# Northern Aero Loyalty Program’s Marketing

Subject: Case Studies 4 1230 5 min College

Enginius software has been used to calculate customer lifetime value (CLV). Generally speaking, CLV refers to the projected total return that a customer can bring to a company in the long term over the lifetime of their interaction with the company. In other words, it is a critical metric for market research related to loyalty programs where companies, including Northern Aero, are investing money right now in developing loyal customer relationships for future profits. With Enginius, the following results were automatically obtained:

Table 1. Estimated CLV values for each of the segments; calculations made with Enginius

 Customer Lifetime Value (\$) Platinum (top 20%) \$ 3 495.92 Platinum (low 80%) \$ 2 379.75 Gold (top 20%) \$ 1 415.70 Gold (low 80%) \$ 783.88 Silver (top 20%) \$ 385.60 Silver (low 80%) \$ 132.41 Inactive customers \$ 33.21

From the figures obtained, it is clearly seen that the most significant long-term benefit is obtained with probably some of the most expensive customers, Platinum (top 20%), who require the most thorough and comfortable service. Both categories of the Platinum client segment would bring the company an estimated \$5,875.67 overall.

The calculation of the first question used a discount rate of 15%, and this study suggests raising it to 40%. That is a pretty significant increase, which will be shown to have a big impact on future earnings. In simple words, this percentage converts the company’s future profits into today’s revenue, which means that the higher the percentage used now, the more expected profits can be made in the future. Automatic calculations at the new discount rate are shown in Table 2.

Table 2. Estimated CLV values for each of the segments; calculations performed using Enginius

 Customer Lifetime Value (\$) Platinum (top 20%) \$ 2 468.77 Platinum (low 80%) \$ 1 644.76 Gold (top 20%) \$ 955.55 Gold (low 80%) \$ 511.58 Silver (top 20%) \$ 234.94 Silver (low 80%) \$ 74.04 Inactive customers \$ 18.77

One can see that the total estimated returns were noticeably lower than in the case of the 15% discount rate, but the overall ranking remained unchanged. In general, the drop in lifetime client profits overtime when the discount rate is increased is not surprising. As a general rule, the lower the rate used, the greater the belief in the stability of the marketing environment. Choosing a moderate rate of 40% means extremely high uncertainty and instability in the future: it creates some financial protection for the company in case of increased risks. However, the company pays for this security with reduced future profitability.

To estimate the ROI for the current loyalty program, one needs to compare the gross margin for net sales for customers with and without the loyalty program. Table 3 below compares these numbers: one can see that disabling the loyalty program has virtually no significant effect on gross margins by segment. On the contrary, quite naturally, reducing some of the costs of the program shows a slight increase in gross profit.

Table 3: Gross profit for customer segments with and without a loyalty program

 Gross profit (current) Gross profit (no loyalty program) Platinum (top 20%) \$4,410 \$4,560 Platinum (low 80%) \$2,145 \$2,295 Gold (top 20%) \$1,100 \$1,125 Gold (low 80%) \$430 \$455 Silver (top 20%) \$86 \$96 Silver (low 80%) \$16 \$26 Inactive customers \$2 \$0 Lost Clients \$0 \$0

Additionally, it is interesting to compare the CLV figures for both variants of the customer segments. This is shown in Table 4: from this perspective, the changes in ROI appear to be more fundamental. The CLV values were nearly halved for customers without a loyalty program. Consequently, the efficiency of the investment is reduced by roughly half.

Table 4. Estimated CLV values for each of the segments with and without a loyalty program; calculations made with Enginius

 Customer Lifetime Value (\$) (current) Customer Lifetime Value (\$) (no loyalty program) Platinum (top 20%) \$ 3 495.92 \$ 1 482.23 Platinum (low 80%) \$ 2 379.75 \$ 1 344.27 Gold (top 20%) \$ 1 415.70 \$ 773.82 Gold (low 80%) \$ 783.88 \$ 439.19 Silver (top 20%) \$ 385.60 \$ 211.63 Silver (low 80%) \$ 132.41 \$ 97.07 Inactive customers \$ 33.21 \$ 24.15

Among the key recommendations that emerged from the numerical analysis of ZENITH’s offerings were strategies to reduce gross margins for each segment except Silver (low 80%) and inactive customers. Apparently, ZENITH seeks to increase operating expenses for all categories except Silver (low 80%) and inactive customers. If we evaluate the recommendations in terms of transition matrices, it is clear that ZENITH wants to increase the number of customers who will stay in their category, as well as generally lower the number of those who will move to lower levels. Thus, the general recommendation is to increase spending on the loyalty program and to invest in keeping customers from moving to lower tiers. Referring back to Table 5 gives an indication of what the results of optimizing this part of the operation would be. We can see that the average profit for all segments increases by about one and a half times.

Table 5. Estimated CLV values for each of the segments when optimizing a loyalty program; calculations made with Enginius

 Customer Lifetime Value (\$) Platinum (top 20%) \$ 5 775.24 Platinum (low 80%) \$ 3 661.46 Gold (top 20%) \$ 2 267.46 Gold (low 80%) \$ 986.80 Silver (top 20%) \$ 498.29 Silver (low 80%) \$ 163.33 Inactive customers \$ 40.19

Given all of the results, the primary recommendation for the board of directors would be to retain the loyalty program but thoroughly review its structure necessarily. In order to increase CLV and thus create more sustainable financial development for Northern Aero, operational costs for loyalty programs need to be reduced. Specifically, the change in gross margins for the most premium customer segment compared to the table optimization was \$210, which means, simplistically speaking, the customer service budget was reduced by that amount. Alternatively, the board is advised to reevaluate the importance of the lower customer segments since they generally only make an upward transition and thus potentially generate more revenue for the company. The change in gross margins for Silver (low 80%) and Inactive customers was negative, which means ZENITH plans to increase the operating budget for loyalty programs for these two segments.

Looking at ZENITH’s proposed optimization in terms of the strategy already in place, it is clear that their rearrangements have resulted in a noticeable increase in long-term profits at the company. ZENITH was able to reduce the company’s gross profit from \$8,185 to \$7,854 by gradually refocusing on the company’s lower segments while maintaining a premium priority on the upper tiers. This action, in turn, led to a significant increase in CLV: \$13392.77 instead of \$8626.47 under the current strategy. At the same time, ZENITH was able to increase the share of those who moved or stayed at the top customer segment by 23%, indicating positive results for customer loyalty growth. A significant customer churn (toward the higher tiers) in the lowest segments is noticeable. It is necessary, however, to continue market research to get more sensitive data. It is possible to conduct social surveys among customers of different segments to find out their satisfaction as the new program is introduced. In addition, we need to investigate why customers are abandoning Northern Aero in favor of cheaper airfare.