Remember when you were a kid, and your parents promised you dessert if (and only if) you first ate all your veggies? It was a simple yet effective tactic of delayed gratification with clear expectations and sweet rewards. I wonder if it was also the key to raising a generation of travelers who were content with chalking up their rewards (or points) slowly and steadily to savor their (metaphorical) dessert later!
Fast forward to the 2020s, and we now contend with Gen Zs, the quintessential digital natives with extremely different expectations than their predecessors. Research suggests that Gen Z tends to value immediate rewards and flexibility over long-term loyalty programs.
While some in the industry argue against what they deem as the new generation's insistence on "immediate gratification," the fact is that travel providers across the ages have catered to changing trends. Companies that successfully leverage loyalty programs based on Gen Z preferences and prioritize innovation prototyping may find that they can increase their loyalty consistently. By the same argument, those failing to connect with Gen Z values could lose market share as demographic realities continue to shift.
Rethinking Travel Loyalty: Rewards vs. Revenue
An article by McKinsey & Company in November 2023 notes: "Travel loyalty programs were originally conceived as a clever way to influence customer behavior and encourage customer loyalty. But it's not clear if the programs are currently fulfilling either mandate as successfully as they could."
Joshua Kanter, Encora's CMO and formerly an Associate Partner at McKinsey & Company, where he was responsible for the Loyalty Strategy and Customer Lifecycle Management practices of several service industries, including hospitality, financial services, telecommunications, and retail, echoes this sentiment. "If you give someone 100% of their value in the transaction and they walk away with 100% of what you're going to offer them, they have no incentive to return a second time," he told me. "The key to remaining profitable is to understand that loyalty consists of both a transactional and emotional experience and ensure that travelers are benefiting from both."
The fear of travelers defecting to competitors who offer a better deal would tie up the industry in a perpetual war of one-upmanship. And focusing on just the transactional nature could eventually spiral out of control. This is where it helps to remind ourselves that loyalty programs are eventually about wooing the customer's heart and creating an experience that lingers.
Therefore, to stay relevant, travel providers must strike the right balance—generate enough instant rewards to captivate Gen Z's attention and provide delayed incentives to foster long-term loyalty, repeat revenue, and a strong emotional connect. One way to do this would be to think beyond traditional point-based systems.
For instance, Marcelo Bicudo of TravelCash feels that the younger generations find cashback rewards more tangible and appealing than loyalty points. They also allow travel providers to offer more incentives than OTAs. From the traveler's perspective, a discount is easily forgotten, but a cashback is an opportunity to reintroduce yourself to the traveler and create "a new experience out of the new budget." In short, it would help you linger longer in the traveler's mind.
As we seek to address the challenges posed by shifting demographics, innovative approaches that foster loyalty will be integral to remain true to the spirit of loyalty programs. This is where I believe AI can prove to be a real game-changer.
Using AI to Reinvent Loyalty Programs
Leveraging machine learning to map an infinite range of individualized reward journeys helps delight customers 'in the moment,' even as it incentivizes lucrative future actions. On a case-by-case basis, this opens up endless possibilities for AI to reinvent loyalty.
Here are a few instances where I believe AI can add value and help travel providers scale and reinvent traditional loyalty programs.
Data-Driven Personalization
With its ability to mine through troves of customer data at lightning speed, AI allows providers to offer hyper-personalized rewards and experiences that foster loyalty. For instance, by analyzing booking patterns, examining social media activity and travel reviews, and refining real-time customer feedback across multiple channels, providers achieve granular insights into customers' preferences and behaviors.
Advanced predictive analytics makes it possible to proactively anticipate customers' future needs and provide tailored loyalty offerings catering to their profile. Every interaction further refines the personalization algorithm, allowing providers to reach out to customers with offers that really matter to them. Not only does this tilt the transactional element in favor of the emotional, but it also elevates the whole loyalty program to something far more sophisticated than merely undercutting one's competitor.
For instance, if a customer demonstrates interest in sustainable fashion brands, the travel provider could highlight offers in eco-friendly hotels, include visits to sustainable/regenerative farms and other eco-tourism experiences, provide carbon offset options when booking flights/transportation, and so on. The basic idea is to leverage the customer's interest in sustainable fashion as a data point and personalize travel offerings around it.
Dynamic Reward Optimization
While data-driven personalization answers the "what," dynamic reward optimization determines the "how, when, and why" of rewards across the customer base. By fine-tuning rewards based on market trends, behavioral patterns, and overall company objectives, providers can reach out to highly individualistic cohorts with 'meaningful' rewards that resonate with their personal values and goals.
How would this work in practice? Say the AI system detects a customer segment particularly responsive to complimentary airport lounge access. Travel providers could leverage this insight to drive bookings in the short term. Families, for instance, could benefit from discounted airfare for kids or in-flight amenities during school breaks. Or, to consider the previous example of the eco-conscious traveler, it could mean offering discounts or bonus points for renting hybrid/EV vehicles.
By continuously analyzing customer data, detecting nuances in the customer's preferences, and dynamically serving up the right reward at the right time, travel providers can leverage exclusive experiences to drive conversions and long-term engagement.
Collaborative Filtering and Social Recommendations
In the Gen Z world, social clout is power, and peer influence far outweighs traditional marketing dogma. AI can capitalize on this trend by harnessing the social currents that define Gen Z's worldview.
AI models could identify 'micro-clusters' of people with aligned behaviors, interests, and preferences by ingesting data on destinations visited, accommodations booked, activities, and more across the entire membership base. It then offers hyper-relevant recommendations based on patterns of similar psychographic tribes.
A use case would be if the travel brand were to integrate with a Gen Z micro cluster's preferred social app, allowing friend groups to co-build and vote on customizable trip itineraries. Or the AI could surface the trendiest destinations and activities endorsed by a particular online community and friend circle. By combining community discovery and crowd validation, travel brands tap into Gen Z's innate desire for individuality while still belonging to a relevant 'tribe.'
Multimodal Content Generation
Another way in which AI can appeal to the current trends is to deliver immersive, experiential loyalty experiences at scale. This could include personalized videos, interactive virtual tours, immersive AR/VR experiences, and more, positioning loyalty programs as gateways to aspirational adventures and nurturing authentic relationships.
By combining visual storytelling with community-driven social proof, campaigns stay perpetually fresh and aligned with changing tastes. This kind of multimodal engagement goes beyond accumulating static points and nurtures Gen Z's sense of ambition and desire for novel experiences. The resulting loyalty, stemming from aspirational allure and emotional connections, is more effective in sustaining profitability and high-margin bookings.
Loyalty Program Simulation and Testing
Based on historical data, AI can also virtually recreate customer behaviors, market dynamics, and competitive landscape. Providers can forecast impacts across critical metrics based on these digital twins and introduce new reward structures, promotional campaigns, and policy changes.
AI takes this capability even further, autonomously generating synthetic data for theoretical customer profiles and market conditions and creating "what-if" scenarios with no historical data precedent. Backed by empirical data that has been rigorously validated for business impact, travel companies can virtually prototype unconventional loyalty concepts without real-world risks.
The AI can run millions of simulated permutations and optimize program designs, membership tiers, and incentive rules for peak performance. The result would be irresistible loyalty experiences that maintain profitability.
Augmented Reality (AR) Experiences
For Gen Zer's who are all about having an 'experience,' AR offers endless possibilities. Immersive, gamified experiences using computer vision, spatial computing, and 3D rendering give travelers a sneak preview of their destination. Not only does this build a sense of excitement, but it offers a longer window for brands to engage them.
For instance, an AR-led scavenger hunt that rewards the traveler for visiting specific destinations, revealing clues, mini-games, and exclusive offers along the way, would be far more effective in building emotional connections than traditional rewards and points.
The social currency gained from these experiences also goes a long way toward cultivating brand affinity and advocacy. Further, AR experiences can incentivize travelers to share their adventures widely on social media and amplify the reach and appeal of the program organically. By incorporating social sharing elements, such as AR filters or virtual merchandise, travel brands can offer these travelers an instant taste of the rewards they are working towards. AR's ability to blend the real and virtual worlds provides a whole new canvas for innovative, attention-grabbing loyalty experiences.
A Few Caveats
While this sounds great in theory, there is one mantra I would advise travel providers never to forget. As Uncle Ben reminds a young Peter Parker, "With great power comes great responsibility." In the coming days, we can expect to see AI playing an increasingly vital role in all aspects of travel, including crafting loyalty strategies. It is our responsibility in this context to prioritize human oversight, data privacy, and ethical AI development. Overlooking these aspects could inadvertently perpetuate biases and compromise customer trust. Gen AI models also risk learning undesirable behaviors from training data and missing cultural nuances.
Rigorous testing, external audits, and clear accountability frameworks could help mitigate potential pitfalls and ensure the AI system aligns with the company's core values. Only when companies are intentional will they be able to remain human-centric and inculcate a culture of continuous learning, iterative improvements, and human-centricity.
Conclusion
As of 2022, travel and tourism contributed 7.7 trillion USD to the global GDP. This figure was forecast to reach an estimated 9.5 trillion US dollars in 2023. Over the next few years, as the post-pandemic boom wears off, travel loyalty programs will become increasingly important to acquire and retain customers and maximize their lifetime value.
As Gen Z continues to challenge existing industry norms, travel providers who can keep pace with these generational shifts by leveraging Gen AI will gain a crucial first-mover advantage. By offering seamless, technology-augmented experiences, these players will be well-positioned to cater to Gen Z's sensibilities and earn loyalty that lasts a lifetime.
References
- Granat, Jim. "The Pros and Cons of Instituting a Customer Loyalty Program." Forbes.com, 3 Sept. 2019, www.forbes.com/sites/forbesfinancecouncil/2019/09/03/the-pros-and-cons-of-instituting-a-customer-loyalty-program/. Accessed April 2, 2024.
- Hollenbeck, Brett, and Wayne Taylor. "How to Make Your Loyalty Program Pay Off." Harvard Business Review, 28 Oct. 2021, hbr.org/2021/10/how-to-make-your-loyalty-program-pay-off. Accessed April 2, 2024.
- Chapple, Lidiya, et al. "Travel Invented Loyalty as We Know It. Now It's Time for Reinvention." McKinsey, November 15, 2023, www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/travel-invented-loyalty-as-we-know-it-now-its-time-for-reinvention. Accessed April 2, 2024.
