Development of Loyalty Program for Indigo - A Low Cost Indian Airline: Consumer Behavior

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Application Exercise as part of the Consumer Behavior course at IIM Bangalore.

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Development of Loyalty Program for Indigo - A Low Cost Indian Airline: Consumer Behavior

  1. 1. Detailed Report of the Application Exercise on DEVELOPMENT OF LOYALTY PROGRAM FOR INDIGO – A LOW COST INDIAN AIRLINE Submitted to Prof. S. Ramesh Kumar by Group 3 – Term III PGP 2012 1211038 1211110 1211195 1211260 1211314 Mishaal Kumar Sarawgi Latngenhun Nongsiej Romil Harish Lodaya Gaurav Bhartia Vishrut Shukla in the partial completion of the course CONSUMER BEHAVIOUR (February 2013)
  2. 2. 1. Industry Overview "There was a time when people at the airports admired us enviously. Today, they pity us." These words by a senior pilot at Air India in a way sums up the current health of the Indian aviation Industry. The ninth-largest civil aviation market in the world is grappling with issues like high operational costs, heavy debts, inadequate infrastructure and poor management and rising fuel prices. The industry which saw an estimated loss of $3.5b in the last three years (2009-11) added more woes to the already distressed state of affairs by recording a loss of $2 billion for the year ended March 2012. Of the lot, the worst-affected is Kingfisher Airlines. As on date, Kingfisher has accumulated losses of 80 billion rupees and is under a debt burden of over INR 75 billion. The Indian aviation sector has historically been moving at a snail’s pace due to high costs of ATFs (Air Turbine Fuel), excessive government regulations and taxations etc. However, over the last decade the sector has shown explosive growth owing to the structural reforms in airline sector, airport modernizations, entry of private players. This has been ably supported by the burgeoning middle class, high disposable incomes. In passenger traffic terms, the aviation industry has been growing at a CAGR of 16% over the past decade. It is estimated that the domestic passenger traffic will reach 209 million and international passenger traffic will touch 60 million by 2016. Despite the encouraging figures, air travel penetration in India still remains among the lowest in the world. Air travel penetration in India stands at 0.2 trips per person per year (the United States has a corresponding figure of 2.0 trips per person per year) which is a clear indication of the growth potential that this sector carries. The Indian airlines industry had total revenues of $14.2 billion in 201. It has been growing at a CAGR of 8.5% between 2007 and 2011. The forecasts for the industry are also bright with an anticipated CAGR of 18.1% for the five-year period 2011 - 2016, which is expected to drive the industry to a value of $32.7 billion by the end of 2016. The major airline operators include Air India, Jet Airways, Kingfisher, IndiGo, SpiceJet and GoAir. IndiGo leads the charts with a markets share of 27.3% followed by Air India (20.7%) while SpiceJet holds third position with a share of 19.5% (data for Nov 2012). Jet Airways and JetLite have a consolidated market share of 25.2% (18.3% and 6.9% respectively). Kingfisher which recently had to shut down its operations owing to huge debts, operational inefficiencies did indirectly benefit some low-cost carriers, such as IndiGo and SpiceJet, as it led to consumers moving to these airlines. But high fuel prices, coupled with intense domestic competition, unfavourable foreign exchange environment, have hurt the financial performance of airlines. Majority of the airlines have been running into losses. The fiscal 2011-12 saw most of the Indian airlines running into losses except IndiGo (127.8 Cr in profits). The three BSE-listed airlines SpiceJet, Jet Airways and Kingfisher Airlines had a combined net loss of INR 4,169.88 crore in 2011-12. Major Developments in the Industry: In a bid to boost the ailing airline industry, the government recently introduced a series of measures such as allowing foreign investors (carriers) to make investments (up to 49%) in Indian airline operators, permitting airlines to directly import aviation turbine fuel and lifting the freeze on international expansion by privately owned airlines. These measures are expected to open up avenues of greater access to capital, global connectivity, technology and best practices to the Indian carriers. For the foreign carriers the recent FDI developments will not only provide entry into one of the fastest growing aviation sectors globally but also an opportunity to establish India as their hub for connections between US/Europe and South-East Asian countries. ATF Page No. 2
  3. 3. costs contribute 30-45% of overall operating costs for Full Service Carrier’s (FSC’s) & 40-55% for Low cost carriers (LCCs). High central and state taxes translate into a 60-70% higher ATF prices in India when compared to the global average. The move to directly import ATF has come as a breather to most of the airline operators. Low Cost Carriers (LCC): The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline - Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet, IndiGo, GoAir and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result, the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines. Together, the low cost carriers held a market share of more than 58% (figure 1). Some of the LCC strategies include a) single model of aircraft; b) Operate on secondary airport; c) Adoption of point-to-point model; d) Single class in flights; e) No-frills; f) Less number of employees per aircraft. Trends in the Industry  Consolidation in the aviation sector: It all started with the Jet-Sahara merger followed by Kingfisher acquiring Air Deccan. From more than 10 players in the last decade, around 5 key players today are remaining in the industry.  Growing middle class, rise in number of consumers opting for airline as a mode of travel  The growth and success of the LCC carriers clearly shows importance of price to consumers  Growing capacity of fleet size by players without clear plans to retire old planes  Entrance of foreign players like Air Asia, Tiger Airways in limited sectors  Growing number of airlines are moving to lease based model instead of owning aircrafts  Oil prices (ATF) are not expected to fall in the near future  Deals: Jet is in talks with Etihad Airways for offloading a minority equity stake. Frequent Flier Programs in India: Of the various existing airline operators in India only Air India, King Fisher, Jet Airways have presently a fully functional loyalty program. As can be seen, none of the LCC’s has a FFP in place. Most of the FFP programs in India are majorly targeted towards business travellers and are run as profit centres instead of focusing themselves as cost centres and means to capture loyalty of the customers. FFP and Loyalty Programs are still at a nascent stage in the Indian airlines sector as compared to similar programs in the developed nations like US, UK. There is a lack of awareness among the majority of the consumers regarding the benefits of such programs. Airline Ticket Purchase on a Low Cost Carrier – A Low Involvement Decision: The air travel has been traditionally considered a high-involvement purchase as it can be said that based on the five antecedent conditions of involvement—perceived importance of the product or the situation, perceived sign value, perceived pleasure value, and perceived risk this activity would be rated high. However, with the emerging of the low cost carrier the involvement levels are suggested to be low which can be derived the explanation of the concept involvement by Peter & Olson as “perceptions of importance or personal relevance for an object, event or activity.” “Involvement is a motivational state that energizes and directs consumers‟ cognitive processes and behaviours as they make decisions.” (Peter, J. P. & Olson, J. C., 1996, 101) For example, in low cost carrier, the product information and experience of what to expect and in what time of a year, a consumer does not have to consider too long, and finding information is easy, therefore the customer is lowly involved in the purchase. A detailed comparison of all major existing brands is provided in exhibit 1 in the appendix. Page No. 3
  4. 4. 2. Dominant Brands and Their Strategies The following analysis covers features of the brands as well as their positioning. A profile of the consumers for each brand was also identified. For lack of space, elaborate features of every loyalty program are not mentioned in this section. Only Air India’s FFP attributes are specified here. Air India Brand Positioning Brand Slogan Brand Elements Upper-class, quality, stylish and premium air carrier connecting passengers with the culture, tradition and flavour of India. “Your Palace in the Sky” Mascot: The Maharajah, symbolizing graciousness and high living through his outsized moustache, the striped turban and his aquiline nose. A case of classical conditioning, the Maharajah (UCS) signifies royalty and upper class associations with the brand (CS) and elicits the already known response of royalty against kings (Maharajahs) towards the Air India brand as well. Logo: Red coloured flying swan with the `Konark Chakra' in orange, placed inside it. (colour symbolism: energy, excitement, passion, powerful) Brand Upscale, premium, Indian pride (ethnocentrism derived from the mascot, link to the Associations Indian heritage) Target Clients High-class business travellers, heritage lovers, public sector executives, politicians Brand’s Media Air India’s print ads from a long time use the classic concept of cosmetic variation Comms. by depicting the Maharajah in various modern and traditional avatars. Ads announcing new international flights in brand new aircrafts give culturally-relevant affective cues such as “Balle Balle” as well as cognitive information such as aircraft features and benefits etc. The ads ranging from “Land in the fashion capital in style” (Delhi-Paris) to “Capital Connection” (Delhi-Washington) make use of substantive variations to promote different destinations the carrier has recently added to its flight service. “Small Journey, Big Comfort” visual ad with the Maharajah riding an elephant is directed at the right-side of the brain (visual component) to induce cultural associations and strong king-like self-concept while learning. Loyalty Air India’s “Flying Returns” (distributed learning, not a one-time benefit) Program  FFP member earns mileage points depending upon the travel destination and distance travelled on Air India, code share flights, Air India partner’s flights, such as Lufthansa, Singapore Airlines and while availing services of its global program partners in the travel, retail, lifestyle, telecom, car rental etc.  Miles can be redeemed with Air India or any of its partner airlines as well as for free travel, goods and benefits, class upgrades and lounge facilities  Mileage Accrual for Redemption: o Base Miles: Based on distance between origin and destination. o Cabin Bonus Miles: Incorporates class of booking factor i.e. the percentage of base miles for First, Business and Economy classes o Tier Bonus Miles: Incorporates Tier membership factor. o Partner Bonus Miles: Earned for activities on partner airlines.  Validity of Miles: Redemption during the calendar year of accrual and three subsequent calendar years, or else miles will lapse.  Validity Extension: Miles extension for a period of upto 1 year for fee.  Program Tiers: If the member has accrued prescribed number of status miles to retain their status existing tier validity gets renewed. o Base Tier: Default at enrolment o Silver Edge Club: 25000 Status Miles + Bonus of 10% * Base o Golden Edge Club: 50,000 Status Miles + Bonus of 20% * Base Page No. 4
  5. 5.  o Maharajah Club: 75000 Status Miles + Bonus of 30% * Base Other Benefits: incentives for achieving instrumental learning. o Personalized web-login to access the perpetrator’s FFP features o Tele check-in (valid on domestic) (relationship marketing) o Complementary upgrade vouchers to business or first class o Lounge access for members travelling by any class, guest access o Additional baggage allowance based on Flying Returns Club o Priority check-in counters, baggage tagging and priority standby Jet Airways Brand Positioning Brand Slogan Brand Elements Reliable, comfortable and efficient airline that sets quality standards via its premium service offerings and offers the most relaxed flying experience. “The Joy of Flying” Livery: Dark blue, gold-accented colour scheme with yellow and gold ribbons (colour symbolism: happiness, warmth and joy); Jet also launched Disney-branded and Nokia-branded aircraft in 2012 (co-branding) Logo: “Flying Sun” (sunshine, joy) / “Foetus Image” (caring like a mother) Substantiators In- flight entertainment, seat pitch in economy, fully flat beds in business and first class, award winning in-flight crew, prime time slots and lounges at major airports Brand Best-in-class facilities, international standard, convenience, reliability, Associations contemporary, world-class, premium, aspirational, caring, business travel Target Clients High end business and leisure travellers. Brand’s Media Jet’s print advertisements featuring exotic destinations give out the feel of a Comms. sophisticated, premium and upscale airline. The ‘India just got closer’ advertisement at New York airport which shows the Lady Liberty donning a ‘Bindi’ focuses on ethnocentrism, nostalgia of travellers. The ‘Join your family for breakfast’ ad (launching flights to Mangalore) employs the joy and love of age-old Indian ritual of eating together (psychological aspect of classical conditioning). Loyalty “Jet Privilege” program Program  Literary symbolism: Name shows status, feeling of being valued, honour  Multiple tiers: Different benefits very similar to Air India: Blue, Blue Plus, Silver, Gold and Platinum. The tiers differ in terms of tele check-in, delayed reservations, cancellations, pre-reserving of seats, check-in counters at airport, additional baggage allowance and limited lounge access. IndiGo Airlines Brand Positioning Brand Slogan Brand Elements A brand that provides an on-time performance at affordable prices, all in all, a courteous, hassle free flying experience. “Go IndiGo” Livery: Painted in blue IndiGo and white (colour symbolism: blue signifies trust, sincerity, intelligence, softness and loyalty; whereas white is associated with light, goodness, innocence and purity) Logo: 20 dots in the shape of aircraft (simplistic, on-the-dot performance) Substantiators Young, smart and passionate workforce who multi-task, technology support, brandnew Airbus A320s Brand Cool (India’s coolest airline), made in India (ethnocentrism ‘Indi’), trustworthy, like Associations the customer (self-image), operational excellence (Refer to Appendix) Target Clients Built for people with things to do and places to go - business, leisure and first time flyers looking for quality flying experience at affordable prices Brand’s Media The airline undertakes witty and smart advertising in line with its ‘cool’ brand Comms. image. The ‘Sleep with your wife’ campaign announcing same day return flights to all metros makes use of subtle, affective means to communicate the message. Page No. 5
  6. 6. ‘Loser’ series of print ads use fear as a means to make the consumers realise the lowest-cost promise of IndiGo. When IndiGo launched international services, it was advertised using the ‘We’re going International’ musical runway campaign to improve retention in the consumers’ emotional and metaphorical minds. GoAir Brand Positioning Brand Slogan Substantiators Brand Associations Target Clients Loyalty Programme ‘Smart People's Airline', offering passengers a consistent, quality-assured and timeefficient service through 'pocket-friendly' fares. “Fly Smart” Focus on technology-driven efficiency (tie-up with Radixx International for automated aviation solutions), Punctual, affordable, convenience Cost conscious lower middle class/middle class consumers on business and leisure “GoClub” Loyalty Programme which lets flyers earn reward points which can be redeemed to gain to GoAir Lounges in prominent metros, voucher codes to be redeemed while booking flight, business upgrades with GoBusiness with extra leg space, free in-flight meals and extra baggage allowance with business class ticket. SpiceJet Brand Positioning Brand Slogan Brand Elements and Substantiators A low-cost, no-frills, and hot Indian carrier which promises not just flying for everyone, but flying smart guaranteeing value for money “Flying for everyone” ‘Spice’ signifies Indian culture, heritage (psychological aspect of classical conditioning) and a positive sensation (literary symbolism); lowercase typography makes the brand approachable and youthful, italics denote efficiency, dynamism; red, orange are warm colours: bold and attractive, derived from chilli and turmeric. Brand Smart, energetic, vibrant, youthful, flexible, dynamic, warm, inviting, tech-savvy, Associations reliable, modern, emotional connect, freedom, ‘masti’ (fun), Indian, approachable Target Clients Cost conscious corporate, leisure, business, couch potatoes and students Brand’s Media The print ads feature people flying with fabric wings with SpiceJet imprinted on Comms. them with the caption ‘the power to fly’ making use of the affective aspects of brand communication symbolising freedom. Another campaign employs classical conditioning and compares freedom of flying for everyone which the brand promises (CS) with basic rights of freedom of speech and resident (UCS) Kingfisher Airlines Brand India’s first full frills – true value carrier and the only five-star ‘fun liner’ airline Positioning which provides the best-in-class ultimate experience at 30,000 feet in the skies Brand Slogan “Fly the Good Times” Brand Uses red livery for boldness, sensuality; Promoter Vijay Mallya - Indian celebrity Elements and business tycoon helps in classical conditioning of the brand; Uses known name of Substantiators Kingfisher in a new category; Kingfisher ‘First’ Class and ‘King Club’ (loyalty program name) uses literary symbolism for learning; Brand Good times, fun, carnival, youthful, lively, king, relax, high class, comfort, Associations premium, sensuality, international standards Target Clients Upper SEC, young, follow international trends, modern, trendy, upwardly mobile Loyalty Kingfisher’s King Club’ members earn King Miles every time they fly across four Program levels in the scheme: Red, Silver, Gold and Platinum. Members enjoy access to the Kingfisher Lounge, priority check-in, excess baggage, bonus miles, and upgrade. Page No. 6
  7. 7. 3. Issues Identified and Their Importance Based on the customer expectations, brand associations of various firms in the airlines industry and the existing loyalty programs, the following issues were identified with respect to the given context: Issue 1 All prevalent frequent flier loyalty programs are highly complex in their reward structure. What is the nature of the complexity and what adverse impact does it have on the purchase behaviour? Based on Industry research and primary research conducted with frequent flyers, it was found that all the loyalty programs were thought to be structured in a very complex manner, with large associated network partners, limited clarity on how points will be redeemed/accumulated on these partners and a very composite reward structure which is difficult to decipher on the part of the consumer. From a learning construct point of view, this perceived complexity in the program has implications on the Goal Attainment - Purchase Behaviour linkage. Most loyalty programs are based on the fundamental learning principle of “Instrumental Conditioning” and the complexity of the reward plan is hindering the process of gratification by inhibiting the realisation of perceived benefit after purchase. Understanding the distinction between the impact of primary and secondary reinforcers on the learning process and its application in this context will help us find answers to tackle this issue. Issue 2 There appears to be loyalty towards the program but that does not necessarily get translated to loyalty towards the brand or the product. This is a major issue that was found when conducting secondary research on the Indian Airline Industry. As already mentioned in the introduction, the market appears to be polygamous in nature with people holding multiple frequent flyer cards and being loyal to different airlines at different points in time based on a variety of factors. So the loyalty is towards the deal being offered and not the product as such, which should ideally be the main purpose of running a loyalty program. Most of the programs are now being run as a profit centre and hence the deliverable of the manger is linked to the program only and is not getting translated to the actual brand and product loyalty. Behavioural learning theory provides some answers on how this issue can be tackled primarily through successive approximations through shaping. The exact conceptual framework and mechanism of implementation are discussed in subsequent portion of the report. Page No. 7
  8. 8. Issue 3 There is an inherent disconnect between the desirable and attainable rewards in all airline loyalty programs. Why is it bad for the loyalty program sponsor and how can it be rectified? One common theme across all loyalty programs currently deployed in the market is the inherent disconnect between desirable and attainable rewards. The programs offer a lot of incentives that the customer desires but the path to attain them is very long and arduous which leads to a sense of frustration on the part of the consumer. His inability to reach the goal reduces his ‘effort’ level. Effort in this context is defined as the actual “purchase behaviour”. In order to entice customers to the loyalty program, the airline tires to communicate all the desirable rewards and incentives that come as part of the program. But, the general perception among frequent fliers (as interpreted from in-depth interviews of Jet Privilege and King Club members) is that beyond the initial stages of the program, all the other reward structures are so designed that they seem to be unachievable. Realization of intermediate goals does not spur an individual to increase his effort towards the next higher goal. This provides for the possibility of extinction creeping in which is detrimental to developing brand loyalty. Issue 4 The airlines loyalty programs have a tendency to demote consumers to a lower tier if they have not flown with the airline in a pre-specified duration of time. Does it have an effect on the consumer’s loyalty towards the brand? How can the consumer learning theory help address this situation? If a costumer does not fly with the airline for a pre-defined period of time, the airline downgrades the customer to a lower category level. The airlines follow this practice to reduce their cost of servicing the consumer. This is in sync with the fact that most of these programs are being run as profit centres. But this exercise does not go down well with customers who have shown loyalty towards the airline and they feel let down. In this stage, costumers are more inclined to respond to competing offers and promotions and defect towards other airlines. If the other airline’s service attribute is able to reinforce this purchase behaviour then there is likelihood repeat purchase and reduction in loyalty towards the original airline. Once you reach a particular level in the program hierarchy, it is natural human tendency to feel upset with the airline for being degraded to a lower level which affects the long term relation between the two parties. Page No. 8
  9. 9. 4. Summary of the Articles Journal Article 1 The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention, Ran Kivetz, Oleg Urminsky and Yuhuang Zheng, Journal of Marketing search (ISSN : 0022-2437) The article uses the basic research done by behaviourist Clark Hull in 1932 on Goal Gradient hypothesis. Hull (1934) found that rats in a straight alley run progressively faster as they approach closer to the food from the starting point. The same hypothesis is then extended to human and subsequently consumer behaviour. The paper addresses the theoretical and practical implications for inter-temporal consumer behaviour in reward programs and other motivational systems. The paper validates the above hypothesis in the context of real reward programs tested on customers in a Café. 2 sets of customers were given a 10-stamp card and 12-stamp card (with 2 bonus stamps). Thus both the customers would get a free coffee after 10 coffee purchases. For both the sets of customers the inter purchase time was measured and was found proportional to the goal distance dt=(r-nt)/r where, r is the perceived total effort and nt is the amount of requirements already fulfilled. The result suggested that customers who exhibited enhanced acceleration possess a strong motivation to earn free rewards. Paper posits that the motivation to earn free rewards is related to the steepness of the goal gradient and the individual differences would give an indication to customer retention. Customers who accelerate quickly towards their first reward are more likely to reengage in the program for the second reward. Another key observation which the paper illustrates using the experiment is that of post-reward resetting. Here the customers who accelerated toward their first reward exhibited a deceleration in their efforts when they began their effort towards the second reward. Though, it accelerated once again later as the customer reached closer to the second reward. The paper builds on the Goal gradient hypothesis to state that customers accelerate their purchase closer to the goals by bringing in the concepts of perceived and real progress. As per the above model the purchase activity depends not only on the actual goal distance to be covered (r-nt: Additional effort to be spent) but also on the original goal distance (r: original effort required). Paper states that ceteris paribus the goal motivation is driven by perceived rather than real progress. This perceived progress can be created using an illusory progress. This illusory progress can be created by increasing the perceived total effort r and nt by the same quantity. Few marketing implications of the goal gradient theory which the paper cites are as follows: 1. On attaining the reward customers exhibited a drop in activity and were likely to defect. Thus it becomes important to communicate and motivate the customers immediately after they earn the rewards. 2. The goal gradient effect has important implications for price sensitivity and competition. The own and cross price elasticity is lower for reward program members who are closer to the goals. The customers would then be willing to pay a premium price or forgo convenience in order to achieve the program goal. Page No. 9
  10. 10. Journal Article 2 Behavioural Learning Theory: Its Relevance to Marketing and Promotions, Rothschild, Micheal L. Journal of Marketing (pre-1986); Spring 1981 The central concept of behavioural learning theory states that behaviour that is positively reinforced is more likely to recur than non-reinforced behaviour. According to Nord and Peter, behavioural learning occurs when response behaviour precipitates the appearance of a stimulus. A transaction occurs when purchase behaviour takes place and a product is received by consumer. Behavioural learning primarily concerned with the relationship between product attribute which must deliver the perceived benefits, the purchase behaviour which is reinforce through the product attribute and future purchase behaviour. The five components of behavioural learning paradigm that are relevant to marketing are shaping, extinction, reinforcement schedules, immediate versus delayed reinforcement, primary versus secondary reinforcement. Shaping Procedure: Shaping is a multi-step process contrary to the one-step process example given by Nord and Peter. It is an essential process in deriving new and complex behaviour because behaviour cannot be rewarded unless it first occurs. The final complex sought behaviour would take a long time to occur if it is the only behaviour that can be rewarded. Instead, if simpler existing behaviours are rewarded complex pattern evolve and then these can be rewarded. Therefore, shaping process occur by method of successive approximation. After the approximate responses have been evoked and firmly established, the arbitrary stimulus supports are faded – gradually withdrawn; and control is transferred to stimuli that act as main elicitors. Extinction: It is the removal of a correlation between response and reward, generally done by removal of reward or introduction of reward not correlated with response. It may result from use of improper shaping techniques or over reliance on incentives that are later removed. Reinforcement Schedules and Locus of Power: Appropriate behaviour can be reinforced on a continuous basis or on a variety of intermittent schedule. Intermittent scheduling works only in situation of imbalance of power whereas in competitive markets continuous reinforcement is required as switching cost for consumers may be low. Immediate vs Delayed Reinforcers: Delayed reinforcement inhibits learning and will lead to lower probability of future occurrence; also, irrelevant behaviours will occur between desired behaviour and reinforcement. Thus, immediate reinforcers are more valuable while acquiring behaviour. Primary versus Secondary Reinforcers: Primary reinforcers have intrinsic utility (the product) whereas secondary reinforcers have no such utility and must be converted; they take on value over time as consumers learn to convert them as primary reinforcers. Behavioural learning theory is a sufficient model for dealing with most low-involvement purchase situations. For low-involvement products behaviour needs to be shaped slowly over time as any behaviour would be due to the highly involved incentives (if financial incentives is given for purchase) and when incentives is removed behaviour is likely to be extinguished. In low involvement cases, behavioural learning predicts greater behaviour changes through shaping and therefore more incentives. In high involvement situation, shaping is used to avoid early extinction. Page No. 10
  11. 11. 5. Relevance of the Selected Articles The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention, Ran Kivetz, Oleg Urminsky and Yuhuang Zheng, Journal of Marketing search (ISSN : 0022-2437) Researches in psychophysics and judgment and decision making have shown that perception and preference are sensitive to relative rather than absolute dimension. The sensitivity to relative and reference values suggests that consumers spontaneously consider their distance to a goal, incorporating the total distance as a reference point which leads to an evaluation of relative goal distance. The goalgradient hypothesis states that tendency to approach a goal increases with proximity to the goal. Also, theories about human motivation and cognition support the relevance of the goal-gradient hypothesis for human psychology of rewards. Looking at the existing programs, the design of these programs suggests consideration of procedural learning of the consumers such that the goal distance is increased successively. Understanding this psychology will help tackle the issue of disconnect between desirable and attainable rewards in all loyalty programs and the demotion of loyal customers to lower level due to non-usage while designing loyalty program. Loyalty programs are designed as recursive goals program as frequent reinforcement is required to maintain and enhance motivation of consumers to continue using the product/brand in the context of low involvement purchase such as a low fare air ticket. Managing the reinforcement schedule is one of the factors that will determine the success of the program; a better understanding of achievement motivation and willingness to invest effort on the part of the consumers will help us determine when and how reinforcement would have to be given. An effort-reward structure applies to many decision context and life domains, including consumer loyalty programs, employee incentives system, etc. The research paper tests for behavioural (approach) goal gradients and their various operationalizations (timing, quantity, and persistence of effort). The first hypothesis tested in the article was to try to prove that consumers accelerate their efforts to earn a reward as the psychological distance to the reward goal decreases. The test results validated the theory of goal gradients hypothesis and also showed evidence of post-reward resetting; clearly verifying that motivation to expend effort depends on goal distance. The findings of this paper provide an understanding of effort at various stages of the goal achievement cycle; necessary to be able to design reward structures so that there is no extinction. The second hypothesis the article tested was that the illusionary progress towards the reward goal motivates consumers to accelerate their efforts to earn the rewards. The illusionary goal progress effect was observed in the respondents and the alternative explanation of sunk cost effect for this behaviour was not validated. The psychological distance , as defined by the proportion of original distance remaining to the goal, to the reward influences motivation; illusionary progress enhance goal motivation and consequently lead to increased efforts to earn the reward. The relationship between goal gradient and retention helped find that just after reward attainment, customer exhibit a drop in activity and were also most likely to defect. The amount of resetting of effort would depend on the self-learning that consumers have acquired about the brand and product and how intrinsic the benefits such that the incentives gradually decline to be the prime motivation for repeat purchase. Page No. 11
  12. 12. Behavioural Learning Theory: Its Relevance to Marketing and Promotions, Rothschild, Micheal L. Journal of Marketing (pre-1986); Spring 1981 Almost all loyalty programs are based on the fundamental principle of stimulus-response learning mechanism. The primary aim is to reinforce every behaviour with a reinforcing stimulus to drive repeat purchase leading to what is called “behaviour modification”. Also, from the point of view of a frequent flier, purchase of an airline ticket is a low involvement activity. Involvement is a “motivational state that energizes and directs consumer’s cognitive processes and behaviours as they make a decision”. Hence, a person who is present in the airline industry will have more information and more idea on what to expect at what time of the year leading to a lowinvolvement decision for him/her. It is crucial to take cognizance of this, as the behavioural learning concept is mostly applicable to low-involvement conditions. Loyalty formation as indicated by various texts publishes over the years involves three basic mechanisms: status, habit and relation. This is essentially a step by step process with relational loyalty being the strongest and which should be the endeavour of all programs. The issue of complexity of the loyalty program and disconnect between program loyalty and brand loyalty has its roots in the way reinforcements are provided to the consumer to entice reengagement. This paper takes a much expanded view of behavioural learning and its associated concepts with a nuanced interpretation of “shaping procedure”, one of the key constructs in behaviour formation. In a recursive award kind of context as in the case of reward programs, this concept talks about how the reinforcements should be structured so that the behaviour is towards the product and not the reinforcement. This helps us solve the issue of consumers being loyal to the program benefits and not the product as such. Shaping by successive approximation can lead us to the stage of habitual loyalty, step closer to the eventual goal of relational loyalty. The discussion in the paper on the efficacy of primary and secondary reinforcers and delayed and immediate rewards gives us an idea as to the kind of incentives that work in the behavioral learning low involvement setting. This concept can be used to streamline the loyalty program and rid it of its complexities. When the theoretical constructs from the paper were applied to solve the issues and incorporate the changes in the proposed plan for Indigo, the results were found to be in sync with the brand positioning of the airline, making it appropriate to be used in this context. Page No. 12
  13. 13. 6. Application of Articles for Addressing Issues Loyalty program in a consumer learning perspective is defined as “Any institutionalized incentive system that attempts to enhance consumer’s consumption behaviour over time beyond the direct effects of changes to price or the core offering”. Loyalty programs create loyalty towards the brand on the basis of three mechanisms: a) Status Loyalty b) Habitual Loyalty c) Relationship Loyalty according to Henderson C M et al (2011). The ultimate aim of any loyalty program should be to create relationship loyalty which will lead to brand equity. We use the concept of multi-step shaping as explained by the above paper on behavioural learning theory. On introduction of the new loyalty program a free ticket(s) would be provided by invitation to set of customers who have been travelling by Indigo frequently (similar to Gmail). This would create a status based loyalty amongst the flyers enrolled in the program. The next step would involve creating habitual loyalty among these set of customers. The key here is to ensure that there is no instrumental contingency between reward and behaviour. This is achieved by providing progressively decreasing discounts at suitable inter-purchase interval. Because of such a program ultimately re-purchase would be driven by the product related attributes rather than the commercial stimulus of discounts. This habit building allows creation of advantageous memory structures leading to favourable brand associations further reinforcing Indigo’s positioning. This enables us to build loyalty towards the brand and not only towards the loyalty program. The loyalty program designed for Indigo would have the following benefits for the frequent flyers: a) b) c) d) e) Free airline ticket after every 10 purchases/ International Ticket after 20 purchases Extra Baggage allowance Priority check In Discount on partner Cab services to and fro from the airport Free On board Service (Food & Beverages) As pointed out by Rothschild and Gaidis (1981) in their paper on Behaviour Learning Theory, secondary and delayed reinforcers don’t act as effective reinforcers and might lead to extinction. By focussing mainly on primary (intrinsic-product) and immediate reinforcers in our loyalty program (as demonstrated by a sample program structure enlisted above), the issue of complexity is solved without compromising on the efficacy of the reinforcements. A simple hassle free plan is also in sync with the stated positioning of Indigo. Also, a plan low on cognitive requirements is in union with the low involvement nature of the product category. The suggested loyalty program incorporates learnings from “Goal Gradient Hypothesis” and the associated “Illusionary Goal” concept to solve the twin issue of ‘Disconnect between attainable and Page No. 13
  14. 14. desirable benefits’ and ‘Adverse Effect on brand loyalty due to customer demotion’ in a hierarchical loyalty program. The ‘Goal Gradient Theory’ posits that the activity of the consumer accelerates as one reaches closer to the goal, which in our case is purchase of 10 flight tickets (a primary reinforcer). Referring to Figure A in the Exhibit 1, the slope of the curve and is a measure of reengagement probability in the next goal attainment cycle. Once the goal has been attained, a post reward resetting occurs and there is a drop in activity levels. Consumers are most likely to defect in this situation. In order to reduce churn, marketing intervention is required. This is incorporated in our program by providing dynamic discounts calculated based on reengagement probability for different consumers. Current loyalty programs in the industry assume a procedural learning curve for the customer which assumes that the activity level is maintained even after attainment of a goal. So even if the distance between subsequent goals increase progressively, then also there is no impact on the customer as far as the perception of subsequent goal attainment is concerned. But the customer activity level is actually based on the ‘Goal Gradient Hypothesis’. Because of post reward resetting, there is perception of the next goal being further away and a feeling on part of the customer that it cannot be achieved. The knowledge of this phenomenon helps us structure our program in a way such that the goals are all equally spaced and the aforementioned marketing intervention furthers helps us solve this issue. Instead of demoting the customer after a period of reduced activity, we use the concept of ‘Illusionary Goal’ to get him to reengage with the brand. As part of the program he will be offered an extra X% discount on his next purchase and simultaneously increasing his purchase goal by Y. The rational distance remains the same but the psychological distance reduces. Research indicates that it is psychological distance that governs effort. By this method we mitigate the impact that demotion had on customer loyalty without incurring additional cost for the airline. As mentioned earlier, habitual loyalty was developed through shaping by successive approximations. The ultimate aim is to create relational loyalty which will create a sense of bonding between the airline and the habitually loyal customer. Bonding is also the final step in the BRANDZ framework and will lead to creation of brand equity. Relational Loyalty building reinforcers will increase as one moves up the loyalty program with simultaneous decrease in the shaping process. The sensitivity of the target customer base to adverse cross customer effect should be analysed before the actual reinforcers are structured. There is ample literature on airline industry to suggest that distinct form domestic low cost purchase, international flight purchase is a high involvement activity. For an airline like Indigo which has just entered this domain, its success will depend on how well it is able to drive its existing domestic brand associations to initiate behaviour towards the international flights. By this design of the loyalty program, the aim is to reinforce the existing brand associations and develop a relationship with the costumer through application of learning concepts. If this is successively achieved, then there is increased likelihood of international purchase by consumers will use heuristics during the decision making process. This can be considered to be a test of the success of the loyalty program. Page No. 14
  15. 15. Appendix Exhibit 1: Comparison of major existing brands FFP (Yes/No) No. of destination s No. of primary hubs 63 No 54 3 0.113 51 (+35 orders) No 33 5 7.4 0.268 14 (+78 orders) GoClub Loyalty Program 21 3 1932 20.7 -950 127 Flying Returns 55 4 Jet Airways 2003 18.3 -0.26 114 Jet Privilege 73 7 Jet Lite 1991 6.9 N/A 19 No 30 3 Kingfisher 2003 0 -420 7 King Club 25 3 Brand Founding Year Market Share Net Profit ($m) Fleet Size IndiGo 2006 27.3 118.3 SpiceJet 2004 19.5 GoAir 2005 Air India Exhibit 2: IndiGo’s Brand Association Page No. 15
  16. 16. Exhibit 3: Integrated Loyalty Development Model Exhibit 4: Relationship Building for Low-Cost Airline Page No. 16
  17. 17. References 1. Henderson, C.M., 2011, Review of the Theoretical Underpinnings of Loyalty Programs, Journal of Consumer Psychology 2. Youjae Yin & Hoseong Joen, 2003, Effect of Loyalty Program on Value Perception, Program Loyalty and Brand Loyalty, Journal of the Academy of Marketing Science, 31 (3), Pages 229240 3. Hull, Clark L, 1938, The Goal Gradient Hypothesis and Maze Learning, Yale University 4. Peter, J. P. & Olson J. C., 1996, Consumer Behaviour and Marketing Strategy (4th Edition), Richard D. Irwin, A Times Mirror Higher Education Group, Inc. Company 5. Gilles Laurent and Jean-Noel Kapferer, February 1985, Measuring Consumer Involvement Profiles Journal of Marketing Research Vol. XXII, Pages 41-53 6. Xavier Dreze and Joseph C. Nunes, 2011, Recurring Goals and Learning: The impact of Successful Reward Attainment on Purchase Behaviour, Journal of Marketing Research. 7. Sindhu Bhattacharya, Airlines Awaiting Allies, enter 2013 on a wing and a prayer, http://www.firstpost.com/business/airlines-awaiting-allies-enter-2013-on-a-wing-and-aprayer-569482.html, Dec 29, 2012 8. Debabrata Das, After FY11 profit, GoAir posts Rs.134-cr loss in http://www.financialexpress.com/news/after-fy11-profit-goair-posts-rs.134cr-loss-infy12/1059340, Jan 15, 2013. FY12, 9. Anjan Ghosh et al, Indian Aviation Indsutry, http://www.icra.in/Files/ticker/Indian%20Aviation%20Industry%20(NEW).pdf, March 2012 Page No. 17

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