Effectiveness of frequent flyer programme on customer retention and loyalty

 

Abstract

The research was developed on the concept that the frequent-flier program enables the retention of profitable customers and the development of loyalty. The aim of the research is a critical evaluation of the effectiveness of frequent player program retaining customers and developing loyalty through an analysis of the customers of British Airways. The objectives of research were to critically evaluate the concept of customer retention in the airline industry, analyse the effect of customer loyalty in the airline industry, analyse the frequent flyer programs employed by the airline’s and in particular British Airways, to evaluate the effectiveness of the frequent flyer program in developing customer loyalty and to evaluate the effectiveness of the frequent flyer program into retaining profitable customers.

Most of the findings of the literature review were with regards to the life cycle of the customer which developed the concept of life cycle management and which is very much correlated with customer retention strategies. It was also found that the loyalty schemes developed by organisations are necessary reduced susceptibility to competition and switching. In order to evaluate the different concepts developed during the literature review primary data was collected from 60 customers of British Airways. The data analysis was conducted by dividing the responses collected from the customers into different tiers of the executive club loyalty program of British Airways. Based on the tier system the responses were divided and correlated with different aspects such as awareness of customer about the benefits of loyalty program, the types of usage in terms of international and domestic travel, the susceptibility to competitive action, comparison of the British Airways frequent flyer program with that of the competitors, the repeat purchase behaviour developed from the loyalty program and finally the development of price sensitivity, willingness to pay and switching cost.

It has been found that the loyalty programs reduce the susceptibility of the customers to competition but this is directly correlated with the life cycle of the customers and the life cycle of the customers has been found to have significant correlation with repeat purchase behaviour and the reduction of price sensitivity. It has been established that the frequent-flier program is effective in developing the switching cost which ensures that the customers search and evaluation costs are increasing. The conclusion is that the customer retention strategy through the loyalty program is ensuring the profitability from the retained customers because there is repeat purchase from the customers with a willingness to pay a premium price due to switching cost.

Introduction

Customer relationship management is defined based on the development of loyalty and commitment from the customer by focusing on those areas where the customer and the organisation benefits. A focus on customer and their needs and requirements have developed several concepts of relationship marketing. Although several conclusions can be found in research articles related to customer relationship management (CRM) many researchers are equivocal about the different stages involved in customer relationship management. These include acquisition of new customers, development by providing them the benefits and advantages through the products and services and retaining them throughout the entire life cycle (Ferguson and Hlavinka, 2007). The two underlying concepts under customer relationship management has been the development of loyalty to increase the revenues and to develop a close bond and alliance between the customer and the brand (Duffy, 2005). Several of the researchers and analysts have identified the concept of increasing the profit levels by a significant margin based on enhanced retention (Atalik, 2007). One of the many concepts involved in customer relationship management is the development of loyalty programs for the profitable customers (Rowley, 2007). Although in practice many of the loyalty programs seem to be having a universal targeting, Meyer-Waarden, (2008) and Casado and Lara, (2010) have identified the need to target the insignificant but highly revenue generating and profitable customers of an organisation.

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Factors affecting the effectiveness of frequent-flier programs

Although research studies and analysts have identified and evaluated several factors which affect the effectiveness of the frequent-flier programs, the most important ones identified are the coverage, market share, duration, distance, schedule and most of all the characteristics of the reward program (Boone and Kurtz, 2011). Several organisations in the airline industry have different approaches or business models, were it concentrates on the business class passengers or on international routes. Moreover not all the airlines are travelling to all types of destinations which requires the need for collaboration between the airlines and hence collaboration in the reward strategy also.

One important function of the effectiveness of the frequent-flier program is the customer’s needs and requirements of the reward schemes provided through the program itself. Although most of the programs provide a reduction in fare, upgrade to higher class, access to enhanced services etc., many customers’ perceptions and attitudes towards these rewards are different. The research by Rajasekar and Fouts, (2009) has indicated that price sensitivity contributes to an important factor in customer purchase decision and hence a reduction in the fare of travel would be an important motivator. But contrary research suggests that switching cost has indeed reduced the significance of price sensitivity and the frequent-flier programs has not been efficient in reducing the cost of travel for the customers and thereby contributing to increase profitability for the airlines.

Due to the competition in the market and the collaboration required between the airlines in order to provide efficient services to the customers in international routes, the market share of the airline and the destinations to which it travels is an important contributor to the effectiveness of the frequent-flier program. Some of the airlines only travel to specific destinations in specific regions and the travelers are often required to take connection flights with different airlines in order to reach the destination. This necessitates a need for collaboration in the provision of points and miles for the customer along with the redemptions in a collaborative manner within the industry. All these factors contribute to the effectiveness of the frequent-flier program but are primarily based on the number of individuals that it can attract (Wu and Wang, 2012).

Hence it is necessary to evaluate the effectiveness of the frequent-flier program contributing to the retention of profitable customers and developing customer loyalty. The several aspects of price sensitivity, switching cost etc. needs to be analysed in detail in order to identify what are the underlying factors behind the frequent-flier program which motivate the customers to be loyal and committed to the organisation.

Aims

A critical evaluation of the effectiveness of frequent player program retaining customers and developing loyalty – analysis of the customers of British Airways.

Objectives of research

  1. To critically evaluate the concept of customer retention in the airline industry
  2. To analyse the effect of customer loyalty in the airline industry
  3. To analyse the frequent flyer programs employed by the airline’s and in particular British Airways
  4. To evaluate the effectiveness of the frequent flyer program in developing customer loyalty
  5. To evaluate the effectiveness of the frequent flyer program into retaining profitable customers.

Research questions

  1. How effective is the frequent flyer program in developing customer retention and loyalty
  2. What are the contributing factors increasing the profitability from frequent flyer programs

 

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