The transition of loyalty program towards the new, largest population segment is proving to be an interesting one. This year Millennials (18-34 years old in 2015) will surpass Baby Boomers as the largest living generation and the market research suggests that their views on loyalty are quite a bit different from prior generations. Speaking at a recent Airline Information event in a presentation titled “Engaging the Millennial Consumer: Trends & Opportunities” Scott Kerr, Executive Director Business Insights, Time Inc. suggested that the concept of loyalty might not exist at all within the group. Traditional miles & points programs do not provide the speed and style of fulfillment these customers desire, Kerr said. The programs’ focus on status elitism doesn’t mesh the the millennials’ ethos. And that creates quite a challenge in the industry.
Loyalty programs used to be a long-term play. Customers would behave irrationally over time in order to secure big rewards from the programs. The programs began to change relatively recently into offering more options for redemption, above and beyond travel rewards. Many were available at a lower price point than award travel and inventory was not an issue. These merchandise rewards were seen as a win for nearly everyone. Customers got awards faster and easier while programs made customers happy and increased redemption frequency, a move which tends to increase earning speed and revenue for the programs. This transition also appeals to the Millennial generation and its focus on (near-)instant gratification and smaller rewards. During a panel discussion later in the same event Chuck Christianson, a Senior Vice President at Connexions Loyalty described the motivation in that market segment, “They’re not into accruing points over time for that big, huge trip at the end but they are micro-redemption focused. The $5 gift card to Starbucks, Amazon or iTunes…that one button technology where you have the ability to hit it and experience it…the immediacy.”
That immediacy also plays into the travel planning behavior of the group. While air travel decisions are still very much driven by fare and schedule there is some evidence that the millennial demographic is working away from those parameters. Spending a bit extra – points or cash – to seek out a more comfortable experience during the trip is just as (or more!) important than collecting the perfect souvenir (or future award redemption) somewhere down the line. That group who used to not spend so much money nor show up too often in the airline lounges suddenly is there. As Steve Arsenault, Managing Director at The Mallett Group explains,
[Millennials] are spending a lot of money and a lot of that is travel money. They’re becoming more important. People who are more comfortable with technology are becoming more and more important. And we’re getting a lot better at the technology.
Big Data & Consumer Targeting
The micro-redemptions today look a lot like coupons, sourced from the marketing dollar budget and not quite as targeted as the marketing departments would probably like. But as the shift towards a mobile experience accelerates, and especially as wearables adoption rates rise, there will be better opportunities to get specific with the redemption options. Of course, as Ms. Hawthorne noted, there is the need to “not be creepy” about the localization and targeting aspect of the the integration, but that is a very gray area today and it does not appear that too much clarity will be coming soon. And while the group identified many potential benefits of the shift towards wearables from a marketing, targeting and engagement perspective, Ms. Hawthorne also mentioned a potential upside for society in general, “It is going to help us interact like people again.”
All the participants in the panel discussion agreed that the data overload on the back-end is a tremendous challenge to ensure that the correct offers are being made to the correct people. Whitnee Hawthorne, Manager TrueBlue Partnerships for JetBlue sees not just the TrueBlue program but the entire JetBlue strategy moving towards a more personalized experience. “It is about managing the data and once you have all this information about someone being able to access it at a moments notice to give them what they need and what they’re looking for.” Then again, as Mr. Christianson noted in his parting remarks, the targeting is not yet perfect and it likely never will be. But it is better today than ever before and that counts for a lot in this industry.
The Next 5 Years
Does this mean that the traditional loyalty program is dead? Probably not today, but it is coming soon. The long sale version of the programs is not nearly as in demand as the short value redemptions and by many accounts, the value proposition to the programs is also stronger for merchandise and other micro or instant redemptions. Not that this means travel redemptions are completely going away, but consider these numbers: For Delta Air Lines in 2014 SkyMiles members redeemed 296,000,000,000 points for 12,500,000 awards. That comes out to just under 24,000 points per award. Travel awards in the US start at 25,000 points (upgrade awards do start at lower rates) and many are higher so to get to that average it means that Delta sees a significant number of non-travel redemptions happening. The prior year had the average redemption price roughly 700 points more expensive and there were approximately 10% fewer redemptions. For United Airlines the numbers are similar. The company saw 4.3mm United travel rewards redeemed in 2011, 4.7mm in 2012 and 5mm in 2013. Miles redeemed for travel on United represented 83% of the total redeemed in 2011 and 80% in 2013. Even as the number of travel rewards redeemed increased the percentage of total miles those awards represent decreased. And given the rapid growth of new micro-redemption options like buying food from airport concessions, it seems to reason that the share of non-travel awards will continue to grow and the transaction size will continue to shrink.
More people are redeeming for smaller awards. And the programs are more profitable than ever. It seems unlikely that any of them will shift course anytime soon.