Metzner Schneider Associates, Inc.

The Latest Thing In Loyalty Programs -- No Program At All?

Even as he announced the industry's newest frequent flyer program, Jet Blue CEO David Neeleman wistfully told a Wall Street Journal reporter, "It would be great if everyone would hold a séance and say, 'Let's get rid of the miles.'"

Mr. Neeleman is not alone - and neither is the airline industry, when it comes to the changing world of customer loyalty programs. The sheer cost and complexity of conventional loyalty programs, combined with revolutionary technological change, is rapidly making them an obsolescent burden for marketers. And significant shifts in consumer values and psychology in the post-September 11 world are making such programs irrelevant to many consumers.

Loyalty programs such as American Airlines' AAdvantage were a dramatic innovation of the early 1980s, designed to incentivize customers to allow themselves to be profiled and their purchase behavior tracked. This enabled airlines and other marketers to more effectively identify their best (or most vulnerable) customers, and deliver targeted offers via direct mail, designed to keep or increase their share of the customer's business.

But the effectiveness of loyalty programs was limited largely to companies selling commoditized products and services, like airline travel, lodging and video rentals, with a high ratio of repeat purchase and one other key characteristic: a product that can be given away for free without incremental cost. Airlines can give away seats that are otherwise unoccupied, because they have no value once the airplane door closes. Likewise, the vacant hotel room or the unrented video is worthless at closing time; why not give them away as rewards to loyal customers? But few businesses fit that economic model. And even those that do, like Mr. Neeleman's Jet Blue, increasingly feel the burden of operating loyalty programs. Such programs traditionally carry a high cost of delivering printed matter and membership cards by mail. And even those companies, like Jet Blue, which rely on the Internet to reduce marketing costs, must carry millions of dollars worth of accrued miles or points on their books as a liability.

Today's smartest marketers are beginning to use the strategies and technologies that power loyalty programs, without incurring the expenses associated with full-blown "membership" programs. Technology is the key; database management applications or vendors allow a company to cost-effectively collect and store profile information provided by customers. The Internet and e-mail make it relatively easy and inexpensive to gather information from, and communicate with customers. And most customers are comfortable allowing their purchases to be tracked, if they can see a genuine benefit from the bargain.

Increasingly, consumers see the benefit of a "relationship" with a marketer as a simple quid pro quo: I'll share information with you, if you use that information to deliver relevant value to me. And I'll decide what's valuable, thank you, and when and how I'd like to hear from you. In other words, flooding my mailbox or e-mailbox with marketing messages is no service to me, and certainly no reward for loyalty. My time is more valuable than ever; I don't want to squander my energy reading (or more likely, deleting) e-mail sales pitches.

But I perceive it as a genuine service when you use your knowledge of my needs and interests to send me information or offers I truly care about.

The best online retailers actually deliver this kind of simple, valuable relationship in the course of everyday business, and not as a benefit of membership which the customer must "earn," or even pay for. Amazon, for example, uses purchase tracking and collaborative filtering technology to make suggestions - usually quite intelligent suggestions - about new books or music I am likely to be interested in.

That kind of approach uses customer data and CRM tools to deliver relevance and value, and builds loyalty in an organic way, by fostering trust and confidence. Repeat business is driven by repeatedly providing good service and suggesting appropriate ways for customers to visit more often (online or in person) and spend more money, time and awareness interacting with the marketer.

Loyalty programs, on the other hand, often try to reinforce desired customer behaviors not with the core values of good product, good service, and fair value, but with extraneous rewards and perks. The consumer comes to expect rewards like frequent flyer miles as an entitlement, thus reducing their effectiveness. And business realities, such as fewer, fuller planes, make it difficult to redeem rewards, thus reducing their usefulness.

And that's where the consumer's changing values and priorities come into play. Especially since September 11, people yearn to interact with those they trust, and who trust and respect them. Customers are seeking value, simplicity, security and ease. They don't want to have to examine each transaction and each service relationship to ensure they're getting real value; they want to trust.

After all, that trust is why branding is so important: a strong brand is a promise that the customer can trust a company. A well conceived, well executed approach to building customer relationships delivers on that brand promise.

Traditional customer loyalty programs, so revolutionary twenty years ago, have outlived their effectiveness. Today such complex, costly and increasingly irrelevant programs are giving way to a more encompassing approach to maximizing customer lifetime value: an array of strategies, technologies and tactics for delivering value and relevance to individual customers. Implicit in that approach is the recognition that today's customer really is in the driver's seat, and a commitment to do business guided by that reality.

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