Think Tank: Christopher Neil-Jones on travel retail loyalty programmes – earn or burn?

The Moodie Davitt Report is pleased to introduce a new guest column, THINK TANK, in which we invite alternative, fresh perspectives on the travel retail and aviation sectors.

After the candid, compelling and controversial column from our introductory contributor, Andrew Gardiner, Chief of Retail at Melbourne Airport, long-time airport commercial revenues executive Keith Hunter offered his own challenging take on the tender model. In this third edition of THINK TANK, Airport Loyalty Group CEO Christopher Neil-Jones attempts to devise the perfect travel retail loyalty programme.

 [The views expressed in THINK TANK are not necessarily those of the Publisher. If you would like to contribute to this column, please contact Martin Moodie at Martin@MoodieDavittReport.com]

Travel retail loyalty programmes – earn or burn?

A shocking McKinsey study has shown that on average, loyalty programmes reduce margins by -10%.

If a programme is well designed, following certain key principles, it can increase both revenues and EBITDA, but evidently most are not. An analysis of airport retail loyalty programmes illustrates this point.

Designing a future-proof loyalty programme: Airport Loyalty Group CEO Christopher Neil-Jones

In the departure lounge, passengers can be divided into two groups: active and passive shoppers.

The active group head for the airport intending to visit the shops, the passives don’t. If the actives are 26% of the total and generate 77% of the revenue [according to the DKMA Airport Consumer Survey 2014], it follows that actives spend 3x the average spend per passenger and passives spend only 30%. Put more simply, that means actives each spend 10x more than passives.

Naturally, airport retailers love those active shoppers. So with a finite marketing budget, should an airport or duty free group focus on encouraging existing customers to spend more (Lift), or aim to get passive shoppers to change their habits (Shift)?

“Enabling earn opportunities across multiple partners beyond the airport is a proven way to increase the relevance of the programme.”

Most current airport and duty free loyalty programmes focus on rewarding existing customers for doing what they do anyway, in the hope that they will do more. An airport programme typically offers points to the value of 1-3% that can be exchanged for vouchers. Some duty free groups offer discounts of -5%, increasing through tiers to -10%. In return, members provide their data and receive marketing messages.

Unfortunately this is a money-losing proposition: the most generous estimate of the Lift strategy that might be achieved generates less margin than the full cost of the discounts or rewards (points) that are given away, plus the cost of running the programme. For even the biggest airports, a Lift of over +15% is required for break-even, which is quite a stretch. Those discount programmes require 3x more (+45%).

74% of passengers don’t plan on buying anything at the airport. 77% of revenue comes from those who do.

Typical airport loyalty programmes are not designed for passive shoppers: it would take them almost 200 departures on average to earn a £5 (US$6.50) reward voucher at Heathrow for example, compared to 20 for the active shoppers. We would therefore expect only active shoppers to enrol and for the average member’s spend to thus be at least 3x the passenger average. This would then need to rise to 3.5x (+15% lift) to achieve break-even.

Discount programmes on the other hand have an immediate and ‘sticky’ negative effect on margins.

When a retailer launches its own loyalty programme, it generally aims to penetrate 30-60% of their revenue base. A duty free group giving an average discount of -7.5% over say just 30% of their revenue base would reduce EBITDA by over -13%. Achieving a Lift of +10% over that revenue base would add +3% EBITDA. A structural loss of over -10% of EBITDA might be an unwelcome surprise for shareholders but is, alas, perfectly aligned with the McKinsey study.

So, the maths tells us it doesn’t make sense to focus exclusively on existing customers in the hope of driving Lift. Focusing on the low-spending passive shoppers is a much better idea.

Convincing just 2% of the passives to change their habits and become actives (Shift) will increase retail revenues by over +20% in five years.

Achieving even only +0.5% Shift pays for the entire cost of a typical airport loyalty programme, yielding positive ROI [return on investment] even with no Lift.

To achieve this we need to make the programme attractive and relevant to passive as well as active shoppers. We need to know when they will be travelling and have their permission to send them relevant messages and offers at their most receptive time.

“For even the biggest airports, a Lift of over +15% is required for break-even, which is quite a stretch.”

But we have seen that a stand-alone airport loyalty programme is irrelevant to passive shoppers. We must therefore design the programme to be points-based and open for mutually-advantageous partnerships.

Enabling earn opportunities across multiple partners beyond the airport is a proven way to increase the relevance of the programme whilst having partners pay for points. Some partners will be earn-only, some will have their own branded programme. Furthermore, some potential partners (airlines, travel agents) will already know exactly when their members will be at the airport and through the platform can push messages direct to the individual’s smartphone at just the right time, maximising effectiveness.

To maximise acquisition and Shift, these must be mutually-beneficial relationships between equal partners and not the kind of master/slave relationships favoured by airline programmes.

Active shoppers spend ten times more than passive shoppers, according to a recent study.

By following best-in-class design rules, the loyalty programme can enhance the customer experience and make the airport or retailer brand a welcome travel companion throughout the journey from home to the destination and back.

There’s even more we can do.

Airline frequent flier programmes (FFPs) don’t work for the airport (as they create a barrier for entry for new carriers or encourage the use of rival hubs) or for 80% of travellers who travel infrequently or on different airlines.

In exchange for data-driven local marketing services, many airlines would agree to accept an airport loyalty card just like an alliance airline FFP card for point accrual, providing the back-end integration is seamless. It would cost them the same for more benefits and have no adverse effect on their own FFP. This enables the development of an alternative multi-airline home-airport FFP that works in the interests of the airport, airlines and the vast majority of passengers.

“If a loyalty  programme is well designed, following certain key principles, it can increase both revenues and EBITDA, but evidently most are not.”

By integrating multiple airport programmes into a common points platform, this then becomes a global travel programme and each airport can address visitors as well as locals, passive as well as active customers.

With the right programme design and platform, brands can offer bonus points or attractive redemption offers to promote specific lines and drive relevant offers to programme members.

Data can be leveraged to the advantage of the airport commercial team, marketers, IT and aviation business, as well as airline and brand partners.

Airport Loyalty Group helps airports and travel retailers to design a future-proof loyalty programme with customer experience, data and ROI in mind, achieving both Lift and Shift to generate a profit, not a loss.

Because when we get to the bottom line, it should always be about earn, not burn.

FOOTNOTE: Wish to comment on this article? Feel free to offer your comment via the DISQUS platform below. Would you like to contribute to THINK TANK? Write to Martin Moodie at Martin@MoodieDavittReport.com

Airport Loyalty Group provides consultancy, data-driven models and workshop facilitation to identify the goals and key success factors for an airport loyalty programme, ensuring buy-in and engagement of all stakeholders.

Contact details:

Christopher Neil-Jones

Email: cneiljones@airportloyalty.com

LinkedIn:  linkedin.com/in/cneiljones

Tel: +44 (0)207 078 3937

Website: www.airportloyalty.com

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