The Changing Face of Airline Loyalty

Having spent this week talking about Virgin America and their stellar Elevate program, we want to step back a little and take a look at the airline loyalty space at large. What we’ve noticed across the board: considering this has been an industry that has seen its fair share of turbulence over the past few years (record-high fuel costs, plunging budgets, a constant stream of bankruptcies), maintaining customer loyalty may be a challenge, but it’s a necessity to survive and to thrive.
virgin america

Loyalty programs provide airlines with an area of influence they can control. American Airlines pioneered this concept, and set the stage for loyalty programs in the late 1980s. These early programs focused around simplistic flyer rewards by tracking miles and rewarding frequent flyers with upgrades and free flights. The success was immediate and evident, and before long, airlines like Delta and United had jumped on the loyalty bandwagon.

Over the last 30 years, the loyalty landscape has evolved into multi-tier programs with rewards stretching far beyond upgrades and free flights. Attracting and retaining members is no longer a formulaic one-size fits all program: airlines must get creative to stay in the game. 

This summer, approximately 140,000,000 Americans have travel plans, with 22% using rewards from loyalty programs to finance those trips. According to an American Express finding, active loyalty participants have increased by 25% since 2011. This increase has contributed to an already competitive market, forcing airlines to discover new ways to innovate, paving a path for younger airlines like JetBlue and Virgin America to drive the industry toward new loyalty standards.

These newer players are disrupting the loyalty space with innovative airline loyalty programs giving older, more established programs like American Airlines’ AAdvantage a run for their money. The key difference with programs like JetBlue’s TrueBlue and Virgin’s Elevate is that they offer additional perks aside from the standard free checked baggage or priority boarding.

We discussed the building blocks of the Elevate program earlier this week, including a no blackout date policy, and the new Red-Silver-Gold tier system. But there are plenty of other highlights worth mentioning. Virgin’s offerings include chic lounges in select locations, enhanced social rewards, and to top it off, the “ultimate round-trip flight award”. The Elevate member who earns the most elite qualifying points between August 8, 2012 and August 7, 2013 will earn a sub-orbital space flight on Virgin Galactic. With the largest frequent flyer population of 1.8 million it is clear Virgin is doing loyalty right. It is unique perks like this that add a competitive edge to airlines willing to step outside of the traditional loyalty box.

The Aberdeen Group addressed this very issue in a recent report. They found that loyalty programs that incorporate mobile technology, engage consumers with social media, and implement a centralized cross-channel loyalty platform are more successful. When incorporating innovative ideas to these basic building blocks, customers are more likely to stick around and take advantage of such well-rounded offerings.

Fresh innovation drives industry forward. A steady stream of creative, technology driven advancements are increasingly important as consumers become more accustomed to loyalty perks and expectant of convenience and technological innovation. It takes robust, cutting-edge loyalty programs to shake things up and provide a unique experience worth returning for time and time again.

Read more about our work with Virgin America and the success of Elevate in our Customer Success Story, here. And keep up on all of the great things Virgin America is doing by following @virginamerica, @richardbranson, and @loyaltylab.

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Relationship Marketing is All About Tiers

By Michael Greenberg | Director, Marketing

Tiers in a relationship marketing program run the gamut from a simple base/elite construct to a series of overlapping hidden and published tiers. Today I’ll spend a little time walking through some of the considerations and issues around tiers and their relevance to loyalty marketing.

What Is A Tier?

A tier is more than you think. A tier represents a predefined, stable group of customers with specific benefits and recognition. It has rules for qualification and rules for downward migration. In most cases, tiers are public but they do not have to be. Tiers are often marketed and published so customers know the rules, promoting behavior that reaches the next tier.

Typically if you have tiers, the core tier structure needs to be MECE – mutually exclusive and collectively exhaustive. That is, everyone is in one tier and one tier only. So the most basic tier structure should be hierarchical – there is a base tier and one or more tiers that are “better” than the base tier. Other options include parallel or multiple tier structures versus a single hierarchy.

It’s worth noting that dollars spent or points earned don’t have to be the sole way to advance to a higher tier. Tier design in a relationship marketing campaign is almost an art unto itself, balancing the portion of the audience who will qualify and the method used to qualify them. For example, behavior analysis and research may show a natural inflection point in the top 25% of customers, but since this group accounts for (say) 60% of revenue, the cost of a 25% acceleration might be prohibitive. A more realistic design might offer recognition or first access on clearance product, with acceleration reserved for the top 5% of customers.

Why Tiers?

Tiers can be a great tool for lock-in and to drive incremental behavior. They establish a clear picture to end customers of the thresholds for advanced services and benefits. This becomes a powerful motivator when customers are close to qualification for the next tier, especially if there is a time deadline. Assuming your tiers offer a desired benefit, maintaining membership in a tier can be a tremendous motivator of loyalty.

The Problems With Tiers

The downside of tiers is primarily around funding. That is, customers expect an upgrade in benefits with higher tiers, which cost money. When designing a program, this incremental cost becomes a crucial input to the funding model, since most tiers target the highest spenders. So smart tier design (and overall program design) must account for this funding, determining the right balance of incremental expense to drive incremental customer spend and reduced attrition.

Relationship marketing tiers can also be difficult to eliminate. Once in place, you risk customer anger if your tiers are reduced or eliminated. While a better approach is often to swap out benefits, complete elimination must include some sort of financial offer to compensate for the loss of tier benefits.

Types Of Tiers

Elite

Most people understand elite tiers – spend more or do more, get elite status. Elite tiers often increase benefits, increase accrual, have special services and recognize customers as elites. Elite tiers are often used to deal with the desire to avoid rewarding behavior that would have happened anyway. Instead, elite relationship marketing tiers provide recognition and soft benefits that provide differentiated service without substantial incremental expense.

Hidden

Hidden tiers are those not published to the general public. They may be elite or parallel. United Global Services is a (mostly) hidden tier that appears to be both elite (above 1K) and parallel (qualification seems to be based on revenue generation, not miles flown).

A more standard approach is a hidden “super-elite” tier which is invitation only, once someone reaches an extreme behavior threshold.

Parallel

Parallel tiers exist alongside the main tier hierarchy or entail two or more main hierarchies. As a result, customers may belong to multiple relationship marketing tiers simultaneously. Until recently, this would have been handled with segments, but the advent of social and activity-driven tiers (as opposed to spending based tiers) now has sophisticated marketers structuring separate hierarchies to reward active but low-spending customers.

Conclusion

This just scratches the surface, but should give you a basic idea of how tiers work and how to approach design. In practice, the mechanics of tiers can be exceedingly complex, and good forecasting of customer behavior is crucial to determine qualification, benefit, recognition and downgrade elements.

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