The 6 A’s of Coalition Loyalty Success & The Virtuous Cycle of Profitability

The 6 A’s of Coalition Loyalty Success & the Virtuous Cycle of Profitability

Net: Over a billion dollars have been lost by companies and investors trying to create a profitable coalition loyalty program in the U.S. over the past 30 years. In recent discussions with Sir Keith Mills, who created the original AIR MILES shopping reward program and the first consumer focused coalition loyalty program in the UK, my former company The Loyalty Group in Canada, Nectar in the UK  and successful programs in The Netherlands, Spain and the UAE, we agreed there are six requisite elements of successful programs.  Rewards must be aspirational, attainable, and accessible to target consumers.  They must be sufficiently affordable to investors, program operators and the business partners who pay for the reward to enable a clear and attractive return on their investment.  The program must be designed and executed to collect actionable information on participating member’s behavior to both prove that the program is delivering an attractive ROI and to identify underperforming segments and new opportunities to use the program’s assets to increase the businesses’ profitability. Finally, participants must be aware of the program’s benefits.  They must be clearly and effectively marketed at launch and on an ongoing basis to create awareness and understanding of program value to potential and existing members and the businesses paying for the rewards.   If these “6 A” elements are present in the program’s design and effectively launched and enhanced through rollout and operation, the loyalty business generates an attractive virtuous cycle of profitability driven by the value created for all stakeholders.

The 6 A’s of Coalition Loyalty Success

All profitable coalition loyalty programs share six common elements in their design, launch and on-going operations. The most profitable loyalty programs, like the AIR MILES Reward Program in Canada, now part of Alliance Data System’s LoyaltyOne division, maximize the effective implementation of all six.  Although trade-offs can be made among the six – as programs that offer extremely high value in some of the areas can still be profitable with less than optimal performance in others – we know of no programs that have been successful, sustainable, and profitable over the long run (e.g. more than five years), who fail to contain all of these elements. The most important witness to this is the collective failure of the various programs that make up the infamous Billion Dollar Club, the term we use to highlight the fact that over one billion dollars of investors’ money has been lost trying to develop successful coalition loyalty programs in North America alone over the past three decades. They all failed to deliver on one or more (and usually several) of the requisite design and operational program imperatives.

A Most Important Caveat

Before diving into the details of each of the 6 A’s, we must share one overarching fact that we know from literally hundreds of years of combined experience by our partners running and studying programs in the space:

A great loyalty program will not compensate for an uncompetitive consumer value proposition.

If your business, product or brand suffers from poor service, product deficiencies and/or pricing that is unaligned with the value provided to target customers by your competitors, a great loyalty program – either stand alone or coalition – will not compensate.  At best, the program will motivate members who have not tried your product or stores to test them, but if they came because of the loyalty rewards, they are unlikely to return if your consumer value proposition is uncompetitive.

We learned this the hard way in the early days of AIR MILES Canada in our grocery category.  In Western Canada, we launched with Safeway, the region’s leading grocer, who became and remains an extraordinary program sponsor.  In Ontario, my business partner and I – both originally from the US – signed Food City in the wee hours the night before our launch press conference.  Although Food City’s flagship store was attractive and high quality, we didn’t realize that many of its stores were old, tired, and offered poor service, at best, from unmotivated employees.  I unfortunately learned this firsthand in an embarrassing moment when Keith visited Canada shortly after launch and I took him on a “store tour” to visit several sponsors.  We stopped at a Food City that I had not visited before and was clearly not a flagship store.  Once inside, I noticed the TV with a built in VCR that was supposed to be playing an AIR MILES promotional video was turned off.  I pushed in the tape, anxious to show Keith some of the marketing support the chain was putting behind the program, but within a few minutes of starting, a check-out clerk shouted something like “What’s that crap?” And another responded “Oh, it’s that AIR MILES video.  I am sooo sick of hearing it.”  Needless to say, not my best experience taking a Chairman on a store tour.

The data soon demonstrated in a more powerful way the problem with including a sponsor with a poor or inconsistent consumer experience and/or brand image in a coalition program.  Soon after launch, we began to test numerous data base driven targeted offers in the early months of the program.   Specifically, we identified collectors with large households who were earning miles from Shell and living in the trading area of one of our grocery partners, but had not yet earned miles on their grocery shopping.  We ran simultaneous programs in Western Canada for Safeway and in Ontario for Food City.  The comparative results were stark and telling.  I recall that more than 50% of those targeted with bonus offers from their nearest Safeway tried shopping at the store. Then, close to 80% of the non-shoppers who tried Safeway returned for additional visits – demonstrating the initial behavior of new, and highly profitable, loyal customers.  The Food City results were nearly opposite.  Significantly less than half of those targeted tried their local Food City, reflecting the chain’s overall weak brand.  More telling is the fact that under 20% of those who shopped at the store once returned for additional visits.  Today, over 15 years later, Safeway remains a cornerstone of the AIR MILES Canada program.  Food City and AIR MILES did not renew their initial contract and the brand was eventually retired. No Food City stores remain in Ontario.  They are a testament to the fact that even a great loyalty program will not compensate for a poor consumer value proposition.

The Details

1. Aspirational rewards:  The program must offer a reward or selection of rewards that will motivate the consumer to change their behavior.

My view of what constitutes “aspirational” has changed over time. When we were first selling in and launching Air Miles, we often made fun of programs that offered “bathroom scales” and other consumer appliances as rewards.  But a few years into the business, our research demonstrated that a significant percentage of our best customers, or Gold Collectors, also held membership in the Canadian mass merchant Zeller’s Club Z (“Zed” in Canada) and that many felt “Club Z is more relevant to me.”  It dawned on me that the definition of an aspirational award was largely individual-centric and we began to expand our rewards, first into other travel related rewards, then entertainment, like free movie passes.  Eventually, we developed a full catalogue of rewards, from electronic merchandise like iPods and flat screen TV’s to grocery and other gift certificates from our Sponsors.  For some, cash back remains an aspirational reward; for others, saving a few cents per gallon of gas on a few fill-ups per year appear to be motivating.

2. Attainable rewards: The consumer must believe she/he can earn the reward in a reasonable time and that the actions required to earn the reward are worth the costs, e.g. risks of trying something new, the inconvenience of crossing the highway to buy gas from a specific station. .  “Attainability” is a word that those of us in the loyalty business speak about almost as a technical term.  But at its core, attainability is a mental calculation or a gut feeling that everyone who continues to participate in a loyalty program operates on.  To continue demonstrating the requisite behavior for the time needed to earn the reward, a consumer has to believe it’s a good deal.  Am I going to stay in LA two hours later and take the 12 AM Delta flight instead of the 10 PM American, just for the frequent flyer miles?  Am I going to carry a Stop & Shop card and use it every time I shop there to get discounts?  Am I going to pay $25 to join the Barnes & Noble program to receive 10% off my purchases for a year?  If I believe I am getting good value for these behaviors, I will continue to do them – as long as I am reminded of the benefit (see Awareness below).  If not, I won’t.

A simple way to think about attainability is “how long does it take to get something I want.”  One of the major benefits of a coalition program over a stand-alone or single company program is the consumer’s ability to accelerate and maximize attainability by consolidating all of their shopping with program sponsors.

At AIR MILES, based on our initial research and re-enforced by ongoing Collector behavior and feedback, we designed the program so that the average member could earn a free trip in a year and, with the addition of our lower mileage reward options (acronymed LeMRO’s), a smaller reward every month.  Adding LeMRO’s to the program in the mid 90’s dramatically improved our attainability for a broad selection of Canadian consumers.  One of the most important consumer groups became the front line employees at our Sponsors.  A young person pumping gas at Shell, for example, wouldn’t spend enough in a year to earn a free flight, but could earn several movie passes or days skiing with our expanded and more affordable reward options.

The attainability of programs that offer cash back, usually 1% back, present an interesting question.  For some, getting a discount of any value is aspirational and therefore even small amounts back at the time of purchase or later into an account also represents program attainability.   This segment may change over time, partly driven by life stage and partly driven by the economy – particularly the consumer’s personal household economics.   One thing we believe is that the amount of cash or funds that can be reasonably collected over a year in niche marketed programs must be reasonably significant.  For example, saving $20 a year toward a college tuition bill that will likely cost me $500,000 in the not too distant future doesn’t feel like a “good deal.”  Neither does being able to decrease a $25,000 season ticket to an NFL game by $500.  But again, attainability is in the eye of the collector.  That said, one thing that cash back does not offer is a reward that is easy to differentiate from competitive offers. Furthermore, putting a dollar in a member’s account can be the most expensive reward (see Affordable below).

3. Accessible rewards: Rewards must be relatively easy to both collect and redeem. If access to rewards is inconvenient, feels complicated, or requires multiple steps, the less attractive the consumer value proposition.

It is amazing how many programs blow this one.  Granted, I don’t believe anyone starts out trying to design a program that makes it difficult for consumers to earn rewards. In their desire, however, to rush to market – usually for reasons as urgent as a thinning cash flow – many companies end up with unbelievably complicated or burdensome programs.  The two best known examples of this are the grocery execution for the 1992 AIR MILES program in the US, and a Dominos Pizza offer in NASCAR’s Race Points program.

In early 1991, Loyalty Management Group, the company that launched AIR MILES in the US, was struggling to sign grocery chains as sponsors and also realized that the then hugely fragmented nature of the retail grocery store industry would make it difficult to sign enough to offer sufficient convenience to the majority of American households.  LMG made the decision to offer exclusivity instead to the major consumer packaged goods (CPG) companies – brands like Coke and Kellogg’s – as a way to offer miles to collectors.  Although LMG executives were able to sign up multiple companies offering great offers on literally hundreds of products, in the pre-internet era, the only way for consumers to actually earn points for buying the specific products was to cut out the UPC codes and mail them to the company’s clearing house partner.  Two years after launch, I called my then-70 year old mother to tell her that the US program was shutting down and to reassure her that I still had a good job.  The first thing she said was, “Oh my, that must be because of me!”  Certain that she was not the cause of the company’s demise, but always interested in her thinking, I asked her to explain.  She replied, “Because I have a whole drawer full of UPC codes that I have cut out and keep forgetting to mail in.”  Although my mother was a social worker (and later twice First Lady) by profession, her business and political instincts were almost always spot on.

Several years ago, NASCAR developed and launched a Race Points program with the firm Stoneacre.  Although some offers were strong and easy to collect, the program suffered from low attainability with no grocer or other major retail sponsors, and with at least one sponsor requiring a baffling level of complexity to earn points.  Dominos, a great and nearly ubiquitous brand, was a Race Points sponsor.  But to earn points from Dominos, collectors had to: (1) Buy pizza, (2) Go to the NASCAR web site, (3) Find and click-on the small Race Points icon, (4) Find the Sponsors tab, (5) Click on Dominos, (6) Locate and print a form, (6) Find the piece of paper that was taped to the pizza box (probably now in the trash or being destroyed by the collector’s Lab), (7) Locate the code on the bottom of the piece of paper, (8) Write down the code on the printed form from Step 6, and finally, (8) Fax in the form to Race Points.  My reaction as a consumer was TMTNGTDT: (too much trouble, not going to do that).

These are extreme, although quite real, examples.  Less extreme would be to require payment card registration or payment with a specific credit card.  These requirements have worked in many programs, but none are as easy as simply showing the same membership card at the point of sale at every sponsor.

Another requirement that will dampen initial and ongoing consumer participation is what we call “two-step programs,” where the consumer must collect points in one program (usually an existing single company program) and then transfer them into another program’s points before they can be redeemed.  This, too, can work and is made far easier with the Web.  For example, I am a loyal American Express Membership Rewards collector and often transfer my Amex points into Delta’s Skymiles.  This can now be done in a few clicks within the Membership Rewards web site, which credits the miles in a few minutes – quick enough for even a world-class procrastinator like me to be able to transfer points and book flights at the last minute.  Although transferring points from one program to another can increase attainability, such a design increases complexity and adds friction that will decrease participation and behavior change, at least to some degree.  Again, the more aspirational and attainable the reward, the more hoops an avid collector will jump through to earn the reward.

4. Affordable rewards: The cost of the reward to investors, the program operator and merchant participants must be less than the incremental value of the concomitant consumer behavior change, on a fully diluted basis.

At the end of the day, nothing else matters if the program is not demonstrably profitable to whoever is paying for the cash back, the points, or other benefits.  In most programs this means that the entire system cost of delivering the reward to program members in exchange for their specific shopping behavior must produce a positive ROI, or return on investment.  The program must be designed in such a way that the economic benefit of members’ behavior change can be shown to be greater than the full cost of implementing the program.  The larger the program, the greater the ROI burden on the company executive sponsoring the program and the agencies or program operators helping run it.

With the growing opportunities for leveraging social, mobile, and interactive digital media to monetize online consumer behavior, the sources of value from reward programs are expanding rapidly.  Traditional programs must prove program ROI from a combination of behaviors usually referred to as lift, shift and retention.  Lift is increased spending from existing customers who join the program. Shift is new revenue from customers who switch from a competitor to the participating business or try a new product. Retention is the revenue gained from slowing or eliminating defections to competitors.

While we use “affordability” as a catchall for program ROI, the actual cost of the reward is an important part of the equation.  The greater the difference between the perceived value of the mile or point to the program participant and the cost of redeeming that point to the company or program operator, the easier it will be to demonstrate and prove profitable behavior change.  The original AIR MILES Shopping Reward Programme developed by Sir Keith and his colleagues in the late 80’s benefited from the ability to access excess seat inventory from British Airways at a fraction of the retail cost of buying a seat.  It helped that BA owned half the company.  Points-based programs can also benefit from “breakage,” or the percent of points that expire or are otherwise not redeemed. That being said, I like to work with programs with minimal breakage in their economic models.

While affordability and ROI are hugely affected by the cost of the reward, the most important part of the equation is not the cost, or the “I,” but rather the level and economic impact of the demonstrated behavior change, or the “R.”  The more aspirational the reward, the faster the attainability, the more accessible the sponsors, and the greater the ease of collecting points, the greater the behavior change.  And most important, if the combination of the company’s product’s, and service’s consumer value proposition (including the reward program) do not provide significantly greater competitive value to targeted customers, then the program will not change behavior over time and instead become only an additional cost of doing business.  This is what happened to trading stamps in the 60’s.  Eventually nearly every grocery store and every gas station offered stamps that could be redeemed for exactly the same merchandise in exactly the same amounts. Eventually, since no storeowner or company executive believed the programs were creating profitable behavior change, they all stopped issuing the stamps.  I believe the ubiquitous grocery gas discount programs are headed rapidly in the same direction.

5. Actionable data: The program operator and merchant participants must be able to identify the incremental spending and profits, and/or the improved retention of members and opportunities for targeted initiatives.

At the end of the day, all businesses continue to exist over time because they create value for their customers – the force that actually generates revenue.  The same is true in spades for loyalty programs, coalition or other.  Those programs that continue to exist and grow, like AIR MILES Canada and Nectar, are clearly providing demonstrable value to their Sponsors.  With AIR MILES Canada’s annual revenues approaching one billion, it’s safe to assume that some sponsoring companies are paying around $100MM per year for their loyalty program.  They would pay this amount, nor would AIR MILES have grown to anywhere near its current size without the ability to prove that the money Sponsors pay for points, data, insights, and targeted marketing programs increases the profitability of AIR MILES Collectors far in excess of their investment.  I use the word investment intentionally.  One of the company’s greatest competencies is their ability to track collector behavior and to work with Sponsors’ CFO’s and other leaders to calculate and maximize their return on investment.

This is only possible if the program is designed and implemented to enable both the program operator and the participating companies to measure behavior change: namely, lift, shift, and retention.  Program value can only be maximized for all parties if the loyalty program’s information system has the ability to identify the gap between members’ potential and current spending at sponsors.   A simple example would be the ability to identify a program member with four persons in their household, who lives within a few blocks of a sponsoring grocery, but spends less than $50 a week at the grocery.  Higher levels of value can be created by understanding other demographic characteristics, responsiveness to offers, reward preferences, etc.  This is another advantage of a coalition program over a stand-alone or single company program.  A coalition program will always have a more robust data set on its members than a single company loyalty program. Coalition programs even have the opportunity to identify changing consumer spending habits over time, e.g. home renovation or an increase in household size (e.g. babie$).

Regardless of whether the program is stand-alone or coalition, the ability to credibly track the cost and value of incremental behavior change, and increasingly, identify high-potential, underperforming households, must be built into the program design before launch.  At a minimum, neglecting this important element will make the program operator’s life miserable.  More likely, executives within the companies who are paying for the program will – and arguably should – kill it.

6. Awareness of benefits: The program attributes and benefits must be clearly and effectively marketed on an ongoing basis to both potential merchant sponsors and to consumers who become program members.

Although this would seem like a no-brainer, we are continually amazed at the number of poorly marketed loyalty programs.  Some recover after a weak launch, but many remain so over time. We can also point to positive examples.  CVS does a great job of marketing their ExtraCare program. 99% of the time I am asked for my CVS card by a cashier and 100% of the time by the self-checkout machine.  CVS also lets customers use their phone number as a program identifier, a good example of making the program accessible, or easy to collect.  Although we never analyzed this, we all believed that one of the primary drivers of AIR MILES’ early enrollment and ongoing participation success was the fact that almost all Sponsors’ front line employees “ask for the card.”  When we were recruiting sponsors for Jaz Rewards in 1999, I would bet US company executives $1000 that if they drove across the border and bought either gas at Shell or groceries at Safeway they would be asked “Do you have an AIR MILES card?” I never lost that bet.  While in Canada, I was a member of YPO (Young Presidents Organization) and was fortunate to be in the small group Forum with Don Guloien, now CEO of Manulife.  Don showed up at a Forum meeting one night, looked at me and said, “I almost got in a fight because of you today!”  Don is a brilliant and passionate Chief Executive, but doesn’t exactly strike you as someone who would ever get in a fight. Shocked, I asked him why.  He responded, “I’m driving a Suburban and the guy at my local Shell told me I was an idiot for not having an AIR MILES card, given how much we spend on gas.”  You get the point.

Creating awareness for the program at launch and on an ongoing basis is critical, but awareness without understanding is actually more damaging than below threshold awareness.  I unfortunately learned this the hard way when we absolutely blew our initial launch marketing for AIR MILES.  We created a marketers nightmare: high awareness faced with even higher misunderstanding.  Many Canadians thought we were a frequent flyer program (duh!), or a credit card program, or that it would take forever to earn a reward.  We knew we had a problem when initial enrollments fell short of our expectation, so we immediately invested in research to understand the problem and rapidly changed our creative to address the problem (this last is now the subject of a business school case study). We learned two lessons. The first was to not get too creative with the program message.  Whereas our initial creative featured people shopping and then flying through the air, our re-launch marketing focused on sponsor products and services with the tag line “buy me, fly free.”  We learned the value of “two-by-four” marketing.  The second lesson taught us to promote “attainability.”  We produced a simple chart that showed potential and existing collectors how quickly their miles would accumulate if they shopped at our largest sponsors, as well as what those miles could be redeemed for. The value of a coalition program became immediately clear.  It is amazing how many programs fail to use this simple but powerful approach to demonstrating their potential value to customers.

The Virtuous Cycle of Profitability

If you get the 6 A’s right, both at launch and on an ongoing basis – and if you are running a coalition program and the sponsoring company partners also get it right at launch and on an ongoing basis – you can create a virtuous cycle of profitability for all stakeholders.  As we stated above, all businesses eventually succeed or fail based on the value they create for their customers and their investors.  One of the reasons we are so passionate about the coalition loyalty model is that the value creation formula is so visible and so linked between collectors, sponsors, and investors.

When I was CEO of the Loyalty Group, part of our mission statement used to read, “always put the Collector first.”  At our core, we believe that loyalty programs must work for the customer – the person who joined the program.  First, the customer must be getting a reward they value, in a reasonable period of time. Next, this must be in return for actions they believe represent a good deal relative to the value they perceive themselves earning.  A program that achieves these two results yields consumers who will not only join, but also continue to exhibit the desired behavior.

In a coalition program, the consumer maximizes program value, or points earned, by consolidating all of their purchases at sponsoring companies.   Sponsors in turn benefit when program member buy as much as they can from their respective businesses.  Most sponsors also want program members to buy specific products that offer bonus miles, as well as register for automatic payment, pay their bills on time, and/or exhibit other profit maximizing behavior.  The consumers’ desire to earn points and the sponsors’ desire to maximize share of wallet are completely aligned. This, however, only touches the surface of the value creation story.  We found that if Sponsors were seeing a significant ROI on their investment in AIR MILES, and at the same time we were helping them identify opportunities to target underperforming customers, they would actually help us recruit additional sponsors.  Derrick Fry, SVP of the Bank of Montreal, flew from Toronto to Calgary with us to attend a dinner with Shell executives who were considering joining the program and then took the red eye back to work that same evening. Both Bill Turner, CMO of Sears Canada, and Jim Brophy, a BMO Vice President, participated in our pitch to the Chairman and President of A&P Canada, who soon after joined the program.

More sponsors in the program increase collector attainability, and this, in turn, increases collector loyalty to each individual sponsor.  Although this is intuitive, it is backed up by behavior we saw demonstrated quantitatively in our programs.  We began to call this pattern “the multiplier effect.” Nectar and their grocery partners Sainsbury’s allowed Harvard Business School to publish the following chart in an HBS Case Study, showing that collectors increased their spending at Sainsbury’s as they increased the number of other Sponsors they bought from:

Consumer value creates sponsor value; sponsors invest to increases consumer value, which even further increases sponsor value.  But what about the program operator and its investors?  They, too, participate in the virtuous cycle. Coalition loyalty is like many businesses, in that they must invest in the creation of a customer. In this case, the customer is a program member.  The program member is initially a cost and only a potential asset. The cost of creating or acquiring a program member only becomes a profitable investment if the consumer begins to earn points by shopping at sponsors.  Depending upon the cost of acquisition and enrollment, the program operator will likely not create a profitable collector if the program member only shops infrequently at one sponsor.  If they shop at more than one sponsor, however, the program member begins to contribute to the fixed costs of running the program sponsors.  Collector value – and therefore program value – is maximized when members consolidate their spending at as many sponsors as possible.  Again, the value creation of all stakeholders – collectors, sponsors, and program owners and operators – is clearly and completely aligned.  This explains why coalition loyalty programs, (with a few notable exceptions), either become large and sustainable businesses or fail within a few years of launch, and why a company three of us started in a hotel room now employs thousands.

So if this is the model for program success and investor profitability, how are coalition loyalty and stand-alone programs doing?  In aggregate, not well, at least in the US.  The loyalty trade magazine Colloquy reports that the average US household has joined 14.1 loyalty or shopping reward programs, yet remain active in only 6.  In other words, the average American consumer has joined and consequently dropped out of more programs than those they have found valuable enough to remain active in.  From our experience around the world, we know that well designed, launched and run loyalty programs can maximize value for all stakeholders.  We believe that those who have joined “the billion dollar club” of loyalty losses invested in programs that failed to fully understand and implement one or more of the 6 A’s of loyalty success.  When this happens the virtuous cycle of profitability can quickly become a vicious cycle of failure.

In future articles, we will share examples of best and worst demonstrated practices for each of the 6 A’s.