined to participate in programs to get rewards for their spending. Do you think that any of these factors could influence their decisions regarding airline loyalty programs? Thanks again for the interesting topic and thoughtful responses.

  • by leigh duncan-durst Thu Dec 11, 2008 via blog

    Colin, Thanks for posting. Everything you have said is insightful and has merit. I do think that the action of rewarding points as THE reward for lifetime value is a bit lame, as the practice has become commoditized and is now a feature of every program. I agree with you on these points: = Loyalty programs are expensive, and as money becomes more scarce, there will be less available to reward loyalty. - As programs are commoditized, they lose distinction/differentiation. I'm intrigued by the title of the "great unknown." I have trouble swallowing the argument that companies cannot measure the results of their loyalty programs... The tools are available for better customer and programmatic mesurement today. Really, the airlines need a better infrastructure for managing and measuring customer experience that is proactive, not reactive. Unfortunately, they are frought with internal, operational challenges and investing in this when they may be going bankrupt is the equivilent of rearranging chairs on the Titanic. If you know anything about the SABRE system, you know that while it's very functional for base operations (ticketing, billing, getting flights scheduled), it suffers from "legacy system" syndrome for anything like "single view of the customer" programs. While these systems may be the reason for what yoy have labled, "the great unknown," I'd argue that the airlines that begin to "get it" with regard to customer experience and CLV are the ones that will win customer loyalty in the future. In the short-term, it's going to be a fare and schedule game... and those who travel like mad will be the ones that enjoy the perks that follow. Thanks, Colin!

  • by Leigh duncan-durst Thu Dec 11, 2008 via blog

    Here's a great WSJ article on Airlines and Frequent Flyer Programs, which is a great supplement/follow up to this article and highlights other aspects of program value/shortcomings.

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