Loyalty programs are the enablers of most of these cool luxury travel deals that we run here. In their simplest mechanism, they work by creating a fiat currency (miles & points) that can be used to 'buy' unused inventory.
The strategy for many airlines/hotel loyalty programs seems to be to dangle a big carrot (a unique, luxury travel experience) in front of your customer, while at the same time make it hard to actually redeem an award (availability, fees, restrictions etc). These restrictions are used so as to not interfere with normal spending patterns and to make sure it is inventory that would go unsold.
The travel industry has been one of the best industries to apply this strategy to. It has a wide range of products (low-cost to luxury) that have a very well-determined expiry date (flight date, hotel night) and minimal fixed cost per product (e.g. minimal supplier costs).
Many airlines, notably Delta or Lufthansa, are working hard to reduce earning (Delta's mile-earning will be revenue based by Jan 1st 2015) or make redemptions pointless (redeeming for Lufthansa group flights in economy using Miles & More will often cost more than a revenue booking).
Here is a bit of new research from the BI@Norwegian Business School that should tell airlines and hotel chains what is the right way to attract AND retain and consumer:
The researchers have found that a consumer gets 'a kick' from the redemption and the 'free product' he receives. The customer is much more likely to buy products before and shortly after the redemption from the same company. This makes sense since the psychological 'savings' translate into money 'available for spending'.
The findings strongly encourage a redemption process that is both easy to use and creates outstanding 'value'. Many excellent US loyalty programs have joined the train to reduce the value in the awards they offer.
The ideal loyalty program builds value but encourages frequent 'smaller' redemptions which give the consumer an incentive to come back. Maybe that's why we have these great values with short-haul Avios redemptions then?