As in Part 1 – What Is Customer Loyalty in the Commercial Airline Industry I would like to expand on the concept of micro-segmentation and how it can build strength to an existing customer loyalty program using an example in the wireless Telco industry.

Low cost airlines (LCCs) have many similarities to wireless providers, especially those in predominantly prepaid markets as follows:

  1. Despite equipment and facilities involved, Both are mainly service industries
  2. Reducing the cost of acquiring a new customers, or cost per gross add is high in both
  3. Telcos are focused on Increasing average revenue per user (ARPU), Airlines focus on Revenue Passenger-Miles or Available Seat-Miles
  4. Telcos are concerned with reducing the rate of customer churn, Airlines are concerned about Passenger/Customer retention and loyalty for repeat business
  5. Both want to drive ancillary revenue from charges such as texts, overnight calls, in the case of telcos and extra check in baggage charge, or meal in the case of airlines
  6. Both are involved in trice/tariff wars with competitors
  7. Both have to deal with the anonymous customers – airlines have multiple databases with incomplete picture – analogous to the prepaid customer where only basic call information is known from billing systems

Wireless providers, especially those in predominantly prepaid markets determined that instead of just a one-size-fits-all program – postpaid or pre-paid plans – they created pre-paid plans that offered specific benefits to certain demographics of consumers based on previous patterns of usage. For example it was seen that students talk late into the night and are heavy users of various Value Added Services (VAS) such as text messages, ring back tones etc. Hence, Telcos created a unique prepaid pricing plan and package for students and marketed it to them as something that is specific to their needs, along with associated branding.

Passport page with travel stamps - traveler's visasIf we apply this model to an analogous segment within the commercial airline industry such as the extremely competitive and low margin, LCC segment, we can develop a framework which has the potential to deliver significant revenue and differentiation for them.

Telco operators have traditionally focused on areas deemed important – increasing ARPU, lowering costs and increasing charges, and developing their brand – yet subscribers focus on other priorities: price, convenience, service and tailored offers. Similarly, LCCs are focused on lowering indirect costs while at the same time providing low average fares. However, as competition increases both from other LCCs and wireless carriers, price wars will develop, which will, in the long run, have an adverse effect on the LCC industry. LCCs cannot continue to remain dependent on ticket revenue and low fare strategies – ancillary revenue generation will plateau. As soon as that happens, they will be unable to generate more revenue, or differentiate in the market.

A possible solution to the competitive and differentiation dilemma faced by LCCs is to combine the concepts of micro-segmentation, loyalty programs with targeted product development. The key to driving effective market share, differentiation from competitors, increase in repeat and loyal customers from the onset, is to develop packages or products for particular demographics and incorporate them within a loyalty program or incentive card scheme as one holistic product.

Currently a majority of LCCs treat all passengers as one monolithic group – price conscious shoppers interested in only getting from point A to point B. However, LCC passengers are a rather varied group. Today’s segmentation is used to understand only the services or demographics for determining products and buying patterns.  A further step will carry out additional analysis to develop micro-segment specific products to enhance the customer experience.

According to various studies, including one by Halmstad University in Sweden, some of the main Demographic groups targeted by LCCs are:

  1. Cost conscious business travelers / start-up employees and Entrepreneurs – travel has been curtailed by the recession, budget cuts; significant segment with immense potential for revenue growth; straddles the line between network and LCCs; requires or at least desires the convenience and image associated with business travel, but at affordable costs
  2. Leisure and Family Travelers – concerned with various child-friendly amenities and services as well as conveniences when traveling with children / within limited budgets
  3. Students – lucrative segment, focused on the social benefits of travel as well as being a more seasonal in travel patterns
  4. Foreign labor or workers through agencies – main issues revolve around providing for bulk travelers going from point A to point B, with limitations in communication
  5. Commuters – due to the inherent nature of the world economy and with various unemployment issues and family and work obligations, many individuals are utilizing the cost effectiveness of commuter LCCs

It is clear that each group is very distinct and has different preferences and requirements and cannot be treated with a one-size fits all philosophy. For example, the cost conscious business traveler requires convenient seating, in which they can work, more leg room, and various high tech amenities in their seat, such as USB charger, Wi-Fi, more hand carry allowance.

The student may prefer social media Interaction at time of Ticket booking, Wi-Fi, in-flight entertainment and a low cost of fare.

If we analyze the business segment, it can be broken down into further sub-segments. Junior to Mid-level professionals or Executives, differ with their unique needs.  After analyzing the behavior patterns and trends of the sub-segments identified, determine the key drivers – for the business traveler in a small or medium business it is cost, convenience of flight schedules, leg room and other extras. Subsequently, develop special products and pricing based on these criteria and create marketing and advertising around these products.  Introduce the “LCC Upwardly Mobile Executive” package, with associated messaging and benefits. Similarly, this is done for other segments and sub-segments identified. Each package should be associated with a unique loyalty scheme to incentivize repeat business, providing discounts and benefits related to the segment. This will serve to create a product instead of a scheme, whereby customers are benefiting at the start of a relationship with a loyalty program built on the foundation of a unique and customized customer experience.

Studies have shown that regardless of the product or service,  as with the case with Telcos, by creating these value packages that were based on various segments and patterns, they were able to drive up loyalty and significantly reduced churn. Customers were willing to pay more and were likely to absorb incremental tariff increases as long as they were getting the product and features they required.

Customer loyalty is not about free flights or upgrades but more about a holistic and relevant, positive customer experience. According to a study by Harris Interactive, 86 percent of consumers will pay more for a better customer experience. At the end of the day, it all comes down to enhancing Customer Experience.  The customer loyalty will follow.

Posted originally on The Customer Edge.