Competing when you can’t compete

Divided loyalties

In the early 1980s, a swirl of deregulation was upending the cozy and profitable arrangements U.S. airlines had enjoyed for years. Routes had previously been tightly restricted, and fares were regulated to ensure a comfortable return for owners.

These market constraints were comprehensively eliminated in 1978, leaving companies to figure out how to compete in the new, less predictable environment. Some enterprising executives realized they would need different tools to stand out against a slew of others offering what were broadly indistinguishable products.

It was in this milieu that a regional carrier named Texas International Airlines introduced the first modern version of something that today dominates the industry: a frequent flyer program. Instead of simply selling individual flights and competing primarily on price, the move shifted transactions into the framework of a longer-term relationship. Scoring credit in a loyalty scheme induced travelers to book their next flight with the same airline to maintain progress towards some defined reward.

Texas International’s experimental plan was soon eclipsed by other versions, notably that of American Airlines, which went on to become the first truly dominant program and remains one of the most significant ones globally.

Unfortunately for American, their innovation was easily copied, and soon almost every airline both in the United States and around the world had its own fully-fledged rewards offering, generally based on distance flown1. Soon the concept began influencing other parts of the travel sector, as similar plans sprung up among hotel chains seeking to build loyalty among guests.2 Rental car agencies got in the game too, and even the ridesharing apps that have become their modern replacements are beginning to do the same.

In the roughly forty years since the first programs were launched an entire industry has sprung up around navigating and hacking the various permutations of activities and points to create the maximum benefits for travelers. Companies are constantly tweaking their formulas to ensure they retain the most profitable customers, much to the dismay of those who have structured their behavior around previous models.3

Today some kind of loyalty program is de rigueur for any significant player in the travel space, to the point that they are no longer as distinctive as they once were. But in those early years, when the market was sorting itself out, in-cabin standards were generally similar, and competition on price was potentially ruinous, the competition started moving to a different playing field.4

In the process loyalty programs have morphed into a highly valuable business of their own, as their currency is now used by numerous businesses beyond the original industry, most significantly in financial services, to attract new customers.

Airlines keep this information tightly controlled, but public financial statements suggest that big ones like American generate the majority of overall profits from selling frequent flyer miles, largely to banks that need them as a marketing tool for co-branded credit cards. Running an airline just provides the infrastructure on which the lucrative business of loyalty programs can ride.

This one’s for you

Brewers competing for the mass-market, light beer drinker in the U.S. have found themselves in similarly straitened circumstances. The product itself is cloaked in an overwhelming blanket of marketing messages, meaning quality isn’t the determining factor. Investing more in ingredients to compete on taste could bump a product into a different price tier, making that a no-go.

With a market nearing saturation and having tapped out many of the usual growth avenues, manufacturers turned their attention to packaging. So began an escalating arms race of innovations that ranged from merely gimmicky to absurd, including bottles with spiraled necks presumably designed to create some type of vortex as the liquid flowed out, or cans that changed color in response to temperature.

There were other cans with special grooves or holes punched in the top to facilitate rapid pouring. One company released bottles with a space on the label on which messages could be scratched with a key, should one be so inclined to personalize a beer in that fashion. The apotheosis of the process may have been reached when one brewer issued its product in aluminum cans that were crimped in the middle to resemble the bow tie of its logo, which required some structural engineer to deliberately weaken a form that was essentially perfected a long time ago.

Consumer insurance companies faced a similar challenge in differentiating themselves from each other. The business depends on deep data sets and increasingly sophisticated algorithms that can predict the risk of any loss with pinpoint precision. Any company that misprices its policies will quickly discover that the hard way, meaning that rates will start to converge among competitors.

The products themselves are heavily regulated, limiting the degrees of freedom for innovation. In response the industry has oriented itself around clever marketing hooks, obscuring the fact that the products are often indistinguishable. The average American consumer might not know much about the actuarial abilities or financial reserves of their car insurer, but they can probably quote their commercial taglines with ease.

A whole new world

For airlines the core product of flights remains largely undifferentiated. In most U.S. markets pricing for comparable routes is identical, down to the dollar, with changes from one airline instantly mimicked by others. This gives passengers little financial reason to choose one over the other. If they can’t compete on price, they must distinguish themselves on something else.5 If price is an unworkable dimension on which to compete, consider how to shift the game to a parallel level.

When the product itself is no longer the locus of competition, try exploring the ancillary features that wrap around it. This can be successful, as with airlines and points programs that have spawned entirely new profit engines. It might also prove ineffective, as with brewers whose light beers are losing share to craft products—despite sustained efforts sometimes all those packaging changes don’t make much of a difference.

Sometimes your product is so routine, or abstract, or regulated, that dramatic innovations in price or feature sets aren’t feasible. Sophisticated consumers might view you as a commodity provider and nothing more. In such cases consider how you could build and compete on an entirely different set of competencies. Some of the most well-known and long-running marketing campaigns of recent years weren’t created by cutting-edge millennial brands, but instead came from the staid insurance industry.

Changing the terms of how you compete can unlock value in unexpected ways, and investing in new capabilities could help reframe your market.

How can you expand the definition of how you compete?

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References

The Points Guy has a history of frequent flyer programs, and Hotel News Now wrote on the evolution of hotel loyalty programs.