Auckland University research : loyalty programs designed to make sure customers don't get rewards

An article earlier this month in the New Zealand Herald claimed that "Shoppers may be missing out on millions of dollars of savings through unclaimed rewards every year". It referenced research from Auckland University' Senior Marketing Lecturer Rick Starr under the headline "Loyalty schemes rely on shoppers forgetting to cash in their points". Rick's view was that "people often forget to redeem their points. And companies count on customers doing so because full redemption would "cut their profits"".

True - in part. But. It depends what type of program you're talking about. In the programs we operate, the driving principle is to get all the points that have been issued turned into rewards by the customers who have earned them. This isn't some egalitarian approach but a very mercenary one.

[Full Disclosure - the article mentions ASB True Rewards and The Warehouse's Rewards MasterCard - both are programs we work for].

There are two key behaviour changes that occur when a customer joins your performing, well designed, rich, relevant loyalty program.

Behaviour change 1.

The first occurs when they begin to earn points and is particularly marked if you've made them pay a fee or annual subscription to join (always a good idea if possible). For example - credit card customers who join the loyalty program attached to the credit card will almost immediately spend more on that card by a multiple of 2 or 3 times what they were spending on the same card before they joined the associated loyalty program.

Behaviour change 2.

The second and far more significant behaviour change occurs when the customer makes their first redemption for a reward. At this point their spend on the card increases again by a factor of 3 to 8 times their pre-loyalty program spend. This second spend lift is determined by what it is they've redeemed for. Customers who redeem for cash back or against their annual fee don't generally increase their spend markedly after redemption. If they've redeemed for merchandise, gift cards or travel - then the second lift is particularly marked.

Customers who don't redeem don't experience this second lift.

The upshot - redemption is good (very good) and points that don't get redeemed (termed "breakage") are bad. How much breakage is there in New Zealand? Rob Mercer of Forsyth Barr Research reckons it's 10% of all points.

Far from cutting a company's profits - points that don't get redeemed are bad business and a missed opportunity to lift spend for the points issuer.

Wall Street Journal profiles the "Stingiest" airline frequent flyer programs

In an article in today's Wall Street Journal entitled "The Road to Redemption - Which Airlines Are Generous With Frequent-Flier Award Seats and Which Aren't" some of our locally available airline's frequent flyer programs are profiled.

The article reports on research by IdeaWorks Company on the ease (or difficulty) with which members of airline Frequent Flyer loyalty programs are able to redeem their accumulated airline miles or points for free flights. According to IdeaWorks airlines are "killing these programs by not allowing more reward availability".

The IdeaWorks study was comprehensive making 280 different Frequent Flyer Program seat requests per airline Frequent Flyer Program reviewed (both long and short routes). This amounted to 6,160 queries at 22 airline websites.

The worst performer in the study was US Airways in which only 11% of the requested redemptions could be achieved. The best performer was SouthWest Airlines in which 99% of requested redemptions were available.

The study also included some (but not all - Air New Zealand was not part of the study for example) of the airlines that fly into New Zealand. The best performer for our locally available airline's Frequent flyer Programs was Virgin Blue's Velocity program in which 90% of requested seats were available. The results for the locally available airlines surveyed were:

• Virgin Blue's Velocity program - 90% of requested seats available
• Singapore Airlines KrisFlyer - 77.1%
• Qantas Airways Frequent Flyer Program - 72.9%
• Emirates Skywards Program - 36.4%

There are more and more airline miles chasing a flat pool of airline seats and according to the Wall Street Journal the "world is awash in frequent-flier miles partly because airlines have built a lucrative business selling them to credit card companies, hotels and others who use miles as incentives and rewards".

The volume of miles issued for things other than flying is now greater in some airlines than the miles issued for using the airline. For American Airlines in 2009 - 66% of the 175 billion miles issued were through their 1,000 partners (credit card companies, hotels and the like) who pay for them. That rate of issue together with the difficulty customers experience in redeeming them means that the balloon of frequent flyer miles outstanding around the world (currently estimated to be 10 trillion) just keeps growing.

Barclaycard Freedom - the (nearly) new credit card loyalty model

Barclaycard Freedom launched in the UK this month. It's an unusual model which has been implemented in similar forms in other parts of the world - most notable in our neighbourhood : Asia. BPI bank in the Philippines run this technology as their card loyalty program (called Real Thrills) as do Axis Bank in India (theirs is called Spice Rewards). The technology that underpins these offerings comes from France based Welcome Real-time who have been developing their solution for over 12 years (and with whom Carlson has a Asia Pacific partnership).

The mechanics (there are two) are similar in all applications :

(1) customers of the card company receive segmented offers at point of sale when they swipe their cards. These offers are printed on the till slip and are redeemable either back in that merchant or at another merchant.

(2) Customer of the card company can use their points to pay for their purchase at that merchant (not unlike ASB Bank's True Rewards program here in New Zealand).

The value of the first mechanic (offers on till slips) is clearer perhaps than the second (burning rewards points at the till). Most retailers want to get their customers through the till as fast as possible and any delay occasioned by a new process to redeem points wouldn't be appreciated. Importantly the retailer never knows the name or details of who they're making the offer to. They're simply card X which belongs to segment Y.

Merchants can set up segments of card carrying customer types from that issuer - a "frequent visitor" or a "never been here before" segment for example. These segments get different offers on the till slip. Frequent Visitor might get a "bring a friend for free next time offer" while Never Been Here Before might get a "come back and get a discounted item" offer. Merchants self manage these offers through an web portal.

What's different about Barclaycard's Freedom is that this is the first time this type of solution has been implemented on such a large scale in such a mature and sophisticated card market. The scale is significant. Barclaycard have 8 million customers who will be able to benefit from this solution at a large portfolio series of merchants (30,000 have been invited but less than that are available today). The goal is to have 200 outlets withing 5 miles of each customer making relevant offers.

If it pans out as its intended to then this is a great example of a marketing network in action. The three parties involved all benefit from relevance and richness.

The merchant is able to make different offers to different customers instead of the classic One Size Fits All structures. They don't have to incentivise business they were already going to get.

The customer gets an additional benefit on top of the others they're already receiving which, if the merchant gets their campaign management right, should be differently rich and differently relevant to each of them.

The bank in Barclaycard adds significant value to the near-commodity business of merchant acquiring as well as making their program an order of magnitude (again - if the merchants get their campaign management right) richer than competitor's card programs.

Australia Round 3 - Direct Earn Credit Cards On Steroids - Singapore Airlines

Qantas's recently required that all the bank credit card loyalty program in Australia remove redemption to Qantas Frequent Flyer points as one of the redemption options in those programs.  Now - customers at Aussie banks can either redeem all of their credit card loyalty points into Qantas's Frequent Flyer program - or none.   Now - if Aussies want to earn Qantas Frequent Flyer points on their credit cards  - they have to sign up to do so exclusively and can't have any of the other rewards that the bank might offer.

NAB for instance no offers only airline co-brand cards (Direct Earn) with Virgin and Qantas. Singapore Airlines and Westpac Australia though have raised the stakes (and surely the costs)  with the new Platinum Westpac Singapore Airlines card.   

This has some seriously strong offers including including 10,000 points for the first transaction.  It has an Amex companion card (the de rigeur interchange defence strategy) that offers 3 points per dollar.  According to a posting on FrequentFlyer.com.au - "Certainly a decent card to get if you're a Singapore Airlines flyer anyway!"

 

Round 2 Australia - Credit Card vs Airline Loyalty Programs

In Australia - Qantas is the victor.  Qantas has seen a lot of press in the last 2 years with much of it focused on its Qantas Frequent Flyer program and the possibility of that being spun off.

Qantas has embraced a whole host of competitively priced non-air rewards options for its customers.  Most importantly though - it's engineered a showdown with the Aussie banks who were previously transferring points out of their credit cards programs into it's Frequent Flyer program.  Qantas no longer permit the transfer.  

Customers in these banks had to make an all or nothing choice which each of the banks had to enable.  For both choices customers are able to carry on earning points on their credit cards.  The difference is in the rewards - 

• Choice 1 - lose the option to convert credit card loyalty program points to Qantas's Frequent Flyer Program
  
• Choice 2 - retain the option to convert credit card loyalty points to Qantas's Frequent Flyer Program - but this is your only reward choice (a so called Direct Earn option) - so no more gift cards, merchandise and the like from the bank (you can now get them from the airline)
  

The difference in approach to this challenge from the Aussie banks has been interesting.  None have gone the Capital One route and completely eschewed an airline co-brand card (or Direct earn card). Most now have portfolios that offer Qantas Direct Earn (co-brand) cards and other cards on which they offer their own loyalty program. Some also offer Virgin Blue co-brands as well.  National Australia Bank (the owners of Bank of New Zealand) seems to have invented a new strategy that we didn't see played out in the American market.  Their's might be characteristed as teh opposite of Capital One - they're closing their own credit card loyalty program and going forward will only issue co-brand airline cards.

Only time will tell how well they fare.

Credit card programs take on Frequent Flyer programs

Its been some time coming but we seem to have a winner.  In the USA it's the credit cards companies, in Australia it's Qantas and in New Zealand the jury's still out.

The USA - credit card companies beat the airlines to have the best rewards offerings

In the USA, credit card providers have slowly but surely trumped the Frequent Flyer programs offered by the airlines.  The holy grail of rewards is the concurrent offering of travel (always a winner), merchandise, experiences, cash-back and gift cards.  

Airlines started owning the travel category and credit card programs transferred points into the Frequent Flyer programs.  But the airlines got lazy.  Customer's couldn't use the points when they wanted to and the points (over 7 years and according to Bain)  halved in value.  Only recently have airlines been forced to offer a valve to vent this accumulated Frequent Flyer points pressure (note the national carrier in New Zealand innovatively and transparently solved this problem a few years ago with Airpoints Dollars - a world first).  Many airlines now offer gift cards and merchandise along with enhanced "any seat" redemptions but only on their airline.

But in the background,  credit card companies have grown their offerings to include all the usual rewards suspects AND the capacity to redeem for Any Seat, on Any Airline at Any Time.  AND they still issue airline co-branded cards.  The figure below from Scott Hornick at last year's Frequent Flyer Conference tells the global credit card airline co-brand story.

Capital One doesn't do airlines co-brands and the value proposition comes out very clearly in it's excellent advertising campaign of 4 years ago.