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Airline Loyalty Programmes: A Behavioural Economics Vantage Point

Fun & everyday life Business

In the race to have an advantage in customer retention, most airline companies rely on a cumulative points system to unlock status and purchasing power on duty free items. Behavioural science, the study of human irrationality, can often introduce improvements to traditional solutions:

Travellers opening a customer account could be given a high number of points right upon registration. However, they can only use the points once they reach a predefined number of trips (flight segments).

At first glance this looks similar to the status quo, but in reality many behavioural biases influence the decision. Giving the points up front under the binding condition of a certain number of flights should make customers race to not lose the "pending" status and the potential to benefit by turning points into purchases.

In reality, loss aversion (the fact that losses loom larger than gains) and the endowment effect (the fact that owning something appears more valuable), together imply that the incentive is almost two times stronger to keep the pending status rather than turn it into a reward. Customers will think "I do not want to lose this opportunity", rather than "I still have to accumulate points and even if I do not reach the cap, no problem". This new scenario also creates a lock-in for the customer not to switch to another airline – losing out on the points will be a greater decision factor than a small cost saving elsewhere. Furthermore, by immediately converting the true value of the points in terms of duty free purchasing power and status advantages, the temporal gap between the rewards’ assimilation and the future is closer. In other words, you are very likely to immediately look up what the given points are worth whereas in the status quo, value discovery happens more gradually as wealth accumulates ("income effect" for the economists out there) making it much less exciting. Last but not least, with people being more attracted to immediate rewards (present bias), the immediate points significantly outweigh their promised counterparts.

You would think that the problem of such a setting is the elimination of gradual rewards, but in reality, one can only start talking about serious advantages after a high number of flights (I would define serious as anything beyond a coffee machine or a set of utensils).

SOURCES:

Kahneman, Daniel and Amos Tversky. (1984). "Choices, Values and Frames"

Kahneman, Daniel and Amos Tversky. (1992). " Advances in Prospect Theory: Cumulative Representation of Uncertainty"

Kahneman, Daniel, JL Knetsch and Richard Thaler (1991) “Anomalies: The endowment effect, loss aversion, and status quo bias”