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My Turn: A Great Model for Frequent Flyer Programs
August 07, 2008
By Bruce Tepper
What makes an incentive program really terrific? Is it enthusiasm from participants, great rewards, changed behavior producing desired results, customer loyalty, a positive ROI for the program sponsor, continued popularity for the long term or all of the above?
Would you like to run a program in your business that does all of those things and more? It's not fantasy, and one model of it has been around for a long time. It's called a frequent flier program (FFP).
The airlines didn't originate the concept, but they applied it across a large consumer base and made history as a result. FFPs have:
• Enthusiastic participants who will inconvenience themselves to earn points
• A high degree of customer loyalty that does modify behavior
• Longevity—American Airlines introduced the AAdvantage program in 1981
• A wide range of awards to choose from
• A very positive return-on-investment for sponsoring airlines
In fact, FFPs have become a profit center in addition to generating loyalty and changing behavior. Think about those FFP partners that include not just hotels and car rental firms but flowers, clothing and affinity credit cards. Partners provide a substantial number of the points earned each year by consumers.
To the recipient, partners make it easier to earn points rapidly. To the airline, partners mean revenue and cash flow. Partners have to pay the airline for those points at the time of issuance. The airline has a liability, but no expense for them until they're redeemed.
A consumer with 300,000 points might redeem 150,000 for an award three years from now. How would anyone determine what sponsor's points were used? There is no way to separate the source of those points at the time of redemption.
Because FFPs have no set ending date (even though points can expire) travelers tend to save and accumulate points for several years or more, unlike incentive programs that end annually. There's no urgency to redeem them. The average redemption rate per year for FFPs tends to be in the 30 to 40 percent range. That means airlines collect revenue to cover the cost of the points today, with most of the liability being delayed for several years or more.
Secondly, there are all those partner points. Best estimates are they represent somewhere around 45 to 55 percent of all points issued, providing another significant revenue source for the airline.
Do the math: Airline points are worth around one to two cents wholesale and two to three cents retail. If the average traveler earns 100,000 points this year, that represents a liability for the airline of $2,000 at two cents a point. If the average traveler redeems 35,000 points; that represents a direct cost to the airline of $700 at two cents a point. If partners contributed 45,000 points at two cents a point, the airline received $900 when those points were purchased. Even if they were discounted, the airline still had the use of the cash—and the interest earned on it—in the interim.
The only ongoing cost to the airline is promotion and administration. Since the price of the ticket covers that, the airlines earn revenue at the time of the ticket purchase and often enjoy financial support from partners when promoting their products to cover those costs.
This concept is the self-liquidator of the incentive world. It applies a similar financial approach and adds the new wrinkle of float on the money and multiple partner participation. It just might be right for your next incentive program.
Editor's Note: Still want to know more? Bruce Tepper discusses a client's successful use of the frequent flier model for its program at www.incentivemag.com/ffp.
Bruce Tepper, CITE, CTC is a consultant, facilitator and speaker in the meeting and incentive industry, and the author of The Complete Guide to Selling Meetings, Incentives & Corporate Events, available at www.joselyntepper.com. Contact Bruce at bbtepper@joselyntepper.com.
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