MilesBuzz! - FFPs and E-Marketing to create competitive advantage in the era of E-Business ?

Randy and all other FTers, I have an interesting topic to write a paper on, and you can help me with your opinions, advice, thoughts, anything related to the research question at the bottom of this post.

For an E-Marketing course at University we have to write a paper and since topic choice was not strictly confined, here is my suggested E-Marketing paper topic. Hopefully you will like it and post plenty of your ideas.

With kind regards, Sebastian

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The mania began in 1981, when American Airlines launched AAdvantage,
the world's first mileage-based frequent-flyer programme (FFP), to
encourage customer loyalty. Since then the FFPs have changed
drastically from being purely mileage accrual and redemption schemes
to a much broader marketing concept enabled by ICT, which integrates
thousands of partners. FFPs have become a multi-billion dollar
businesses, sometimes even separate entities, that increase customer
loyalty, gather customer data, sell points to partners that in turn
issue them as incentives, etc. This development continues to become
even more multifaceted in the era of e-business.

According to the Economist the global stock of 14 trillion
frequent-flyer miles is now worth over $700 billion, more than all the
dollar notes and coins at large. Were it to exist, the IMF (the
International Mileage Fund) would by now repeatedly have warned that
these growing external liabilities are unsustainable in exactly the
same way that America cannot keep borrowing from the rest of the
world. Thus the topic is not only of interest for business and leisure
travellers but also very significant due to the monetary value one can
attach to miles.


Our research question is:

How can frequent flyer programs be combined with the current
e-marketing practises to create a competitive advantage in the era of
e-business?

Some more related questions for you to comment on:

What can airlines improve in their frequent flyer programs (FFPs) to be more attractive for its customers ?
How can FFPs add value (selling miles to partners, customer profiles, etc.) ?
Which new features of FFPs can IT / ICT enable ?
How is (in the present) and how could (in the future) E-Marketing be combined with FFPs ?

I appreciate all your support.

I'm quite active in the search engine marketing space, which I tend to put in the e-marketing area and will try to make some wise comments from my side of the fence:

Currently there are 3 major search engines out there that have market-shares around the globe: Google, Yahoo! and MSN. All three of them are trying hard to either keep their user base or increase it. FFPs were made for exactly this reason as the companies wanted to bind their clients to their airline.

Most people that have ever flown for private or business reasons are affiliated with at least one program and do usually have a certain amount of money that they can spend off- or online, which makes them the perfect target audience for every business.

Search engines are making their money by people clicking on the ads that are usually shown on top and on the right side of the real search engine results. Prices for clicks range from 0.01 USD to 50.00 USD whereas the majority is probably in the area between 0.10 and 0.60 USD, which means the average cost per click (CPC) is about 0.35 USD.

Companies can buy airline miles for roughly 0.02 USD/mile and I guess that buying somewhere in the area of 1 bio miles should get them discounts that bring it down to 0.01 USD/mile which will be the base for the next calculations.

An average click-rate on ads in search engines would probably be between 2% and 4% depending on a lot of factors. Taking this number brings us to a value of about 0.015 USD/search. If search engines would buy miles for 0.01 USD/mile they would still make a profit of 0.005 USD among the people clicking their ads and using a FFPs and the normal profit within the people that don't participate in the FFP program.

Technical solutions for this idea would be very easy to create and it would be a good way to make people shift from one search engine to the other as the quality is no longer that much different, same as with most airlines.

Hi Thomas, Thanks for the analogy witht the search engines. I filled out your survey yesterday.

Over time FFPs converge in benefits and and qualification criteria, i.e. changes to the BA Executive Club, Qantas and LH Miles and More, which now aim to reward higher revenue rather than plain mileage flown. Thus profitability of customers is more important than just frequency of interaction.

Question is if the search engines will already implement the 2nd step and reward different search queries differently. This would be extremely hard as people might start to fake their search behaviour as there's no cost for them involved, only for third parties.
I guess there would be a lot of people that would fly SFO > LAX via ORD if the flights would be free and if they'd get 100% miles.

...Over time FFPs converge in benefits and and qualification criteria, i.e. changes to the BA Executive Club, Qantas and LH Miles and More, which now aim to reward higher revenue rather than plain mileage flown. Thus profitability of customers is more important than just frequency of interaction.

1. There is not overall convergence. There is one convergence within US-based FFPs and another within Europe-based FFPs. (I cannot speak about Asian program(me)s, but I suspect they resemble Europe in this regard.) These reflect different airline choice patterns in each region.

2. Your statement that profitability of customers is "more important than frequency" reflects a common misconception. (You may not suffer from it, you may have left out details to keep your post short, but I'll address it anyhow.) It is not profitability that is important in designing an FFP. It is the impact of the FFP on that profitability.

The reason is that the purpose of an FFP is not to reward past behavior, but to influence future behavior. In the U.S., discount economy passengers are far more susceptible to FFP influence than those who travel at higher fares. For one thing, paid F/J pax already receive lounge access (this varies, as do FFP policies regarding it), premium check-in and early boarding. While F/J pax are more profitable overall than discount economy pax, the impact of an FFP on their choice of airline is smaller since they get these benefits on any airline. (Not zero. Just smaller, usually much smaller.) A full analysis must consider both factors: Is X impact on the future behavior of F/J pax worth more or less than 5X, 10X or greater impact on the future behavior of discount economy pax? That's the real business question. It's probably more than you want to answer in this paper, but you should show that you understand it - since a good marketing professor does!

Hi Efrem, It is indeed the impact on future profitability that matters most and careful segmentation (discount vs. J vs. F pax) is necessary achieve an impact on profitability that is worth the effort and costs. For example some European FFPs try to encourage customers to shift towards higher fare classes, i.e. they strive at higher profitability rather than plain more BIS miles.


One big problem is though that too many marketers ignore customers who are actually most loyal, but "only" passively loyal -- those of us who go back to the same companies repeatedly because we're too indifferent, lazy, or stupid to go elsewhere are almost universally ignored.
Ironically, the passively loyal contribute disproportionately to the ranks of every company's most profitable customers. They typically pay the manufacturer's suggested retail price without discounts, incentives, and reductions and without getting spiffed with frequent-flyer miles, cell phone minutes, hotel nights, and other redeemable points. The indifferent, lazy, and stupid are low maintenance and highly profitable customers but are ignored by the companies that have them. For that reason, they're vulnerable to the blandishments of others.

Slight change in direction of the paper:

In our paper we will focus on how personalized services of airline loyalty programs are enabled by ICT, how customers influence what they are being offered and how relationships between an airline’s customers and its partner organizations develop. Finally, we suggest future E-Marketing strategies that may be successful due to high responsiveness, attentiveness and relevance towards individual customers. Thus we shift our attention towards the knowledge layer, which comprises databases, customer profiles, basically all client details available to a company, and how it influences an important part of customer relationship management (CRM): Frequent Flier Programs.

Our new research questions are:

How are personalized services of frequent flyer programs enabled by ICT and to what extent are they really customer driven ?

What implication does ICT have on customer relationships with whole networks of companies that are linked through FFPs ?

What future E-Marketing strategies for FFPs are viable ?

So when you have completed this paper or a draft of it, are you going to make it available somewhere for us to read? I would be interested to do so. (Is this a business school effort? Whatever it may be, good luck with the project.)

Slight change in direction of the paper:

In our paper we will focus on how personalized services of airline loyalty programs are enabled by ICT, how customers influence what they are being offered and how relationships between an airline’s customers and its partner organizations develop. Finally, we suggest future E-Marketing strategies that may be successful due to high responsiveness, attentiveness and relevance towards individual customers. Thus we shift our attention towards the knowledge layer, which comprises databases, customer profiles, basically all client details available to a company, and how it influences an important part of customer relationship management (CRM): Frequent Flier Programs.

Our new research questions are:

How are personalized services of frequent flyer programs enabled by ICT and to what extent are they really customer driven ?

What implication does ICT have on customer relationships with whole networks of companies that are linked through FFPs ?

What future E-Marketing strategies for FFPs are viable ?

...Search engines are making their money by people clicking on the ads that are usually shown on top and on the right side of the real search engine results. Prices for clicks range from 0.01 USD to 50.00 USD whereas the majority is probably in the area between 0.10 and 0.60 USD, which means the average cost per click (CPC) is about 0.35 USD.

Companies can buy airline miles for roughly 0.02 USD/mile and I guess that buying somewhere in the area of 1 bio miles should get them discounts that bring it down to 0.01 USD/mile which will be the base for the next calculations.

An average click-rate on ads in search engines would probably be between 2% and 4% depending on a lot of factors. Taking this number brings us to a value of about 0.015 USD/search. If search engines would buy miles for 0.01 USD/mile they would still make a profit of 0.005 USD among the people clicking their ads and using a FFPs and the normal profit within the people that don't participate in the FFP program...

I find this interesting, but not sure about the numbers you use. When you talk about "a value of 0.015 USD/search," "buy(ing) miles for 0.01 USD/mile" and "still mak(ing) a profit of 0.005 USD among the people clicking their ads and using a FFPs," you are contemplating that those people would see 1 frequent flyer mile into their account in return for generating 0.005 profit for the search engine? Doesn't sound like a viable strategy to me, but perhaps I don't understand what you have in mind.

According to the Economist the global stock of 14 trillion frequent-flyer miles is now worth over $700 billion....
By my math, the Economist is valuing frequent flyer miles at over $0.05/mile. That seems high for US based airlines, where typically individual consumers can buy miles directly from the airline for $0.025. Does the Economist say how they support that valuation?

So when you have completed this paper or a draft of it, are you going to make it available somewhere for us to read? I would be interested to do so. (Is this a business school effort? Whatever it may be, good luck with the project.)
Yes, it is a paper for my E-Marketing course at the Rotterdam School of Management (www.rsm.nl), and yes, I will post it here.

I have posted another paper on FT already a year ago:
http://www.flyertalk.com/forum/showpost.php?p=3769761&postcount=25

And no, the economist does not say anything about mile valuation. There was a court decision lately in Germany which equalled 350000 LH miles to a monetary value of 9700 Euro.
9,700 Euro (EUR) = 11,965 US Dollar (USD) according to www.oanda.com today.