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Opportunity for India's Travel Industry to Make the Most of Customer Loyalty Programs

Internationally, such programs have proven effective in building long-term relationships with loyal consumers

Published: Jun 17, 2013 06:11:40 AM IST
Updated: Jun 17, 2013 08:14:43 AM IST

Indian companies are becoming world class competitors in a range of industries—but one area where they can do more is in operating effective customer loyalty programs.  Internationally, such programs have proven effective in not only building long-term relationships with loyal consumers but in providing businesses with invaluable data about the buying practices of their most dedicated customers.

From hotel points to frequent flyer miles to car upgrades, such programs are of particular importance in travel, as they can help companies fill airline seats, rooms or rental cars that might otherwise remain vacant by extracting more value from repeat customers. This is a big opportunity India’s travel industry in terms of overhauling its loyalty efforts. 

Take the airline industry for example.  The three big international loyalty programs: Star Alliance, OneWorld and SkyTeam have expanded to include a wide range of international carriers. Yet though carriers like Ethiopian Airlines, Sri Lankan Airlines and Vietnam Airlines have been welcomed into these alliances, few Indian carriers have signed up. Air India and Jet Airways have their own customer loyalty programs, but in design and execution these are little more than cookie-cutters of offers that are designed for the Western world. Miles expire within three years and cannot be redeemed for anything other than flights.

Other areas of the transport industry could also do more. Indian Railways, which carries 23 million passengers per day, does not have a customer loyalty program—even for valuable customers traveling in its most expensive first class compartments. Car rental agencies affiliated with foreign companies such as Avis and Hertz have such programs, but they service mainly the top of the market. Local agencies don’t have such programs or are limited in utility because they operate only in a few cities. Likewise Indian hotel loyalty programs are geared towards the luxury consumer, but are notably absent or poorly-developed elsewhere in the industry.

A good loyalty program consists of two distinct components: frequency reward and customer tier.  Differentiating the relative effectiveness of these two components is important for evaluating and diagnosing the impact of any loyalty program. Frequency reward programs are of the form, “Buy X times, get something free.” Customer tier programs are of the form, “Once you qualify for our Diamond tier, we will provide you with special benefits and services.”  Both these programs provide firms with a wealth of information about their customers. In particular, it can give them vast amounts of data on how a company’s most loyal consumers perceive value—and how the company can most effectively structure its pricing. Are two for one offers more attractive to key customers than 40 percent off sales? Are coupons more effective than everyday low prices? More controversially, such programs can also give firms the data to offer different prices to different consumers at the same time.   

The structure of India’s hotel and car rental industries—with independents and smaller chains playing a large role in the middle market—presents a challenge to establishing such programs. A company with just four outlets may not have the resources to build out a customer loyalty program, and many customers may see little value to adding a loyalty card to their wallet for such a small player. Yet such a problem is not insurmountable. Smaller hotel and car rental chains can band together to create national loyalty programs. Alternatively, they could form alliances with national players in related industries such as airlines or Indian Railways—adding value both to the larger company’s program while garnering new data about their customers and strengthening long-term customer relationships that will pay off for years to come.

One feature of Indian travel loyalty programs is that many have not been tailored to the local market. As McDonald’s learned when introducing the fast-food burgers, customizing your products to Indian consumers is important. Loyalty programs have been the subject of extensive research in the West, but just as McDonals’s McAloo Tikki burger and Maharaja Mac demonstrate, Indian consumers  have different tastes than their Western counterparts.

In the U.S. research by myself and colleagues has shown that leisure travelers prefer frequency rewards, such as “stay five nights and the sixth one is free” or “fly25,000 miles and the next flight is free.” Business travelers prefer what we call customer tier or “upgrade” rewards, such as priority check-ins, periodic upgrades to first-class seating on flights or a more luxurious rental car. Since research on Indian consumers shows they tend to be more value-conscious, it’s likely that frequency rewards are much more attractive across the Indian travel market.   

As e-commerce expands rapidly in India, customer loyalty programs will only grow in importance. By building databases of customer e-mail addresses and buying practices, even small companies can see rapid benefits by sending offers to customers geared towards their specific habits, such as travel offers before holidays in the specific place the consumer has traveled in the past. Developing more sophisticated and progressive loyalty programs in India will require in-depth study. Yet many companies in India have been reluctant to share their data even confidentially with researchers such as myself. As India’s companies evolve and the benefits of a strong customer loyalty program become more apparent, perhaps such stances will evolve as well.

Praveen Kopalle Professor of Marketing at Tuck School of Business at Dartmouth

[This article republished with permission from the author and the Tuck School of Business.]