Loyalty programs are designed to reward customers for past patronage and to incentivize them to make future purchases. According to BEROE Inc. the global market for loyalty programs is expected to grow by a CAGR of 4%-5% to $201B by 2022. However, the mileage reward programs of the travel and hospitality industry seem to be falling short of the goal of ensuring customer retention.
To start with, the use of these programs have steadily declined since 2010 at a rate of 2% to 3% per year. Analysts compute that consumers don’t bother with redeeming as much as 50% of accumulated reward points, valued $50 billion. This piece explores the problems of the global rewards industry with a view to providing insights on some stakeholders are revamping their loyalty rewards for sustainable efficiency.
Problems with mileage programs
In 2012, McKinsey & Company reported that having a loyalty program doesn’t guarantee sales. In fact, companies that spend more on loyalty programs tend to perform slightly worse than companies who don’t have such programs. According to the study the “analysis of U.S. retailers that found those with loyalty programs were posting a 2.28% comp sales increase, while those without loyalty programs were posting 4.26% gains.”
The anomaly was probably because the loyalty program gives them a false sense of security that stops them from improving their product, deliver excellent service delivery, or leverage other sales and marketing resources.
Worse still, another estimate suggests that up to 77% of new loyalty reward programs fail within the first two years. The failure rate is understandable when you consider the fact that the typical American household is enrolled in 29 loyalty programs but only actively take advantage of 5 to 12 of such programs.
One of the leading problems with mileage rewards programs is that the rewards do not always align with the needs of the consumer. A frequent-flier rewards program designed to discount the price of future flight tickets might not be relevant for someone who only goes on one or two vacation trips in a year.
Also, the fact that the loyalty points are brand specific makes it impossible for consumers to transfer their points to redeeming other perks that meet their needs. Additionally, users who don’t reach the minimum threshold for redeeming points often end up with wasted points which in turn creates a sense of apathy towards pursuing such rewards during another season.
Rethinking mileage programs with emerging tech
In 2016, Marriott International Inc. (NASDAQ:MAR) revealed that it was revamping its mileage rewards programs with the introduction of an “Experiences Marketplace”. The revamp allows its customers to apply their points towards new experiences such as tickets to shows or discounts on merchandise. According to the company’s VP of Loyalty Thom Kozik in a chat with USA Today, “Points are not the point anymore” and the brand is rethinking its loyalty program to conform with changes in consumer behavior. To start with, customers want more flexibility in how they redeem their travel points, they aren’t always interested in a free night or complementary dinner.
The chart above shows the performance of Marriott’s stock since it revamped its loyalty program in 2016. The stock has delivered 49.13% gains to outperform the industry benchmark of 37.96% in the Dow Jones U.S. Hotels Index and to outperform the 32% uptrend in the S&P 500 in the same period.
Of course, it would gross oversimplification to attribute the performance of the stock to the change in its loyalty program; yet, there’s no denying the fact repeat customers help brands to increase the top and bottom lines faster than new customers.
Other travel brands such as Delta Air Lines, Inc. (NYSE: DAL), InterContinental Hotels Group (NYSE:IHG) and United Airlines Holdings Inc. (NASDAQ:UAL) are also exploring ways to introduce more flexibility into their loyalty programs. The introduction of dynamic-ward pricing and revenue-based programs in lieu of fixed award charts are part of efforts to restore customer confidence in loyalty programs.
Blockchain technology could turn out to be a more sustainable solution for creating effective mileage programs. MiL.k Alliance, is blockchain platform started on the Hyperledger Fabric is designed to integrate reward points of service companies in the travel, leisure, and lifestyle industries. MiL.k platform enable users to review and redeem the points from services under the MiL.k Alliance on a single platform. The earned points can then be transferred to MLK (the token), which can also be swap it into another point that can be redeemed with other services or vendors.
Since its introduction, MiL.k Alliance has made some notable strides especially in Asia where it has signed up Yanolja, Korea’s #1 OTA with more than 8 million registered users and 3 million monthly active users. It has also brought Shinsegae Duty Free on board its platform as a partner. Shinsegae Duty-Free is the duty-free store operator of the Shinsegae Group, one of Korea’s foremost large-scale distributors.
Loyalty programs, when properly managed can help companies reduce their customer acquisition costs (CAC) and increase the lifetime value (LTV) of their customers. According to Thanx, the cost of attracting a new customer is 5X more than the cost of retaining and existing customer. The more insightful point is that customer spend grows as trust in the business grows Hence, loyal customers tend to spend 67% more than new customers and as much as 80% of a company’s future sales can come from 20% of its current customers
Going forward, it would be interesting to see how emerging solutions such as blockchain are able to align the different blocs of the travel rewards industry. Yet, the idea of decentralized exchange of reward points, cross-sector integration, and near-instant settlement could restore consumer confidence in the global travel rewards industry.