LaaB – One New Acronym that you Should Remember
Every time we host a Loyalty Academy™ workshop, we include a module on the financial considerations of customer loyalty. That session is based on Loyalty Academy course #105 - Introduction to Loyalty Financial Modeling. The course provides a thorough overview of the key financial considerations in planning and managing a customer loyalty program.
In our most recent workshop in Bangalore India, which I co-presented with Brian Almeida, CEO Strategic Caravan, I realized that customer loyalty has elevated to represent significant financial impact to many large brands, especially those that are highly visible household names for most consumers. The list includes the largest hotel chains, airlines, and retailers like Starbucks and Amazon.
I’m not a fan of acronyms, unless they hold meaning or add value to conversations, but I’m leaning towards adding LaaB to my loyalty-language. That’s Loyalty as a Business.
We already know that loyalty programs can create incremental revenue and gross profit, increase visit frequency, and improve retention rates. But if you carefully review earnings calls of the publicly held brands on the list above, you will learn that the business of loyalty has also been used to acquire large populations of new customers, raise tremendous amounts of cash, secure debt financings, even provide a solution to desperate financial situations.
Bloomberg covered the frequent flyer (FFP) market in a recent issue, citing that the value of miles redeemed for travel in the first six months of 2023 is up 21% at United Airlines and 14% at Delta. Faced with higher fares as travel has rebounded post-pandemic, consumers are turning towards their mileage banks as sources of cash-equivalent to make travel easier on the wallet. For those wondering how reward redemption ties to higher customer engagement and satisfaction levels, you have a pointed example as FFP’s are top of mind with many consumers.
For the airlines, loyalty is indeed a big business. In the first six months of 2023 Delta reported cash sales from marketing agreements with credit card companies, hotels, and rental car providers of $3.4 Billion, or approximately 12% of their revenue over the same period. Observing these numbers, one pundit exclaimed “this is not a loyalty program, this is just another line of business.”
Delta is using its SkyMiles program to acquire new customers also, adding about 1 million new members per month since it made membership a requirement to enjoy free in-flight Wi-Fi this past February.
Southwest Airlines reported “We had record Rapid Reward acquisitions in the second quarter, record co-brand spend, which is an indication of customer engagement in the second quarter.”
United Airlines reported that it added 8 million members during 2022 and in its 2023 Q2 earnings report said “MileagePlus had another strong quarter with revenue up 11% year-over-year. We broke records this quarter for all key measurements from new card acquisitions to new member enrollment”.
American AAdvantage says its membership has risen 61 percent since 2019 and in its 2023 Q2 earnings report said that “among the customers who are Advantaged (sic) customers, we actually grew their transactions by 8% and their revenues by 13%.”
This result apparently exceeded expectations and American commented further on what I consider to be three defining characteristics of its FFP members:
- For every dollar of flight revenue created by members, another $0.10 of other revenue is generated, mostly from branded credit cards.
- The cost of sales is materially lower when serving AAdvantage members.
- There is “durability of demand” for these customers.
In its 2023 Q2 earnings report Marriott said that Bonvoy membership had surpassed 186 million members and that global credit card acquisitions were up 25 percent, with global card spend up 10 percent versus the year‐ago quarter. It also announced an exclusive, 20‐year strategic license agreement with MGM Resorts International and the creation of MGM Collection with Marriott Bonvoy. The
collection, which is set to launch in October, encompasses 17 resorts with 40,000 rooms and links this content to Bonvoy members and the 40 million MGM Rewards members. That is one loyalty program brand that is touching a tremendous population of consumers.
In terms of engagement and growth, Amazon and Starbucks are setting a great example of what’s possible when you build a strong loyalty community.
- Amazon reports regularly on its Prime program, most recently commenting that on its most recent Prime Day members purchased more than 375 million items worldwide and saved more than $2.5 billion across the Amazon store, helping make it the biggest Prime Day ever. There are now more than 300 million items available with U.S. Prime free shipping and delivered more than 1.8 billion units to U.S. Prime members the same or next day.
- Starbucks Rewards members are driving revenue and showing high activity levels. Starbucks reported that its rewards members accounted for 57% of US tender in the most recent quarter, up 3 percentage points from the previous year. 90-day active Starbucks customers were reported to have grown more than 25% growth in the most recent quarter to nearly 75 million globally, with the US active user base growing by 15% to 31.4 million customers.
Starbucks Rewards also generates massive amounts of cash for the enterprise. Although not a bank, it reported $1.6 billion in outstanding gift card balances and $196 million in breakage (unused gift card balances) in FY 2022. Those cash balances are a cash manager’s dream as they are equivalent to an interest-free loan from the customer base.
There is no doubt that Loyalty programs can be a powerful financial tool for the enterprise. Frequent flyer programs have even been used to raise capital and secure debt financing. During the pandemic and in response to a difficult business cycle, three major US airlines raised significant capital through their FFP:
- American Airlines borrowed $7.5 Billion in Loyalty-Backed Debt (2021)
- Delta used its FFP as security to borrow $6.5 Billion
- United borrowed $5 billion with FFP as collateral
I’ve just scratched the surface here, but the evidence is strong from this quick survey of publicly disclosed earning reports that Customer Loyalty should never be short sold as being “just a marketing program”. The financial impact of a well-run customer loyalty program can not only drive incremental profit and accretive value to the enterprise, but it can also even serve as a key financial instrument to ensure the financial viability of your company.
Maybe LaaB (Loyalty as a Business) will be an acronym worthy of remembering.