How Important Is Being Fair To Customers?

Graham Hill
Guru
Member

Posted 25-Oct-2004 12:18 AM
At a recent CRM conference, the head of an airline loyalty programme said that in the toss-up over who got the last seat on an over-booked flight, that a young mid-tier loyalty programme member with a long future of flying in front of them should get the seat, in preference to an elite member at the end of their career with much less flying in front of them. This struck me—and much of the audience too—as somewhat unfair.

In effect, he said that a customer's past loyalty to the airline was practically irrelevant in the pursuit of future profits.

Do you think this is unfair?
Do you think this makes business sense for an airline?
Would you fly with an airline that treats its frequent flyers this way?
Is this a sign of the increasing unfairness of many companies, particularly towards existing customers?

Graham Hill
Independent CRM Consultant
CRMGuru Customer Value Management Guru

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Jean-Patrick (J.P.)
Member

Posted 25-Oct-2004 03:28 PM
Graham,

I have myself worked for airlines many years ... and I must say that I was quite puzzled and shocked by that statement. That market is a tough one and customer retention and loyalty means a lot to an airline.

I have tried to balance this out in my mind with the rational of future value vs. past value and could not come up with a definite answer because both are equally true. You do want to thank your valuable past customers business that made your airline what it is and you do want to encourage good potential valued customer to keep using your wings and spending money with you. With the risk of dissatisfing the older customer and demotivating the younger one who is striving to have the status of the older one.

So, I decided to simply and fairly answer your questions with the first impression that came to my head, as a customer of such services, and not as a CRM consultant.

Do you think this is unfair? YES
Do you think this makes business sense for an airline? YES
Would you fly with an airline that treats its frequent flyers this way? NO
Is this a sign of the increasing unfairness of many companies, particularly towards existing customers? I have no clue

By simply compiling those simple answers, I think I got my answer. This sucks! If it doesn't make sense at the simplistic level, then it's not going to make good business sense at all. Also, if I would ever find out what is the name of that company, I would not hesitate to switch. And that goes for any loyalty program that would be unfaithful to my old business.

But come to think of it ... wouldn't you just revert back to a normal status (tier) customer when the time came that you are no longer a high paying customer? Usualy you have to maintain a pretty high level of flying to be an elite member. So if you got the status, this means you are flying the miles.

Maybee the head of that airlines loyalty programme should read his customers handbook first.

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Dick Lee, CRMGuru Panelist
Advisory Board
Member
Picture of Dick Lee, CRMGuru Panelist

Posted 28-Oct-2004 10:58 AM
Graham—the stupidity of that airline exec's remark is breathtaking. He should have asked a different question: "How many direct reports (and even indirects) fly whatever airline the senior exec mandates versus how many fly the airline mandated by the younger person?" Bottom line, the answer is never as importasnt as asking the right question.

Dick Lee

Author Dick Lee is founder and principal of High-Yield Methods, a Twin Cities-based consulting firm specializing in helping clients achieve customer-centricity through CRM and proper alignment of process and technology. Dick is the developer of the Visual Workflow approach to business process improvement.

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aaahart
Member

Posted 28-Oct-2004 11:00 AM
If I were the younger customer in the anecdote, and I knew the boarding policy of the airline had put me in a seat ahead of the other customer, I would have many thoughts. First, I would be very happy to be on the flight. Second, I would be sorry about the other customer's disservice and third, I'd be looking for another airline to give my business to.
If I were the older of the two, I would do everything I could to fly with that airline's competitors and each time I did fly with the offending airline's competitor(s) I would send a letter to the offending airline's president with a letter of explanation and attach a copy of the fare receipt.

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Howard Schneider
Member

Posted 28-Oct-2004 05:35 PM
Anyone interested in some of the latest thinking about airline/travel loyalty programs, please e-mail me: howard@metzner-schneider.com, and I will be glad to share some material recently presented at the Frequent Travel Marketing Association conference.

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Paul Linnell
Member

Posted 28-Oct-2004 09:46 PM
Graham,

This reminds me of a similar conference I attended about 10 years ago.

Again, the speaker was an airline executive and this time the example he used was a frequent flier member vs. a "little old lady".

Both examples show that when you start basing business decisions on speculation instead of facts you can get it wrong just as often as you can get it right. Both examples are missing the potential "sphere of influence" of each customer. As Dick Lee has pointed out, the old executive may be able to influence the buying decision of all of his direct reports. My old lady may be the mother of the CEO of Megacorp and a good word from her may be worth millions to the airline.

Either way, most airline schemes do drop your level if you are not using their services year on year so in your example they were much better sticking to the facts—reward the elite member's loyalty to the airline with some loyalty to him.

Loyalty is a two-way-street.

Paul Linnell

"...helping organisations get bottom-line benefits by improving their service to customers."

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Jay Curry
Guru
Member

Posted 08-Nov-2004 12:51 PM
A friend of mine was vacationing in the Caribbean and met an elderly gentleman who was obsessed with bad-mouthing Airline X. The gentleman was chief HRM by a multinational responsible for the flying rules for thousands of employees, worth millions of dollars. He personally travelled all over the world and had a platinum card. Within six months after his retirement, his platinum card was cancelled and he was reduced to No No status—and he has dedicated his remaining years to trying to stop people from flying on that airline.

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Graham Hill
Guru
Member

Posted 09-Nov-2004 01:16 AM
Jay

An interesting posting.

When I worked in the Aviation CRM practice for PricewaterhouseCoopers, a colleague of mine who was the ex Head of HRM for a 'new generation' UK airline, told me the story of a business passenger being 'bumped' off an over-booked New York to London flight. The passenger turned out to be a Senior Director in one of the Wall St investment banks. My colleague told me that the airline lost ALL of the bank's extensive tran-atlantic custom almost immediately and that the unofficial, word-of-mouth embargo lasted for some months, until passengers started to trickle back. This cost the airline several millions of dollars lost profit.

The true story has a not so obvious twist...

Customers who weren't personally affected by the airline's bumping of the Senior Director decided of their own accord not to use the airline for their regular New York-Heathrow shuttle. For some of these passengers, that may have meant inconvenience at having to take a flight at a non-ideal time. For others it may have meant higher prices. Even taking these factors into account, the bank's senior staff collectively punished the airline for its shoddy treatment of one of their colleagues.

This is exactly the same behaviour as that identified by economists investigating how markets operate. People will and do punish others who treat them unfairly, or who treat people like them unfiarly, even if that means incurring additional costs themselves. In fact, without a shared sense of 'fair play' held by the majority of players, economist's reckon that modern market's probably couldn't function at all.

Food for thought when making snap judgements about how to treat customers, irrespective of their value.

Graham Hill
Independent CRM Consultant

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Simone Oltolina
Member
Picture of Simone Oltolina

Posted 09-Nov-2004 06:09 AM
A very interesting situation beacause it clearly shows the limits of Customer Values Management and Customer Equity. If customer equity is measured using historical data, with no regard for LTV, then the old, top-tier customer has the upper hand. He spent more in the past so he is more important and, hence, deserves better treatment. The seat goes to him.

if we use a bit of Life-time value modeling (and, being a student who's writing on this topic I'm starting to hate the very thought of it) it's the mid-tier customer with a looong future ahead of him that comes out winning.

There are a few "buts":

FIRST: I think secondary behaviour should be accounted in LTV calculations: what if the top-tier customer, even if he has little remaining value, can recommend the airline to 4, maybe 5 other rich customers? It might well turn out that with this little change, the value of the old customer for the firm increases.

SECOND: I hope the difference in terms of value between the old customer and the mid-tier one is very big because a small gap wouldn't mean much. LTV involves lot of conjectures (the time horizon, the frequency of purchase, the margin on each purchase, ecc.).... Is it really a reliable measure of customer value? I'm starting to wonder this....

I understand your concerns about fairness but really, I still don't think this is a strong priority for most companies (unless it can impact the "image" of the firm and I can't see this happening in the present situation.)

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Richard Metzner
Member

Posted 18-Nov-2004 03:41 PM
Isn't the real question "future value", not lifetime value? Future value would take into account referrals, word of mouth, and intrinsic value. Past value is interesting, and worth acknowledging, but does not generate an ROI in and of itself.www.metzner-schneider.com

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Alan Piesse
Member
Picture of Alan Piesse

Posted 18-Nov-2004 10:15 PM
Two issues spring to mind.

Has the automation of CRM got so bad that we have lost sight of the customer? Wasn't CRM the idea that we would gain better vision and more intelligent decisions about customers? I suppose on the plus side we at least are talking about being fair to customers. Some time ago we wouldn't have even known or been concerned about it.

And is CRM breeding a discipline of marketing by numbers and losing the ability to think for marketers. It seems similar to the software/hardware argument. Are we supplying the hardware (CRM systems) without the software (CRM thinking/training/culture) that goes with it.

Alan Piesse

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Graham Hill
Guru
Member

Posted 19-Nov-2004 05:20 AM
Simone & Richard

I hear your concerns over customer value measurement. And by implication, what you do with that information.

But as Richard suggests, this is not easy. The value of a customer is the summation of their forecastable future cash-flows, other not so forecastable future growth options and various forms of risk, all discounted back to current value. If the customer has a history of doing business with a company, they can make a reasonable forecast of their future cash-flows from their historical behaviour. But as Simone pointed out, there is an enormous amount of variability once you go out much further than 3-5 years.

Who would have guessed how successful Ryanair or Easyjet would be in Europe's fragmented airline industry? Or how much of an impact MVNOs would have on Europe's mobile telecoms industry. And these are just examples of new business models driving variability. Assumptions about these and other sources of variability need to be worked into the future growth options. Part of this variability might also include referrals, WOM and other hard to quantify factors too.

But this doesn't tackle the fundamental question raised at the begining of this thread.

How important is it to be perceived to be fair to customers? And are there any sanctions for companies who treat customers unfairly? For the Wall St executive, being treated unfairly carried a very high price for the airline involved. Yet for most of the banks, telcos and utilities, who acquire new customers with offers that could be perceived as unfair by long-standing customers, there is practically no sanction. Other than for hard done by customers to switch to another company making a better offer of course!

Do you have interesting examples of unfair treatment and what happened afterwards?

Graham Hill
Independent CRM Consultant

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Paul Strohm
Member
Picture of Paul Strohm

Posted 19-Nov-2004 06:32 AM
Since it is often impossible to know relational details (# of direct reports, relationship to Co. chairman)we are left to proactive business rules.

Had the airline exec replied, "Our segmentation modeling business rules made the decision for us. We know that overall, on average, the value of the new member over his or her lifetime justifies the decision (even if it means we lose the elite customer), who would we be to question the answer?

Intuitively it doesn't make sense, but if the numbers support the decision, the exec would have no real option but to follow the value
trail.

Unfortunately, the exec's blanket-statement response didn't explain that hard data supported his decision. As a result, he appears to be, at best, uninformed about the real intrinsic value of his FF members. With the facts at hand, we don't know if he is or not.

Bottom line, the elite member value should be so well known that he should have never been bumped. The up and comer (if he/she had elite level status possibilities) should have received the next best service response available. Better than a new-comer with typical projected lifetime value but not as "valuable" as the proven elite flyer.

When a person is identified as Bill Gates, he ought to be listed in the database—and treated—as more than simply another CEO.

However, until people stop focusing on the management part of CRM and start focusing on the relationship part, these gaffs will persist.

The technology and brain power exists to do it right. It's up to us to prove the value of doing so.

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gautam
Member
Picture of gautam

Posted 24-Nov-2004 06:10 AM
Paul—you've really simplified the issue at hand... I almost found my self agreeing with you, but then I had another thought.

Lets say that the numbers do show the older exec to have a lower LTV, why should that have any affect on the decision? IMHO, all that matters is was he was there first!

The real point is one of fair business practices. LTV is fine for offering a upgrades/ baggage priority etc. selectively.
In this case, I would think that the person who booked first should get the seat.. No matter what the LTVs say.

Or to put it another ways:

1. Would the airline be willing to document and advertise a policy that it would screw over a regular customer for a rich one? And if its a practice to wrong to advertise, isn't it wrong to implement it?

2. If this exec ran movie theaters, would he cancel tickets of regular patrons if favor of higher-LTV latecomers?

3. If the airplane is in trouble, would the hi-LTV passengers be put in front of the line for emergency exits?
As a captain of a sinking ship, would this exec holler "Man the lifeboats—High-LTV passengers first!" (rather than "Women and children first?")

I say, Shame on Him!! He is short-term and has a weak sense of ethics towards customers.

To answer Graham Hill's original questions:
1. It is absolutely unfair,
2. I would not fly such an airline,
3. It makes as much business sense as Ken Lay's practices made business sense for Enron! You can be fooled into thinking its sensible, but its basically unfair and ultimately unprofitable.

What do you think??

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All conservatism is based upon the idea that if you leave things alone you leave them as they are. But you do not. If you leave a thing alone you leave it to a torrent of change.—G. K. Chesterton

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Alan Piesse
Member
Picture of Alan Piesse

Posted 24-Nov-2004 09:44 AM
Graham

I specialise in customer retention within Mobile and Landline telecoms businesses. Here's a couple of example of treating or not treating customers fairly. Or perhaps more accurately not treating them at all.

In my last piece of work for a landline business the lack of customer retention was caused by poor ongoing customer management. Of those customers defecting 43% quoted poor customer management as the reason and in particular that the company exploited high contract prices after the end of a contract while the market rate dropped. As soon as the customers found they were paying "over the odds" they immediately switched to another supplier. 30% of this business's revenue was disappearing each year because they didn't treat customers "fairly".

I've also worked in Mobile where we discovered that customer churn in a particular segment was largely caused by those customers who joined on aggressive special deals. These customers defected either becasue they were "promiscuous" and sought the best new deal each year or that the package they were sold was inappropriate. Customers who stayed were those who were on the right tariff and believed they were. Once we took the step of offering to put customers onto the best available tariff, retention among high value customers increased dramatically. The big surprise was that most customers did not change their tariff but stayed on their old one and still their retention rate soared. So when we treated customers fairly we got a large increase in retention with ultimately very little cost and a big increase in margin.

Alan

Alan Piesse

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Cathy Allington
Member

Posted 25-Nov-2004 05:32 AM
I have watched this discussion progress with interest, and then with increasing anger.

Customers are people—just like you and I. We are all customers of so many different services and companies. Let's not forget this in all the talk of LTV and all of the other acronyms that abound. Sure, a company who has great data, and is truly customer focussed, will take, and rightly so, advantage of everything they collect!

But it's the small things that make a difference—it's feeling—if not knowing—that a company values your custom—hey—we all respond to that. Like walking into a restaurant where the owner/maitre'd recognises you—powerful stuff!!

If someone feels good about you, they will do business with you! In this case, the airline's policy did not allow for all the other benefits which flow from good service—their loss—a new recruit who was trying to make his mark by forgetting about the power of customers.

In Australia, James Hardie Industries is a great example of the power which "customers" have,

Let's not forget that in all this talk about the metrics of customer relationship management—and all the industry jargon that goes with it, that customers have no idea what we are talking about—they just react favourably when they know their custom is valued.

www.gyob.net.au

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Graham Hill
Guru
Member

Posted 02-Dec-2004 10:39 AM
Cathy is right. Customers are people. And they sometimes respond in ways which may suprise you until you remember that...Customers are people.

For example...

I am writing this from the Marriot Hotel in Lisbon, Portugal, where I have been speaking at the IIR Mobile Telecoms CRM conference.

I was looking at the room service menu the other evening and rang through and ordered something to eat. When it arrived some 30 minutes later, the bill was Euro 2.50 higher than expected. So I asked the waiter why that was. It´s the delivery charge he said and showed me the small print at the bottom of the room service menu. Sure enough, tucked away in the small print was a "delivery charge" for room service of Euro 2.50.

My meal was tasty and it was not expensive. But the hidden charge stuck in my throat the whole evening. I told the conference about it the following day as an example of how little unfair things can have large unintended consequences. And now I am telling you about it too.

Simply put, as far as I am concerned, the charge was unfair and was nothing but a crude way to collect (but not to earn) a wee bit of additional revenue from an unsuspecting customer. It was not the amount. The amount was irrelevant. It was the principle. Payment should be earned, not gratuitously charged as a hidden extra.

As you can well guess, I will not be staying at the Marriot the next time I am in Lisbon.

Graham Hill
Independent CRM Consultant

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akashmavle
Member

Posted 21-Dec-2004 04:06 AM
I agree with Graham. I think we are are putting more and more systems which are no doubt giving results in terms of efficiency and productivty, what every company should realise is that even after putting every possible system, customers are real people, they need to be handled tenderly....

Akash Mavle
www.solversa.com