00:00:01
I want to welcome Wharton marketing
00:00:03
Professor Pete fader to join us today to
00:00:06
talk about the recent move by Delta
00:00:08
Airlines to change its frequent flyer
00:00:10
Rewards program from one based on Miles
00:00:13
flown to one based on how much money you
00:00:16
spend with the Airlines and um that
00:00:19
means Pete that those who spend more
00:00:21
will get preferential treatment and just
00:00:23
to give a little context from the
00:00:25
airlines point of view the top 4% of
00:00:28
Delta's customers are resp responsible
00:00:30
uh in dollar spending for about 25% of
00:00:34
the revenue so you can see why they
00:00:36
wanted to do something for that group
00:00:37
but but you have uh a book about
00:00:41
customer centricity that is very much
00:00:43
around this point so could you talk
00:00:44
about how that relates to what the
00:00:46
airlines in delta in particular is doing
00:00:49
today the airlines are such an
00:00:51
interesting industry because in many
00:00:53
ways they brought many of the the
00:00:56
aspects of customer centricity out uh
00:00:59
earlier and better than any other
00:01:01
industry you know on the heels of of
00:01:03
being deregulated in the 1970s and right
00:01:05
through the 1980s everything from
00:01:08
Dynamic pricing to loyalty programs as
00:01:11
we know them today we have to thank or
00:01:13
or blame the airlines for that they they
00:01:16
did some amazingly Progressive things a
00:01:18
lot of people can't even imagine a time
00:01:20
without the the plethora of loyalty
00:01:23
programs that we have today but but they
00:01:24
are a relatively recent Innovation and
00:01:27
it was very risky on the part of the
00:01:29
airlines to take gone all these
00:01:31
liabilities and to build all this
00:01:32
infrastructure and to come up with all
00:01:34
these uh incentives for people to use
00:01:36
these programs so so lots of credit to
00:01:39
the airlines of course Delta included
00:01:41
for making all this happen but then it
00:01:44
all kind of stagnated they they started
00:01:47
with some really amazing practices but
00:01:49
then those practices haven't changed for
00:01:51
the the 30 years since they first
00:01:53
instituted them so the kind of move that
00:01:55
Delta is making here makes total sense
00:01:58
and it should have happened years
00:02:00
earlier and it's a shame that it's taken
00:02:01
so long for the major airlines to
00:02:03
realize that it's dollars that matter
00:02:06
More Than
00:02:07
Miles uh briefly explain what customer
00:02:11
centricity is and how it would relate to
00:02:13
what they've done here so in my book
00:02:16
literally a customer centricity is about
00:02:18
a recognition of the differences across
00:02:21
your customers there is no single
00:02:23
average customer there's this wide
00:02:25
variety of them and they vary not only
00:02:27
in their their needs and what they want
00:02:30
from a relationship but they vary in
00:02:32
terms of their value to the firm and
00:02:34
it's imperative for a firm to figure out
00:02:36
who the most valuable customers are to
00:02:38
start taking on tactics to create more
00:02:41
value to extract some of that value for
00:02:43
their shareholders and to find more
00:02:45
customers who resemble those valuable
00:02:48
ones to try to bend over backwards to
00:02:50
bring them in to try to create and
00:02:52
extract value from them as well so it's
00:02:54
a celebration of differences as opposed
00:02:57
to let's figure out what the average
00:02:58
customer wants and loyalty programs are
00:03:00
a great way for customers to self-
00:03:03
select and to provide those kinds of
00:03:05
rewards and that value extraction and
00:03:08
again the airlines have been good about
00:03:10
developing those programs but they
00:03:12
haven't been really Progressive about
00:03:14
changing them for the the the are
00:03:16
changing understanding of customers and
00:03:18
the changing needs for a company and its
00:03:20
shareholders so it makes sense for an
00:03:22
airline to want to reward its best
00:03:24
customers best meaning the ones that
00:03:26
give it the most money from whom they
00:03:28
get the most revenues um that also means
00:03:31
that some customers are going to be less
00:03:33
well off right so there'll be some
00:03:34
winners and losers could you talk about
00:03:36
that I don't like to think that there'
00:03:38
be losers I do like to think about
00:03:40
Winners and I'm not saying this just to
00:03:42
be politically correct I'm not I I don't
00:03:45
want companies to be firing customers I
00:03:47
don't want companies to go to customers
00:03:49
and and and basically treat them badly
00:03:52
the problem is today there are so many
00:03:54
companies out there not including the
00:03:56
airlines for the most part that are
00:03:58
treating too many customers too well so
00:04:01
no one should be treated badly but some
00:04:03
customers deserve better treatment and
00:04:05
that should be on the basis of what
00:04:07
they're worth to the firm and so this is
00:04:09
a step in the right direction I I I
00:04:10
don't want to see that any customers
00:04:12
going to be much worse off but I think
00:04:14
that the the the incentives associated
00:04:17
with an airline loyalty program have
00:04:18
been a bit out of whack by rewarding
00:04:21
people for Miles instead of dollars so
00:04:23
it's not so much giving people less it's
00:04:26
giving them more what they deserve so uh
00:04:29
um it might be that under the new Delta
00:04:32
program the ultimate beneficiary would
00:04:34
be a frequent flyer who travels who's
00:04:37
let's say takes a lot of short trips and
00:04:40
does them on short notice because of
00:04:41
business reasons or whatever so they're
00:04:43
paying top dollar for the fairs they're
00:04:44
not getting any discounts by reserving
00:04:47
way in advance and they're not getting
00:04:48
many miles because they're just flying
00:04:50
you know maybe an hour or so away um and
00:04:53
on the other hand there's the bargain
00:04:54
shopper who's you know getting the
00:04:56
cross-continental flights at bargain
00:04:58
rates and maybe they do that you know a
00:05:00
couple times a year and they're and
00:05:02
they're getting lots of miles so they
00:05:03
may not be losers but they're but
00:05:05
they're are they they're going to not
00:05:07
get quite the benefits that they've had
00:05:08
in the past so it's a redistribution of
00:05:11
the benefits and while it might be
00:05:13
disappointing to those who are getting a
00:05:16
little bit less than they uh got before
00:05:18
it's hard for them to complain about it
00:05:21
uh I mean they they will complain about
00:05:23
it but uh but it's hard to feel a great
00:05:25
deal of sympathy for them I think that
00:05:26
the the structures of the programs the
00:05:29
way that were set up were a little
00:05:30
artificial a little bit out of whack so
00:05:32
this is just uh recalibrating the
00:05:34
programs in an appropriate way I don't
00:05:36
see this as an example of a company
00:05:38
chiseling away and and taking away from
00:05:41
its customers I think it really is just
00:05:43
a fairer distribution and and it really
00:05:45
does make sense if you think about the
00:05:47
the the principles or the the metrics
00:05:49
that are associated with customer value
00:05:51
uh one of the rubrics that we celebrate
00:05:53
is the notion of rfm recency frequency
00:05:56
monetary value uh and so let's Reward
00:05:59
customer customers on that basis so
00:06:01
someone who's flying infrequently and
00:06:03
they're just taking that occasional big
00:06:05
flight and often not paying a lot for it
00:06:07
isn't worth as much as someone who's
00:06:09
taking a lot of short flights very often
00:06:11
and and indeed paying top dollar for
00:06:13
them so it makes all the sense in the
00:06:15
world and it's hard to make an argument
00:06:17
to the contrary other than sheer
00:06:20
inertia is there sometimes a conflict it
00:06:23
seems like there would be between
00:06:25
providing good customer service overall
00:06:29
and
00:06:30
and customer centricity so other it's
00:06:32
very expensive to provide really good
00:06:34
customer service to all your customers
00:06:36
all companies want to do that they say
00:06:38
they want to do it there's good reasons
00:06:39
for wanting to do it whether they can
00:06:41
afford it or whether it makes sense are
00:06:43
the very items that you're talking about
00:06:44
here how how do you balance that how
00:06:48
companies balance that companies need to
00:06:50
be more selective about who gets that
00:06:51
red carpet treatment and this is
00:06:53
actually one area where the airlines
00:06:55
have been pretty good which is to say
00:06:56
most people get treated eh but for but
00:07:00
it's the it's those who get the upgrades
00:07:02
it's those who get other kinds of
00:07:03
benefits that the airline might offer
00:07:04
that are getting that that special
00:07:06
treatment and again uh that should be on
00:07:08
the basis of what the customer is worth
00:07:11
uh and when I'm talking about worth I'm
00:07:12
not necessarily talking about past
00:07:14
profitability I'm talking about a
00:07:16
projection of what we think this
00:07:17
customer will be worth in the future
00:07:19
that's how we want to be giving the
00:07:21
rewards out for the most part the
00:07:23
airlines have been very backwards
00:07:24
looking let's reward people on what they
00:07:26
have done hoping that that's a Mir near
00:07:29
to the Future in some cases it is but I
00:07:32
think if we can look at people who are
00:07:34
spending big dollars today as opposed to
00:07:36
those who took a few long flights with
00:07:38
us say six months ago I think it makes
00:07:41
much more sense and and and not only
00:07:43
will the the points be given out in in a
00:07:45
in a better manner but the but the
00:07:47
benefits uh that customers get will be
00:07:49
distributed more appropriately as well
00:07:51
could you talk about uh the tools that
00:07:53
are available for making uh decisions
00:07:57
about future spending you predictability
00:08:01
how how do you do that you talked about
00:08:04
some customers may have spent a lot with
00:08:05
you recently but they may not be as
00:08:07
valuable as ones where certain metrics
00:08:09
show they're the ones that going to be
00:08:11
spending more in the future what are
00:08:12
those metrics how do you measure that it
00:08:13
all comes down to the notion of customer
00:08:15
lifetime value we're going to look at
00:08:18
the the flow of transactions the size of
00:08:20
transactions other interactions that
00:08:23
we've had with each and every customer
00:08:24
and we're going to make uh an educated
00:08:27
guess about what we think that customer
00:08:28
will be in the future a lot of people
00:08:31
look at this as as rocket science some
00:08:33
people find it kind of creepy that we're
00:08:34
going to be uh basing our customer
00:08:36
management strategies on a prediction of
00:08:38
the future as opposed to the the
00:08:40
certainty of the past but we've seen a
00:08:42
number of Industries where these ideas
00:08:45
of of using data valuing customers and
00:08:48
making tactical decisions on the basis
00:08:50
of their projected future value makes a
00:08:53
whole lot of sense the airlines haven't
00:08:55
been very good about it again it's
00:08:57
ironic that they've put in place a lot
00:08:59
of the tactics again Revenue management
00:09:02
schemes loyalty programs that enable
00:09:05
this kind of management but they just
00:09:06
haven't had either the the analytic
00:09:09
horsepower or the or or the guts or the
00:09:12
the corporate culture that enables the
00:09:14
use of clv as much as as other kinds of
00:09:18
Industries like say Financial Services
00:09:20
or telecommunications so this is I see
00:09:22
as a step in the right direction I think
00:09:24
in the long run it's going to be good
00:09:26
for the customers for the right kinds of
00:09:27
customers and good for the air L as well
00:09:31
uh should the other airlines follow suit
00:09:33
I think some actually have proceeded
00:09:35
Delta but is it inevitable that the
00:09:37
others will because the best customers
00:09:40
May flock to where their rewards are
00:09:41
better even though they have a stake in
00:09:42
past miles in other airlines I really do
00:09:45
believe it makes sense for for the other
00:09:47
airlines to be doing the same kind of
00:09:49
thing again it took way too long for
00:09:51
Delta to step in this direction but I
00:09:54
think all the other big ones should be
00:09:55
doing the same thing of course when they
00:09:57
do uh the public and policy makers will
00:10:00
say oh it's just the airlines ganging up
00:10:02
on the poor customer I don't think
00:10:04
that's the case here certainly those
00:10:06
kinds of things are true in in other
00:10:08
settings when Airlines follow each other
00:10:11
around but but this was a change that
00:10:13
that should have happened long ago and
00:10:15
and and better uh that it happened later
00:10:18
than never and I think each of the other
00:10:20
a lines will will do something like this
00:10:22
I'm sure that they'll refine it in terms
00:10:23
of the the specific ways that they they
00:10:26
translate dollars into customer value
00:10:29
and the kind the way that they they Dole
00:10:30
out the benefits as a result so it's not
00:10:32
going to be the same program for
00:10:34
everybody but it's just a more sensible
00:10:36
way overall for them to be managing the
00:10:38
relationship with their customers so
00:10:40
generally speaking these customer uh
00:10:43
Centric ideas apply across most
00:10:45
Industries if they followed them in your
00:10:47
view they Industries would be better off
00:10:49
are there some Industries where they are
00:10:51
more valuable to impose than others
00:10:54
first I want to disagree with the
00:10:56
assertion I don't want to suggest that
00:10:58
that this idea of customer centricity
00:11:00
and and focusing on certain kinds of
00:11:02
customers and treating them differently
00:11:03
I don't think that is true for for all
00:11:06
Industries or for all companies and even
00:11:08
in an industry where it does make sense
00:11:10
and I think Airlines would be included
00:11:12
as well as retailing telecommunications
00:11:14
Financial Services on others uh that
00:11:16
doesn't mean that every firm needs to do
00:11:18
it in fact a healthy ecosystem would
00:11:21
consist of some firms that are doing the
00:11:23
customer Centric thing other firms that
00:11:25
are focusing on let's call it
00:11:27
performance superiority where the best
00:11:29
and others that are focusing on
00:11:31
operational excellence so it's not a
00:11:33
one-size fits-all strategy and in
00:11:35
particular in Industries where it's
00:11:38
really hard to observe what each
00:11:40
customer is doing and really hard to
00:11:42
Target them with individualized messages
00:11:44
and treatment and so on then it's it's
00:11:46
really hard to do the customer Centric
00:11:48
thing so in an industry say consumer
00:11:50
packaged Goods where it's it's hard for
00:11:53
a Proctor and Gamble to know what each
00:11:55
and every consumer is doing and and and
00:11:57
while they they spend a lot of time
00:11:59
trying to get General understandings of
00:12:01
What kinds of customers like certain
00:12:03
kinds of products and services it's hard
00:12:06
for them to tailor their offerings uh
00:12:08
quite as well as say a a a retailer can
00:12:13
could you give some examples of other
00:12:14
companies that uh or or industries that
00:12:17
would be taking a different approach so
00:12:20
uh we can just understand that a little
00:12:22
more
00:12:23
clearly many Industries are are formed
00:12:26
around a blockbuster mentality let's
00:12:29
come up with the next big thing let's
00:12:31
produce it in Great quantities let's
00:12:33
bring the cost down as we do so let's
00:12:36
get it out there to our customers as
00:12:37
efficiently as possible so so so many
00:12:40
companies so many Industries are are
00:12:42
born into that and it's hard for them to
00:12:44
move away from it even if it might be
00:12:46
the best thing for them to do so it's
00:12:48
interesting to look at industries that
00:12:50
again are are born into that block of
00:12:52
Buster mentality but are but are kind of
00:12:54
fighting against it these days such as
00:12:56
Pharmaceuticals there's a really great
00:12:58
example them it's clearly about
00:13:00
Blockbusters but some firms in that
00:13:02
industry are realizing that they need to
00:13:05
go in a slightly different direction
00:13:06
they need to focus a little bit more on
00:13:08
doing this customer Centric thing
00:13:10
instead of just trying to keep inventing
00:13:12
Blockbuster new drugs and and then
00:13:14
giving up on them when they go off
00:13:16
patent so that would be just one example
00:13:18
of an industry that that's struggling a
00:13:20
bit that's kind of breaking away in in
00:13:22
some ways from its traditional routs but
00:13:24
not abandoning them completely so what
00:13:26
about you personally will you be more
00:13:28
likely to fly say Delta as a result of
00:13:30
this kind of a program what's
00:13:32
interesting about the airline industry
00:13:33
is that there's so much uh uh local
00:13:36
virtual monopolies taking place so
00:13:39
living here in Philadelphia I'm largely
00:13:41
locked into US Airways and that doesn't
00:13:44
mean that I'm being held hostage by them
00:13:46
I could switch but because I am uh at
00:13:49
the highest tier for US Airways and I'm
00:13:51
one of those customers who gets treated
00:13:52
pretty well uh I don't really have a
00:13:54
reason to switch away from them I'm one
00:13:56
of the few people who will stand up and
00:13:57
say I like the way that US Airways
00:13:59
treats me now it could get even better
00:14:02
if they uh restructure their loyalty
00:14:04
program in the way that Delta has and
00:14:06
and while there's no specific evidence
00:14:08
of it I predict that they will do that
00:14:10
as well so so I have no reason to to
00:14:12
jump ship and and try other airlines out
00:14:15
although of course on occasion uh for
00:14:17
various reasons I I'm forced to do so
00:14:20
and as a as a as a student of the
00:14:22
marketing industry it it is very
00:14:24
interesting for me to see the way these
00:14:25
different programs play out the way
00:14:27
different kinds of customer service
00:14:29
policies play out I think I'm learning a
00:14:31
lot from these different kinds of
00:14:32
tactics and I'm encouraged by the fact
00:14:34
that different airlines are trying
00:14:36
different things I think uh the industry
00:14:38
will be better as a whole and again in
00:14:40
the long run I think it can can be okay
00:14:42
for customers too all right P thank you
00:14:44
very much for joining us today my
00:14:46
pleasure
00:14:50
[Music]
