In the accompanying blog I argued that Air NZ has just made changes to its trans-Tasman ticket pricing that have seriously undermined its customer loyalty program. I made the distinction between ‘reward’ and ‘loyalty’ programs and said that rewarding customers is always going to be difficult to sustain but that loyalty was easier.

There are three rules to a successful loyalty scheme. These are having your customers:

1. work towards a significant ‘perk’…
2. …that can be taken away if they stop being frequent customers.
3. The perk needs to be obscenely expensive to buy by itself.

So what does Air NZ have that fits the bill? When you receive your Gold status pack in the mail and peel off the wrapping of ’priority airport standby’ and waft away the marketing smoke of ‘rental car voucher’. You are left with two things that really matter – access to the lounges and upgrades.

Let’s start with lounges. Air New Zealand’s Auckland lounge is pretty swanky. The coffee is black ambrosia and the scrambled eggs are the finest slab of yellow creamy goodness you could wish for. As the sun streams in of a morning and you bump into a movie star in there on the way to Wellywood then it’s even a bit glamorous.

It’s also exclusive. It’s not possible to walk in off the street and into the lounge – you have to buy an annual pass that costs around $750. This is expensive – you can buy a lot of coffee and muffins, wifi access and chair massages and still be better off NOT in the lounge. I expect that very few people actually buy lounge access – if you aren’t a frequent traveller you don’t need it. If you are, then you earn it when you reach ‘Gold’ status. And you feel quite chuffed when you do because you know that it’s worth a shed load of money. Those eggs taste even better.

But even the lure of bumping into Angelina Jolie in the lounge is not enough to guarantee that I will pay any price to fly with Air NZ. Let’s say the Air NZ ticket is about $50 more, which it often is. I’m not going to consume that much in the lounge so I might as well fly on the cheaper option. But hang on, I don’t know how many flights I’m going to be doing this year trans-Tasman (and who does) so Sod’s Law means that if I don’t fly Air NZ this time I’ll end up being 1 flight short of earning or retaining Gold status and that $50 will actually cost me $750. So bugger it, I’ll pay the premium.

In my case I actually did pay for lounge access at the start of this year, so Air NZ get the perfect loyalty trifecta – I’ve paid extra for lounge access causing me to pay extra for a ticket and while being locked into the airline for my next over priced airfare. This is a loyalty program’s finest hour.

So how did Air New Zealand stuff it up? Easy – start selling affordable access to the lounge.

At the end of last year Air NZ launched its new ‘seats to suit’ trans-Tasman tickets. Where they invite you to buy back all those ‘extras’ that were once included, like movies, luggage, in-flight food and entertainment. They could have stopped there but instead they went one step further and in their ‘Works Deluxe’ product for just another $80 they allow you to buy access to the lounge for a single flight.

So now my next air fare purchasing decision has become much easier. Could I shower myself in coffees, eggs, pastries, and massages and still pay less than the Air NZ premium? If so then fly on the other airline. I don’t have to worry about losing lounge access – if I ever feel nostalgic about the eggs and Angeline Jolie then I can just buy my way back into the lounge.

Air NZ could save the situation with upgrades, the other highly desirable and expensive perk, but they don’t. On the A320, which dominates trans-Tasman flying, there is nowhere to upgrade to, and if you are unlucky enough to reach Gold Elite frequent flyer status they actually, and I’m not making this up, take your unused upgrades away. It’s as if Air NZ is almost daring us to fly on someone else, so will you?

Probably not. Despite the resentment that comes from Air NZ screwing the pooch on loyalty they have a trump card – their service.

The annoying thing about the Air New Zealand flying experience is that whether you are at the front of the plane or the back, service is pretty good compared to the competition. Actually it’s outstanding.It doesn’t take long on a flight on a US domestic carrier to realise how good we have it. I still have nightmares about the passive aggressive grandma ramming the drink’s trolley into my leg and demanding ‘Would I care for a beverage?’ Whereas Air New Zealand call centre staff (unlike Qantas in Australia) actually answer the phone, the check-in people don’t treat you as if you have the pox, and the hosties are genuinely friendly, personable and pleasant.

A friend of mine, a CEO and frequent flyer long gave up looking at other airlines. She says that her air fare shopping just involves trying to get the best seat on Air NZ. Most people who fly with Air NZ a lot feel the same way. I know I do.

So here is what I think the lessons are if you are in the difficult business of trying to attract and retain customers in a highly competitive industry;

‘Reward programs’, giving away freebies to differentiate your product, are hard to sustain. They are expensive and if your competition can match them then they can lose their value.

Loyalty programs – preventing churn by giving the frequent customer access to a better and premium experience appears to be a much better way to go. Just don’t change your mind and make that experience affordable. Loyalty programs are a promise, a contract. So is a brand. Once you start messing with them then you are messing with your brand.

Better yet differentiate on something else, like service. If you have a unique and appealing product/service offering then you don’t need to do the reward and loyalty tap dance quite so frantically.

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