Academic journal article International Journal of Marketing Studies

Customer Loyalty and Profitability: Empirical Evidence of Frequent Flyer Program

Academic journal article International Journal of Marketing Studies

Customer Loyalty and Profitability: Empirical Evidence of Frequent Flyer Program

Article excerpt

Abstract

The aim of loyalty reward program is to retain profitable customers to the organization. Airline loyalty program such as frequent flyer program (FFP) is a phenomenon in marketing strategy used by airline industries to maintain customer loyalty and gain more financial benefit. However most airlines have very little understanding of their FFP members yet have little knowledge about their most valuable customers. This study aims to determine customer value to the company in the context of aviation loyalty reward program in Indonesia based on RFM analysis as well as to analyze the correspondence between the members' value and their socio-demographic profile. This study used a proprietary dataset from a FFP' membership of an Indonesian airline. The empirical result shows that axiomatic 80/20 rule is fit well on this FFP. Around 75% of the revenues come from only 20% of the members. Furthermore, seven segments of the FFP members are identified sequentially from the most valuable to the least valuable customer to the airline. Top Members generate the highest revenue and the highest RFM whereas Inactive Members are the least valuable customers. In summary, high value members are dominated by male members, age 46-55 years, having elite tier levels (Platinum & Gold) and working as a director and or an owner of the companies. The result contributes to the industry in developing marketing strategy, enhancing customer loyalty and implementing accurate marketing functions in term of FFP. The study offers a more accurate model for FFP member valuation than just simply based on the miles flown.

Keywords: frequent flyer program, profitability, segmentation, RFM, correspondence analysis

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The key-roles of Loyalty Reward Program (LRP) are "loyalty" as the primary goal of loyalty program, and "reward" as the key instrument for attaining it (Yuheng, 2011). The basic concept of LRP is to enhance customers' long-term profitability in term of customers' lifetime value as a form of equity (Yuheng, 2011). Reward has proven strongly in influencing customers' making decision and also their behavior changes as well (Gomez et al., 2006). A successful loyalty program increases value-proposition of the product, retains loyalty and hence preserves the profitability from the customers (Kumar & Petersen, 2005).

The best known example of successful loyalty programs in airline industry is a frequent flyer program (FFP) (Kim et al., 2001; Browne et al., 1995). This marketing strategy is used by airline industries to maximize their profit and retain their loyal customers. Having grown at exponential expansion, FFPs are notorious as the largest membership of loyalty program with more than 120 million members enrolled in one or more of the 200 FFPs globally (McCaughey & Behrens, 2011). FFP awards generally reward loyal and frequent customers in the form of loyalty currency which can be used for free flights, upgrades, shop products, and other services. Having considered as a part of payment systems, frequent flyer miles represent one of the world's most popular currencies (Dreze & Nunes, 2004).

However the effectiveness of FFP has been argued because of the huge operating cost involved (Yang & Liu, 2003). How do the programs affect beneficial outcomes for the airline? FFP costs to the airline of $2M to $12M for the investment and about $3 to $20 per member per year just for offering the benefits (O'Connel, 2009). Economic benefits range from award and upgrade tickets to shop product, while social benefits include priority check-in, boarding, reservation, extra baggage allowances or airport lounges access. In the meanwhile, most airlines commonly offer generic benefit scheme to their FFP members (Tirenni et al., 2007). This "one size fits all" strategy is indeed very costly yet ineffective because each type of customer segmentation has been exposed to the same treatment regardless their particular preferences pertaining to the benefits (Suzuki, 2003; Martin et al. …

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