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Commercial opportunities from an integrated strategy
As the commercial realities continue to bite, smarter brands should be looking to identify how they can extend their value proposition to customers and drive both increased loyalty and incremental income.
The banking sector has been particularly successful, profitably stretching its core financial relationship into the lifestyles of its customers. Added value bank or checking accounts were developed to provide customers with travel, lifestyle, leisure and security benefits and in 2009, 15% of bank account holders in the UK hold one1. Lloyds TSB has been offering these accounts in the UK since the mid-late 1990's. Their customers clearly see value in paying to access these benefits with 77,000 of their customers repairing or replacing their mobile phones through these accounts in 20072, for example.
Added value accounts, generating both incremental revenue and loyalty, were therefore worth over £874m for UK banks in 20053. This has been achieved by successfully adopting an integrated and customer-focused approach to combined ancillary revenue and loyalty strategies. In a different example Tesco has continually extended its customer value proposition by up-selling and cross-selling relevant products such as insurance and financial services.
Many travel brands are rapidly deploying ancillary revenue initiatives but research has found that 63% of airlines claim not to have a formalised strategy in place4. Furthermore only 18% regarded driving ancillary revenue as a key objective of their loyalty programme5. This helps explain why ancillary revenue generation activities are often managed separately from loyalty initiatives. Both are in fact targeting the same customer and a cohesive approach to customer management must be applied across the business.
Consider customer risk and opportunity
Airlines and hotels are particularly keen to drive incremental revenues but ICLP's global research has shown that 52% are mistakenly focusing their efforts on either top-tier customers (31%) or base-tier customers (21%) of their loyalty programmes5. However based on an understanding of customer needs, value and the opportunity to change their behaviour, neither of these segments provide the best ROI from tactical marketing.
Whilst top-tier members are the most valuable, it is difficult to provide new incentives to them which will drive increased revenue. This is due to their saturation with rewards and already high share of wallet. Meanwhile the bottom-tier do not travel frequently enough to make the targeting of these members with tactical revenue initiatives effective.
Companies should look to middle-tier members, or non-loyalty programme members, as this is where the greatest opportunity to increase revenue exists. For example British Airways' recent addition of offering Executive Club tier points for discounted and leisure fares, thus effectively rewarding lower value customer segments than previously.
Keep it customer centric
Too many brands focus too heavily on driving short term potential revenue and whilst it has proved very successful for companies like Ryannair, it does not foster a long term customer loyalty and deliver a positive brand experience which companies like Virgin Atlantic have spent time and money nurturing.
The goal is to balance loyalty benefits and ancillary revenue sales to customers. Whilst airport lounge access is a relevant up-sell for occasional travellers and has the potential to derive substantial income, an airline has to consider the risk associated with alienating existing frequent loyalty programme members who have earned the privilege of using that same lounge.
Worryingly, research has indicated that less than 10% of airlines regarded customer satisfaction as a key metric within an ancillary revenue strategy4 and this drops to 8% when assessing the performance of a loyalty programme5.
However research conducted by Mori Financial Services in the UK from the late 1990s continually demonstrated that holders of added value accounts exhibited higher satisfaction rates, retention rates and had a higher cross holding of financial products than standard current account holders.
Differentiate and create additional value
Identifying what insight you have about your different potential audiences and what your competitors currently offer them will start to highlight opportunities to meet the latent needs of key target segments.
From this you can define differentiated propositions that will both create value for customers whilst driving desired behaviour. A high profile example is O2, the UK mobile operator who has taken a new approach to creating a differentiated entertainment experience for its customers through the sponsorship of live music venues, events and access to priority tickets and benefits. This strategy supported both the acquisition of new customers as well as the retention of its loyal base.
Meeting and managing customer expectations is paramount but should be achieved using internal company core capabilities. In the airline sector, charging for additional but integral services such as hold or even carry-on baggage can be effective, but could harm the value associated with those legacy brands who have created higher customer expectations.
Working together successfully
Deploying a formalised and combined loyalty and ancillary revenue programme based on customer insight will defend core revenue, drive additional incremental profit opportunities and support deeper customer engagement.
It also provides the opportunity to differentiate for the longer term and create sustainable competitive advantages, demonstrated by Tesco's continued success in meeting customer needs in both core and new revenue segments.
If you are not however finding new ways to enhance your value propositon to your customers and continually seek areas of differentiation, you can be sure that both your traditional competitors and potential new market entrants are.
Status quo is no longer a strategic option.
[1] Mintel Packaged, Premium and Current Accounts research 2009
2 Lloyds TSB February 2008
3 Mintel research 2005
4 Collinson Latitude research 2009
5 ICLP research 2009