Miles Rookie: What are Loyalty Programs?

Welcome to Miles Rookie 101, where we are trying to decode the concept of miles and points for everyone who is new to the game.

The simple reference point I have for you to think of a loyalty program is that of the Starbucks Card. At least in India, every time I buy something worth INR 300, I get one star. When I collect ten stars, I get a free tall drink. That is the incentive Starbucks is willing to offer me to get my repeat business. And the loyalty program one of the reasons I go to them when I want my coffee (Coffee Day isn’t great coffee, so that should settle the what is good coffee argument?). In essence, when I buy stuff worth INR 3,000 I get stuff worth INR 250 back, which is an 8.33% return to me for keeping me coming back.

In this 8.33% returns, Starbucks is not paying out of pocket to get me my freebie. It comes from all the profit they make off me, selling me a coffee at very high margins. Hence, there is not much of a cost involved for them.

But that is not all. As they see you do more business with them, they add more privileges to you as well. For instance, free size upgrades on drinks, free flavor toppings and so on. Stuff that I’d have otherwise have to pay for, is now free to a certain extent.

Cue to airline loyalty programs

Similarly, airlines reward your loyalty. Every time you make a flight with them, they issue you miles. When you have enough number of miles, you can get a fare-waived ticket on the airline. More often than not, mileage redemption tickets, also called reward tickets, come from the inventory of unsold seats. Simply said, a plane is going to fly anyways, so with an empty seat being made available against miles redemption, you have a happy member who hopefully has more reasons to come back to the airline. After all, he managed to get a couple of free seats to go over for your vacation, while you’ve been spending a lot of time and money on the same airline due to your work commitments.

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Lounge Access comes complimentary when you are a higher tier member for airlines!

Additionally, when you do more business with the same airline, they start giving you privileges that make you feel special, as well as induce you into an infinite loop of loyalty. For instance, when you reach some sort of status with the airline, it means you gave them enough business to be able to offer you some benefits they don’t offer everyone. At Silver, you may be offered an additional baggage allowance. At Gold, lounge access. At Platinum, ability to cancel tickets for free in case you can’t make use of them.

Once you reach a certain status with the airline and like the benefits, you either want to continue to receive those benefits and hence continue to allocate business to the same airline, or else, you want higher benefits, which you think are better for you. In which case, you are trying to give more business to the same airline to make sure you climb up the ladder. For instance, if you are Silver, you don’t want the extra baggage allowance. But you want lounge access every time you travel. Perhaps because you find that 30 minutes in the lounge the only time you can be at ease or make your phone calls that day.

And hotel loyalty programs…

Hotel loyalty works in a similar manner. Previously unsold room inventory can now be offered to a loyal member for a free room night(s) while they keep giving their repeat business to the hotel chain. Also, as you grow your loyalty towards the hotel chain, they pamper you with room upgrades, late check outs and so on. Hey, at the end of the day, it is the same 24 hours in a day and no special hotel rooms are being created for you. So if you visit often, how would you like to stay in a suite this one time rather than the simple room you booked. And you are hooked.

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View from the Penthouse Suite of Andaz West Hollywood, loyalty pays!

And Credit Card incentives…

The original credit card reward programs were designed to make you use the same credit card again and again and would give you a toaster in return for your loyalty. Or a refrigerator, and so on. But in today’s day and age, a lot of programs have aligned themselves with airlines to offer the ability to transfer your credit card reward points to miles. And this makes perfect business sense, because customers can now use their rewards for things they really want rather than buy more toasters than they ever needed to use.

Miles and Points are currencies now

Miles and points were obscure when they were launched over three decades ago by American Airlines as AAdvantage first. But now, they are legit currency, but not issued by a country or a bank, but by a travel service provider. For instance, every time you buy a Jet Airways ticket and fly it, Jet Privilege is issuing you miles provided you have an account with them. Not just that, every time you swipe a credit card, you earn miles as well. Also for your dinner at your favorite restaurant, or perhaps for that shirt you bought as a present for your dad.

What does this currency buy you? Travel services when you need them, or want them. Like I wrote ahead… you pay for economy class for work travel through out the year. But now you have enough miles to travel business class or first class for your annual vacation, which you can use your miles and points for. And free rooms as well.

So what should I do?

I know enough people who wonder how we do some crazy trips while they are still travelling economy. Or how is it that we get the best room in the hotel when they are still in the base category rooms. It is all about loyalty programs. In my home, we spend almost every rupee on a credit card. Because by spending cash I don’t get to earn miles on those transactions, while still paying the same value. We choose to stay at a Hyatt where we can, because they treat us well and have some great hotels. We choose to fly Jet Airways where we can, because, in exchange we can fly more on them, at the cost of paying taxes and airport charges sometimes.

So choose if you would want to hop on to the gravy train, because that is what it is. You don’t have to do much more, but the payoffs are fantastic!

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About Ajay Awtaney

Ajay is a financial services pro, working to bring order to the chaos of the financial industry on an everyday basis! Beyond that, he dons the hat of India's favourite frequent traveller, trying to help people elevate their travel experience via tips and tricks they never knew before, or introduce them to the world of miles and points. Armed with an MBA from MDI Gurgaon and graduate degree in computer science from the University of Delhi, Ajay brings a systematic and objective approach on the table for his audience in dissecting travel and loyalty programs in India and around the world, and how to benefit from them. Ajay has been quoted in various reputed traditional and online media including The Hindustan Times, Inside Flyer, Bloomberg, DNA India, Conde Nast Traveller, The Telegraph, Mumbai Mirror, Mint, MoneyLife and The USA Today.

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