14 August 2006

Loyalty can be bought, even traded

In business – and in life too – loyalty can be bought. Even traded. In fact, at times, it might be necessary to do so.

Take the airline industry, for example. Most of the airlines are hard-pressed at putting up frequent flyer programmes – eventually leading to full-fledged loyalty programmes – just to keep up in business. Competition is stiff; costs are soaring; and customers seem to drift away every time another airline offers a lower fare. So, they add up the miles travelled by their customers, award points on the number of miles, and exchange the points for tickets or upgrades or gifts.

Customers are happy because they would travel those miles anyway – whichever airline they choose to fly on. For the business travellers, this is a huge bonus, because the fare is most likely paid by their company, yet the miles and the points accrue in their names. Indeed, it’s a happy situation for the customer. They choose to fly, frequently, if not always, on the airline that offers to pay for their loyalty. And, why not? We all want a little appreciation for our loyalty.

The airlines are, of course, business entities. They take their business of rewarding their frequent flyers seriously. They look upon customer loyalty as an investment, necessary to stay ahead in the game. So, they turn the frequent flyer programme into a brand – creating a brand name, a logo, a customer identity plan, a rewards system, a whole new travel experience, and all the paraphernalia that goes with it – and market it wholeheartedly. The strategy behind it being competitive differentiation.

The airlines use their frequent flyer brands to pitch for price-sensitive customers who are otherwise being drawn into the low-fare net by, typically, new upstart carriers. But that’s only one-half of the strategy. The airlines also use the frequent flyer brand to insulate their own business travellers – who are, incidentally, their primary revenue base – from price sensitivity. And, if opportunity prevails, even ask for a premium price and offset it with rewards galore.

It’s a simple system of rewarding and debiting frequent flyers on usage. But, expensive for the airlines to run. Tickets cost money; upgrades cost money; gifts cost money. However, undaunted, the airlines have thought of ways to reward customers without having to give away tickets or upgrades or gifts… simply by tying up with a bevy of partners: travel destinations, hotels, restaurants, car rental agencies, telephone and mobilephone services, shopping malls and retail stores, credit card companies, insurance companies, etc.

There seems to be an endless list of such partners... most of whom are willing to pay a little extra per mile to partner well-established frequent flyer programmes. Where else would they find a database of such ‘pre-qualified’ customers! As it turns out, this trading of loyalty miles is a pretty good source of prepaid travel for the airlines. So much so that, now, frequent flyer programmes not only make up for the administrative costs of running the programme, but actually add some revenue directly to the airline’s bottomline.

For airlines with well-established frequent flyer programmes, there’s no turning back on rewarding customer loyalty. After all, it’s now a necessity. Customer loyalty now ensures they remain competitive in the marketplace.

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