Thoughts Regarding Long-Term Loyalty Versus Short-Term Monetization…

f you operated a commercial airline, which would benefit you more: upgrading members of your frequent flier loyalty program at no charge to seats in the premium cabin of the aircraft; or charging a nominal amount to upgrade people who are willing to pay for those seats?

In other words, which would you be seeking: long-term loyalty versus short-term monetization? Can both be achieved; and if so, what would be the ultimate compromise?

The answer — in terms of pure economics — arguably could be to charge for the upgrades. You get additional money in the short term on which you can bank…

…but there are frequent fliers who would tend to think that their loyalty pays off in the long term. By paying extra money for upgradable airfares for the chance to sit in a seat in the premium class cabin for the price of an economy class seat and by taking flights which are not as convenient — instead of being a passenger in a seat on an airplane operated by a competitor — the airline arguably earns more money from the loyal customer in the long term.

After all, the purpose of a loyalty program is not to reward the past business of customers; but rather to encourage future business from customers — right?

“I agree an airline should reward us for going out of our way to fly them”, René wrote in this article at Delta Points earlier today. “Gosh I wish Delta did that but they are only rewarding those who go out of their way to PAY MORE. American & Alaska Air are rewarding those who go out of their way to fly them.”

Gary Leff of View From The Wing commented in this article: “So there are limits to how bad the basic coach experience can get based on airline self-interest.”

Well…yes.

The ultimate goal of every business would be to achieve 100 percent pure profit at absolutely no cost; and to reap in as much of it as possible. As I know of no company which has actually achieved this nirvana, executives attempt to conjure policies and initiatives which will get the corporate entity as close to that dream goal as possible by achieving a “sweet spot” of sorts — a threshold which balances the patronage of customers with the cost to keep them and attract new customers.

If airlines cut too much from the benefits and amenities, the passengers will seek competitors with which to do business. If the airlines give away too many benefits and amenities, they lose money despite how many passengers per year they serve.

There were myriad other factors involved back in the 1990s and the first half of the 2000s; but that basically was one of the problems with airlines back then: they gave away too much to their customers in terms of low airfares and too many benefits — resulting in losing money by the millions. Be loyal to your airline and it will reward you handsomely. That message was repeated to the point where it was ingrained in the heads of frequent fliers, who had come to expect such benefits as upgrades, meals and other amenities — usually at a low price.

There is one problem with achieving that “sweet spot”: not every customer has the same wants and needs; and not every airline operates the same way.

Speaking for myself, I like an upgraded seat as much as anyone else. However, I am not obese; so I do not need a wider seat. I do not drink alcoholic beverages; so offering them to me free of charge would not sway my patronage towards an airline. I like to eat a meal aboard the aircraft; but what if what I prefer is different that what you want? Perhaps I am the perfect customer for the new Comfort+ product to be offered by Delta Air Lines — which will be a supposed upgrade of the experience of its current Economy Comfort product — or maybe not, if I feel that the price is too high and the value proposition is not enough for me to “pull the trigger”, so to speak.

You will find many pundits out there who purport to completely understand the economics of commercial aviation. I am not one of them. I am not even sure that the best of the best who works in an airline completely understands those economics, as there are so many variables to consider. There are some basics which can be agreed upon, though — including but not limited to:

  • The airline needs profit to survive and thrive
  • The customer needs to have a pleasant overall experience of value which will prompt him or her to continue to do business with the airline

 

Where it gets murky are factors which define value to each of us — such as price point, benefits and convenience, on which you and I might disagree. You might be the perfect customer for one airline in the long term; while I might be the ideal customer for another airline in the short term.

There will always be a percentage of “loss leader” customers on whom any business would lose money — whether it is the customer who only shops the sale prices at supermarkets or the passenger who only purchases the lowest airfares to seek the most benefits in return. The supermarket has sales in order to entice customers into the store in the hopes that the customer will also purchase items which have a higher margin of profit. Although there seem to be fewer of them these days, airlines similarly have sales to entice more passengers to fly on their airplanes — but not too many of them due to reduced capacity. Too much capacity for an airline is like too much inventory for a supermarket: at a certain point, it costs more money.

“More first class upgrades! ROAR – HA – RRRIIIGGGHHHHT!”, exclaimed René. “Can you say FCM!”

First class monetization does not interest me simply because it is usually not worth the money to me to upgrade for the reasons I mentioned earlier — but you might believe that it is valuable to you. Neither one of us is right or wrong; as what we prefer is subjective. Which one of us is the ideal customer in the short term and in the long term; and how should an airline market towards us?

Where does that “sweet spot” lie? Does the airline benefit more from short-term profits over long-term loyalty — or vice versa? Is there a certain percentage of both which the airline can achieve successfully?

I look forward to reading your thoughts in furthering discussion on this topic…

4 thoughts on “Thoughts Regarding Long-Term Loyalty Versus Short-Term Monetization…”

  1. Noah says:

    I think the future lies in creating systems that cater to what people want. Some want upgrades, others want miles. The key is not to be all things to all people, but to customize the reward to create loyalty without giving everything away.

  2. Miles says:

    I know this is unpopular in some corners, but I think American has the correct, economic answer — monetize upgrades for elites via stickers.

  3. Victor says:

    And then there are the airlines that do not upgrade anyone nor do they offer cash to upgrade anyone.
    Qantas routinely leaves first and business class seats empty rather than upgrade or sell premium award seats.

    1. Brian Cohen says:

      Some airlines apparently do that to preserve the value of the premium cabin, Victor, on the premise that if there is a way to pay less than the asking price, people will find that way…

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