Frequent Flyers in Brazil

The best example of a customer loyalty program is the  frequent flyer program for airlines.  Here are the key concepts in the design and execution of frequent flyer programs: 

1.   The 80-20 Rule
In general, the 80-20 rule asserts that 80% (or some disproportionately high percentage) of any given effect is likely to be caused by a mere 20% (or some disproportionately low percentage) of the relevant variables. In marketing terms, the 80-20 rule says that 80% of a company’s revenues are likely to be generated by 20% of its customers.  For this reason, frequent flyer programs are designed to scale the rewards disproportionately upwards as usage increases because of the disproprotionate impact of that 20%.

2.   “Cost-to-Retain” Versus “Cost-to-Acquire”
It is a truism that it is more expensive to acquire a new customer than to retain an existing customer. Loyalty marketing leverages this disparity by focusing on customer-retention: the more frequently one travels,  the greater will be one's reward.  At the front end, it is the job of traditional mass-media advertising to build awareness of the brand and help induce trial.  At the back end, it is up to the customer loyalty program to make those customers to come back again and again.

3.   Lifetime Value of the Customer
It is shortsighted to employ a transaction model when analyzing individual customer purchases through asking the naive question, "What is the revenue and profit effect of this particlular purchase?"  The far-sighted model calls for viewing ustomers on the basis of their expected purchases over the course of their lifetimes.  A business traveler, for example, could spend more than $500,000 on airline ticket purchases over his/her lifetime.  Thus, the key concept is that this is all about relationship marketing rather than just transactional analysis.

We will look at how well such frequent flyer programs work in the case of  Brazil.  For this purpose, we will refer to some data from the TGI Brasil study.  This is a survey of 10,624 persons between the ages of 12 to 64 years old conducted in Brazil during 2003.  Within the TGI Brasil study, we found that 11% of the survey respondents had taken an airline trip within the last 12 months.  Of these travelers, 29% said that they are enrolled in some kind of airline frequent flyer program, which is equal to 3.3% on a population basis (29% of 11%).

If we look at the number of trips that these people make, then the 80-20 rule does not strictly hold for all possible product/service categories.  The 80-20 rule was never meant to be an exact quantitative rule; rather, it is a qualitative concept that some heavy users account for disproportionately more of the volume.  In this case, about 50% of all  airline travelers account for 75% of all airline trips.  

Which are the top airline frequency flyer programs?  The top airline programs are Varig (69%), TAM (44%), American Airlines (13%), Rio Sul (10%) and United Airlines (9%).  Of these, Varig, TAM and Rio Sul serve the domestic Brazilian  market, while Varig, TAM, American Airlines and United Airlines serve the international market.  All the top players in this market recognize the importance of frequent flyer programs.

From the viewpoint of the airlines, a customer loyalty program should be targeted to those users who purchase high volumes.  The concept of loyalty is meaningless for infrequent users.  Therefore, these programs are structured to increase the rewards with increased usage.  Consequently, from the viewpoint of the users, they are more motivated to join a frequent flyer program if they are racking up high mileage and/or large number of  trips (note: airlines recognize that trips involve different distances and therefore they will calculate frequent flyer credits in terms of either the distance covered or the number of trips).  In the next chart, we show the frequency flyer enrollment rate by the number of trips made in the last 12 months.  Without doubt, the incidence increases with the number of trips.

(data source: TGI Brasil)

But the truest test of the effectiveness of a frequent flyer program is embodied in this question: "What is the most important factor of you to choose an airline for a travel trip?  Could it be the fact that you are enrolled in the frequent flyer program?  Or is tit something else?"  Among all air travelers, the agreement rate to frequent flyer is 23%, putting it behind other factors such as ticket price (70%), safety (69%), punctuality (44%), schedules (41%), convenienece (23%) and nationalism (26%).  Among those who are enrolled in a frequent flyer program, the agreement rate is 70%, which it just behind ticket price (78%) and safety (71%).  This is a convincing endorsement of the frequent flyer concept.

(posted by Roland Soong, 01/10/2004)