Coalition Loyalty: A Model with Sustainable Advantages for Retailers
The ubiquity of standalone loyalty programs in the U.S. may be reaching a saturation point, as retailers and consumers have begun to call into question whether these programs are actually delivering any lasting value. It’s clear that U.S. retailers need a more effective and differentiated loyalty platform now more than ever, and the proven coalition model can provide this solution. A coalition loyalty program is a multi-company shopper rewards program that offers consumers a superior value proposition to a standalone program – a common rewards currency earned at many places consumers shop, and not just one retailer.
With many successful coalition programs operating around the world, this proven platform has delivered substantial value to participating retailers primarily from the four benefits that coalition programs offer over standalone programs:
1. Greater consumer value, engagement and behavior change
2. More efficient, data-rich CRM platform for customer-centric initiatives
3. Value-enhancing partnership with non-competing companies and a third party operator
4. Sustainable competitive advantage through differentiated offering
With many current industry trends pointing towards coalition as a solution in the U.S. market, we believe it is not a question of “if” but “when” a coalition program is launched in this country.
Are Standalone Customer Loyalty Programs Still Creating Value for U.S. Retailers?
Customer loyalty is not only important, but absolutely imperative for retailers to survive in today’s uber-competitive marketplace. Samuel Goldwyn, a well-known film producer in the 20’s and 30’s, once said, “I’ll take fifty percent efficiency to get one-hundred percent loyalty.” While that may have been a necessary trade-off in Hollywood, thankfully, today’s retailers do not have to make that same compromise. In fact, much has been written to the contrary, outlining the powerful financial implications of converting occasional shoppers into loyal customers. (See SLI’s white paper The Economic Benefits of Customer Loyalty).
Therefore it comes as no surprise that many U.S. retailers, if not most, offer some type of loyalty program in an attempt to capture the benefits of increased customer loyalty. In a previous white paper by SLI – Loyalty Program Economics 101 – the benefits of a well-designed loyalty program are summarized as: (i) reduced defections, (ii) increased customer spending, (iii) lower customer-servicing cost, (iv) increased purchases of higher margin products, (v) increased customer referrals and (vi) more efficient acquisition of new customers.
However, the ubiquity and sheer volume of independent loyalty programs in the U.S. may have finally reached a saturation point, calling into question how many of these programs are actually delivering the value they could be to retailers.
According to the 2013 COLLOQUY Loyalty Census released in June 2013, there are now 2.6BN loyalty program memberships in the U.S. The average U.S. shopper has joined 22 loyalty programs, but actively participates in only 9.5 of these programs, which are almost exclusively single-retailer or “standalone” loyalty programs. This active participation rate slid down to 44% in 2012, as consumers increasingly disengage from many of the loyalty programs that they once believed would be of value. As consumers, we are all familiar with the feeling of signing up for a program so that we don’t leave value on the table, but it is often not clear whether we will actually realize any of that value. In a December 2012 Edgell Knowledge Network survey, 81% of loyalty program members did not even know the benefits of their programs or how and when they could receive rewards. This survey concluded that customers of retailers who offer a loyalty program are no more loyal than those of retailers who don’t offer one.
It seems clear that now, more than ever, U.S. retailers need a truly differentiated and effective loyalty platform in order to break through the cluttered loyalty landscape, realize the wealth of benefits generated by a well-designed loyalty program and ultimately build a sustainable competitive advantage.
So what kind of loyalty program could drive that kind of sustainable advantage? For U.S. retailers looking for an enhanced loyalty model, the answer could be a coalition loyalty program.
What is a Coalition Loyalty Program?
A coalition loyalty program is a multi-company shopper rewards program. Consumers who participate in these programs are rewarded with a common currency for shopping at exclusive (or co-exclusive) sponsors within each major consumer spending category: e.g., a single supermarket sponsor, a fuel sponsor, a department store sponsor, a credit or debit card sponsor, etc. The number of participating sponsors can range from 5 to well over 100 depending on the breadth and maturity of the program. In most cases, “points” are earned by consumers for shopping across the sponsor network and accumulate in one common account in a singular currency. The consumer can then redeem their points for a variety of rewards such as travel, events, merchandise, gift cards or discounts at coalition sponsors.
The coalition loyalty model has been adopted in many countries outside the U.S.; some were introduced as early as the 1990’s and have achieved tremendous success. The most widely known coalition programs include AIR MILES in Canada, Nectar in the UK, Dotz in Brazil, Fly Buys in New Zealand and Payback in Germany. At maturity, these programs have reached penetration of over 60% of households. The value of these coalitions is clearly demonstrated by the majority of households in the target countries choosing to take part.
Why is a Coalition Program Superior to a Standalone Loyalty Program for Retailers?
So what makes a coalition model superior to a proprietary or standalone loyalty program for retailers? There are many factors, but they stem primarily from four sources of value: (1) greater consumer engagement and behavior change, (2) more efficient, data-rich platform for customer-centric initiatives, (3) value enhancing partnerships with non-competing companies potentially through a third-party operator, and (4) sustainable competitive advantage through differentiation.
1. Greater consumer engagement and behavior change
Stated simply – a coalition loyalty program is a stronger value proposition for consumers than a standalone program. It’s a straightforward and a coherent concept for consumers to quickly understand, and actually simplifies consumers’ shopping rewards experience: one rewards program across all the places you shop, rather than 10-20+ different programs (and differing value propositions) for consumers to keep track of. Below is a summary comparison of the consumer value proposition for a coalition vs. standalone loyalty program.
This distinguishable value proposition further enables consumers to earn rewards much faster through shopping at multiple sponsors. Since points accumulate more quickly than within any individual standalone program, the coalition model makes possible the inclusion of higher value aspirational rewards (such as travel and other “once in a lifetime” experiences). In addition, coalition models generally offer members a choice of rewards, which include lower-point threshold rewards such as cash-back and discounts. The potential to offer a greater selection of motivating and attainable rewards in a coalition not only creates greater value for the consumer, but also maintains higher consumer engagement for much longer with this flexibility to earn different rewards over time. Analysis of program member behavior shows that after members of Coalition Loyalty Programs redeem, their shopping and loyalty at program sponsors increases.
Many retailers’ standalone loyalty programs rely solely on lower value rewards, often discounts or cash back, which can be earned more frequently in an attempt to satisfy consumers’ need for “instant gratification”. These types of reward models can create a “transactional loyalty” with customers – a low-involvement, often short-lived connection to the retailer. However, they do not encourage the “emotional loyalty” possible with aspirational rewards, that forge deeper customer engagement and life-long customer relationships. Non-cash rewards are often enjoyed by multiple household members, which elevates interest and motivation in the program. In addition, these discount and cash-back models can, and are, easily replicated by competitors – giving customers the opportunity to easily ‘swap’ one retailer for another and still earn a similar reward. Ultimately, the ability to collect points over time toward aspirational rewards creates a vested interest for customers to forge longer relationships and deeper engagement with retailers within a coalition program. Also, as their points balance accumulates, members are more likely to stick to shopping at coalition sponsors to earn higher level rewards, effectively creating a “barrier to exit” that standalone programs with short-dated rewards expiry can never match.
Because a coalition program offers a stronger value proposition for consumers compared to a standalone loyalty program and drives greater consumer engagement, it follows that the longer and more loyal the customer relationship, the more a customer will spend, resulting in greater behavior change. In general, more consumers will actively participate in a coalition program and will spend more at participating retailers over a sustained period compared to a standalone loyalty program. Indeed, many coalition programs have over 70% of all covered households as active members, and affected sales lift at retailers who participate in a coalition program can often reach 10-20%, with long-term retention rates jumping to well above industry levels.
2. More efficient, data-rich marketing platform for customer-centric initiatives
When consumers are engaged in the coalition program and motivated to maximize their earning of the powerful coalition currency, retailers have created a significant lever to further influence their customers. Marketing offers and promotions that provide more ways for customers to earn coalition points result in higher response rates for retailers. Because administration and rewards costs are shared among sponsors, coalition points are typically lower cost as compared to discounts. The resultant sales lift is also greater compared to straight product discounting. All of this leads to a more efficient marketing and promotional platform for retailers looking to lift sales at a low cost. Below is an illustrative example of how triple bonus points in a coalition program drive greater sales lift at lower cost vs. straight product discounts.
In addition, the coalition program provides a richer and more actionable database of information on consumers that can be used to develop sophisticated, permission-based, targeted and highly profitable marketing campaigns.
Coalition data collected over time increases the richness of insights and depth of analytics possible, including:
- Customer centric coalition platform which enables creation of cross-category lifestyle segments (premium, frugal, local, health)
- Offer / response / channel profile enhancement
- Accurate defector validation to fund win-back appropriately (e.g. consumers who still shop elsewhere but not grocer vs. those shoppers who have moved)
- Cross-category correlations
- Contact information and shopping patterns of non-customers
As indicated in the last bullet above, coalition data can help to better identify and target high potential non-shoppers who join the program within a participating retailer’s trade area. Thus, the program becomes an efficient new customer acquisition tool as well. The charts below provide an illustrative example of how a coalition bonus point offer is lower cost, results in greater new customer response rate, and leads to higher retention of these new customers over time.
3. Value enhancing partnership with non-competing companies and potentially a third party operator
In addition to shared rewards costs mentioned above, participating retailers in a coalition benefit by sharing many of the fixed costs with other program sponsors, including marketing and operational costs, rather than bearing the entire expense load as they would within a standalone program. The result is that most of the loyalty program rewards cost is focused on rewarding the sponsors’ customers.
Retailers can also benefit from a “brand halo” effect through their association with other strong sponsor brands and the coalition program’s brand. For example, the coalition program AIR MILES Canada has built one of the country’s most respected brands – one of the “top 10 most influential brands in Canada”, according to the ICA and Ipsos – and brands with less recognition can reap instant benefits from associating with the coalition’s brand.
Many coalition programs are operated by a third party that specializes solely in the management of multi-partner loyalty platforms, which can provide additional value and advantages to the participating retailers. Third party operators often provide intellectual capital and marketing expertise, including customer-centric analytics and advanced one-to-one loyalty marketing campaign capabilities. This can be valuable to retailers looking to benefit from well-designed coalition marketing programs and who want to use coalition data strategically to drive their business.
A third party can also effectively manage the rewards redemption liability, taking this significant financial concern off of retailers’ balance sheets. With this liability managed professionally by an operator with coalition experience, it can allow for greater program design flexibility such as extended or no points expiration parameters. Consumers prefer longer expiration dates for reward points, which allows them the choice to redeem points when they are most valuable, not when forced to by short expiration periods. However, many standalone U.S. loyalty programs today have short expiration periods so that retailers can avoid managing long-term rewards liability. This has resulted in a large number of U.S. retailers relying on standalone programs with high breakage (i.e., reward points that are never redeemed). See SLI’s white paper Ghost Points for more on this phenomenon. Any coalition with long or no expiry of points clearly would be differentiating in today’s shopper loyalty landscape. This brings us to the last primary advantage of a coalition loyalty.
4. Sustainable differentiation and competitive advantage
Coalition programs provide category exclusivity to participating sponsors in the program, which means no competing retailers can issue the coalition points currency or have access to the 360-degree-view of members’ shopping behavior provided by the coalition customer database. The exclusive nature of the platform, and the valuable assets it provides, serves as a clear source of differentiation for participating retailers and can provide a strategic advantage vs. competitive offerings.
Another key source of differentiation are co-promotions by a federation of strong brands. For example, when a new supercenter enters the market where several coalition sponsors operate, these coalition partners can offer a promotion (e.g., “triple bonus points”) to lessen the impact of an aggressive new competitor. These promotions can help maintain consumer engagement and prevent the loss of customers.
Unlike most standalone loyalty programs, a coalition program is very difficult for competitors to replicate. Designing a program with the right approach to the market and a strong coalition of fully committed sponsors can be extremely challenging to execute successfully. When competing coalitions do develop within the same market, which is rare, the first-mover retailers associated with the initial coalition to launch often can have first mover advantage if they secure the strongest partners ahead of the competition.
Lastly, coalition programs have proven to be sustainable – creating value for retailers over many years. With numerous coalition partners and typically a sizable inventory of rewards, coalitions can continue to be “fresh” and evolve over time. Both the number of rewards and sponsors can be increased over time to continue to enhance the value to consumers and drive continual engagement and behavior change. Increasingly sophisticated use of the coalition database and social, mobile and interactive digital technology can also keep the program fresh and exciting for consumers.
Coalitions such as AIR MILES and Nectar have created value for retailers such as Safeway Canada and Sainsbury’s in the UK over decades. These top retailers have continued their participation in these programs since their inception because they not only produce bottom line results but also provide a point of differentiation and strategic advantages over their competitors.
Do Current Market Trends Support a Move Toward Coalition Loyalty for U.S. Retailers?
Today’s trends appear to support a move towards coalition as a solution for U.S. retailers searching for meaningful benefits from increased customer loyalty and to gain greater share of wallet. Socially, the global movement towards “co” (collaboration, community, etc.) vs. “i” (individualism, isolation, etc.) continues to advance both in the workplace and at home as Marian Salzman, author of What’s Next?: What To Expect in 2013 explains. This trend is expected to reach more executive offices in the U.S., with the realization that partnering with other strong brands can help businesses grow or even to survive.
In the loyalty space, as we’ve indicated, it’s questionable whether “going it alone” with a standalone loyalty program has created much value for many companies in recent years. There is growing evidence of this, as several large retailers have dropped their loyalty programs in recent months (e.g., Jewel in Chicago, Albertsons across several markets in the western U.S., Shaw’s in Boston).
Yet, by eliminating one’s loyalty program altogether, it often means losing an increasingly valuable asset for retailers: customer data. As companies become adept at mining “big data” to learn more about their customers’ preferences and shopping habits, this data will become more and more important. Without a loyalty program to acquire customer specific data that can be tracked along with transactional data, a retailer will have less information about their customers and how to effectively serve them. This lack of customer visibility clearly puts these companies at a disadvantage in the data-driven future, where enterprise loyalty can empower retailers to apply customer-specific insights across their organization – from marketing to merchandising to operations on down. As COLLOQUY describes in its April 2013 article, The Big Bang of Customer-Centricity, this business-wide strategy promotes a laser-sharp focus on customers. By using transactional data, customer preferences and social media activity, companies can learn to engage with the company’s best customers more profitably, and can ultimately sustain long term, profitable growth.
Therefore, as an alternative to pulling the plug entirely on a loyalty program, companies can participate in a coalition program, which not only drives greater consumer behavior change and sustainable differentiation compared to current standalone programs, it also provides robust customer data that extends beyond the walls of the participating retailer. A coalition program can be a uniquely valuable source of customer information in a data driven customer-centric world. This allows retailers to have a data advantage over their competitors.
As it turns out, certain prominent U.S. retailers are already turning to coalition as a solution in other markets rather than a standalone program. Gap, Staples, Toys“R”Us and Michaels all joined AIR MILES in Canada in the past year as an alternative to operating their own standalone programs in that market.
Will U.S. consumers be receptive to a coalition program in this country? SLI’s quantitative research indicates that the answer is overwhelmingly “yes”: In a 2012 survey, over 70% of survey respondents were willing to join a loyalty program offering rewards in a common currency for shopping at non-competing retailers, and approximately two thirds of joiners indicated they would change their shopping habits. Consumers clearly “get it”: earning more valuable rewards much faster through a coalition program is better.
Full-fledged coalition loyalty programs do not currently operate in the U.S., but have had considerable success and adoption in established, developed economies for over 20 years. This will surely change as coalition continues to gain steam in the U.S., and retailers look for better alternatives to drive profitable growth over increasingly ineffective loyalty programs. Retailers will look to coalition’s proven model of offering superior customer engagement for lower costs and its added benefits of providing an efficient, data-rich marketing platform to offer better customer-centric initiatives. Retailers joining with other non-competing companies will create a lasting, value enhancing partnership that will allow them to differentiate themselves from competitors. The first U.S. retailers to create a coalition will certainly reap these rewards, and enjoy longer lasting, more profitable customer engagement. We believe it is not a question of if, but only a matter of when.