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Medium Profitability Pricing Customer Loyalty

The Value of Loyalty

#Transportation #Travel & Hospitality
ProHub Comment

This case tests quantitative profitability analysis by requiring candidates to model incremental revenues and costs across customer segments before reaching a recommendation. The structure moves from identifying key customer differences, calculating revenue shifts, determining loyalty program costs, and finally assessing overall viability—a strong example of structured problem-solving in pricing and customer economics.

Estimated Time 26 minutes
Difficulty Medium
Source Queen's
10 / 100
Your client is Southwest Air. The CEO wants to institute a loyalty program to boost the number of deluxe seats sold on a given flight. He believes that this strategy will be a good way to capture market share from competitors. How would you evaluate this proposal?

Clarifying Information

  1. Policy is designed so that each mile flown in a deluxe seat per year earns 1 point
  2. Points can be redeemed for free flights at a rate of 10,000 points per flight in a deluxe seat
  3. Deluxe seats cost $500, plus $2 per mile
  4. Regular seats are $300, plus $1 per mile
  5. Instituting this program will cause business travelers to take deluxe seats 75% of the time and recreational travelers to take deluxe 50% of the time.
Mock Interview
Interviewer

Your client is Southwest Air. The CEO wants to institute a loyalty program to boost the number of deluxe seats sold on a given flight. He believes that this strategy will be a good way to capture market share from competitors. How would you evaluate this proposal?

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
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Southwest Air CEO proposes a loyalty program to increase deluxe seat sales. The case requires calculating incremental revenues (business segment gains $4,500, recreational gains $1,200) against incremental costs of loyalty rewards (business costs $750, recreational costs $500), yielding strong per-person profit margins that make the program worthwhile, though with caveats about capacity and competitive assumptions.

Key Insights:

  1. Customer segmentation is critical: business travelers (40 flights/year at 250 miles each) drive much higher value than recreational travelers (4 flights/year at 1,000 miles each)
  2. Incremental analysis requires separate before/after calculations for revenue and cost, not just aggregates
  3. Loyalty program cost is determined by redemption value (miles flown × points earned ÷ points per free flight × deluxe seat cost), not by participant acquisition
  4. Missing analysis considerations include new customer acquisition from competitors and capacity constraints if free flights require new flight additions