Loyalty programs can be a visible and powerful tool for companies to retain their best customers. Yet, incentive programs often produce negative effects–destroying, rather than creating, brand affiliation.

Take airlines. American launched the first frequent flier program back in 1981 (it’s now the largest of its kind). Today, there are more than 9 trillion unused frequent flier miles, according to Webflyer.com (via Kirotv). Everyone knows the main reason why there are so many unused miles: airlines release very few seats for frequent flyer “awards,” making it extremely difficult to redeem points.

However, airlines do much more to make frequent flyer programs distasteful. First, communications are often misleading. Consider a recent announcement from United titled “Announcing new benefits and changes to your Mileage Plus program.” Though one might expect to learn of actual benefits from an announcement claiming new benefits, United’s changes are anything but: the program now imposes new fees (for example, it will cost you $75 to book an “award” ticket ticketed less than six days prior to departure), and many trips will cost you more miles than they did before (a domestic standard award will cost 50,000 miles rather than 40,000). Of course, airlines are happy to retroactively add new restrictions and surcharges to points earned months or years ago–just because an offer was available when points were earned doesn’t mean the same offer is available when you’d like to take advantage of it.

Perhaps worse, one practically needs expert advice in order to fully understand just what United’s changes actually mean. For example, the announcement begins by stating: “Effective immediately, our short haul Saver Awards for trips 700 miles or less each way are only 15,000 miles, instead of 25,000 miles.” Sounds good, right? Wrong. While United emphasizes the reduced mileage requirements, what isn’t stated is that the definition of short haul trips has changed: it used to include any trip under 750 miles. That in mind, many popular routes (including trips from Chicago to NYC or Montreal) no longer qualify.

United may have thought that their announcement would go unnoticed. As Joe Brancatelli notes, companies and politicans often try to hide bad news by issuing press releases on Fridays. That way, the news gets picked up on Saturday, when most people are enjoying their weekend. United released their above announcement on Good Friday–at 5:10pm.

Personally, the net result is that I often feel scammed by United’s program. I don’t make a serious effort to consolidate my travel there (though I am global services), because I don’t value their awards very highly.

You might think that airlines are forced to introduce clauses, fees, and fine print because of $70 oil, geopolitical instability, or other heady issues. Maybe, but consider this: if you could jump back a year, to May 2, 2005, and invest invest $1 in either Google or American Airlines, which would have produced a superior return?

The answer: American Airlines.

Really. Here’s a chart:

Other airlines, like United and US Airways, have done nearly as well (maybe they’re performing well because of new restrictions to their frequent flyer programs, but I doubt it).

Incentive programs don’t have to suck. Amazon’s program for affiliate sellers is probably my favorite (granted, it’s a little different than a traditional frequent flyer offer). The idea is for “associates,” or participating publishers, to drive internet traffic to Amazon through specially formatted links that enable Amazon to track sales activity. In return, Amazon pays associates up to 8.5% in referral fees for revenue made through these links.

Why does the program work? Simple: it’s easy to join and use, benefits are meaningful and come in the form of cash (or Amazon gift certificates), and programmatic changes are relatively transparent (Amazon hosts a discussion board for questions).

While I don’t know how the associate program has specifically impacted Amazon’s profitability, my guess is that it has been very positive, resulting in lower customer acquisition costs and better marketing efficiency.

And to participate, you don’t have to eat any airplane meals.

Posted by Dan Grossman on Tuesday, May 2nd, 2006 at 4:16 pm.