1)

Because program managers are trying to create – from scratch – a market for a currency. This is an expensive, and often losing, proposition, because there are already plenty of currencies in place and customers must be convinced of the need for another one.

2)

Because many point-earning programs are nothing more than a bribe and do not build loyalty. To create true loyalty, a points program must use all the information being gathered about the customer’s activity, and must truly improve the customer’s experience with the sponsoring company. In a successful program, points are a means to an end, not an end in and of themselves.

3)

Because in most cases, the economics do not work. In order for a program to make financial sense, the perceived value of its currency must be significantly greater than the cost to deliver its rewards. When a company has a perishable product that otherwise would not have sold, and it has a mechanism to “sell” that product through its program – as with airline seats, hotel rooms, and video rentals – a program can work. Customers feel that they are getting a deal, and the company fills otherwise unused capacity. If this is not the case, points become just a substitute for cash and are unnecessary.

1)

Customers/members must be able to spend the currency on things that they want to buy and perceive as valuable. The airline programs are successful because free travel is highly valued. A number of online point programs in the market are not successful because members earn points that only entitle them to meager discounts, distressed merchandise, or cheap promotional items.

2)

Program managers must actively use the data they are gathering on customers, and not let it wither in a remote data warehouse. By participating in a program, members are giving their consent for their activity to be tracked. This consent is extremely valuable, because it lets a company understand a customer’s behavior and treat him accordingly. It lets the company provide benefits, communications and services that are tailored, and that vary according to the value and interests of that customer. True loyalty is gained by airline programs, not primarily because of the miles in a customer’s account, but because if a customer flies often enough he gets preferential services like upgrades, expedited check-in, etc. If it weren’t for those benefits, members would be at a very high risk of defection each time they reached a reward threshold and cashed out. Once a customer is accustomed to this high level of service, he will keep coming back for more.

Even without formal recognition programs for top customers, however, tracked customer data allows a company to target its marketing efforts, thereby saving money and achieving superior results. Many program managers do not capture this value because they do not rigorously analyze and use the data they are gathering.

3)

Points should have some correlation to the value of the activity that earns them, both from the customer’s perspective and from the company’s perspective. A customer should perceive that the more value they bring to the company, the more they earn. Likewise, the points given to a customer should correlate to the profit brought in by that customer. One flaw of the airline programs, as they were originally designed, was that they tracked activity using miles instead of revenue. There was a good reason for this decision – databases at that time did not allow airlines to track revenue at the individual customer level. But this feature of the programs locked airlines into a structure that made it hard to manage the economics and redirect the programs once the desired tracked data was available. Now, in these troubled times, the airlines are seeking ways to reduce the miles they issue for low-fare tickets. They naturally want to pay out more miles for the more profitable tickets, and fewer miles for the less profitable. Unfortunately, the mileage paradigm – and members’ sense of entitlement – has become so ingrained that carriers are seeing a strong backlash, and they may not succeed in tying the structure more closely to profitability.

4)

The rewards must be seen as attainable. A currency is not valuable if a customer believes he will never be able to earn a reward.

5)

Members must be able to earn the currency without extraordinary effort. The airlines vastly increased the value of their currencies when they allowed mileage accrual with credit cards, long distance phone calls, and other partner activities. On the surface it seems counter-intuitive that an airline would want customers to earn miles without ever setting foot on a plane. But air travel does remain the primary driver of the programs, accounting for 60-90% of most mileage earning. And there is an added bonus - since partners pay the airline for the miles at a rate greater than the cost of the airline’s liability, these mileage transactions are profitable. In fact, given the sorry state of air travel recently, the sale of miles is in fact one of the few profit-generating activities for many airlines.

6)

The earning structure and the reward structure must be relatively straightforward. The more complicated a program is, the less customers will take the time to figure it out. Though it certainly makes economic sense for the airlines to curtail mileage earning on low-fare tickets, the airlines are running a risk by attaching different values to different types of tickets just because of the added complexity

7)

For a reward program to be sustainable, the cost of the rewards must be less – preferably far less – than their perceived value. Again, the airlines have followed this rule; the value customers attach to an award ticket is far higher than what it costs the airline to fly the passenger.

8)

There must be an exit strategy in case economic conditions change. The airlines made this mistake in the launch of their programs, but recovered with the introduction of capacity controls, the sale of miles to partners, and various program restrictions.