Loyalty aggregation will lead to cluster programmes

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By: Wise Marketer Staff |

Posted on March 9, 2012

A new breed of reward-tracking web sites aimed at easing consumer frustrations with loyalty programmes are a step in the right direction but not a long-term fix, according to a study and white paper from Colloquy and Swift Exchange.

According to the paper, which examined the wave of websites promising simpler ways for consumers to to manage multiple loyalty programme memberships and points balances, these companies are the forerunners to fully collaborative loyalty solutions that will eventually allow consumers to consolidate their retail, travel and credit card rewards to help maximise and streamline their redemption opportunities.

The paper, entitled 'Mix Fix: Rewards Aggregators and the Trend Toward Collaboration', suggested that rewards aggregators are a mere stepping stone toward alleviating the deeper, systemic shortcomings that continue to plague the loyalty industry. These shortcomings most notably include the need to manage too many programmes, complex redemption requirements, and low returns on rewards.

Over time, the loyalty market has progressed from consumers belonging to a single programme, to partner programmes. These are usually in one of three formats:

  1. Members can convert their points or miles from one programme to another;
  2. A programme allows merchants to offer and fund bonus points as a reward for designated behaviour;
  3. A programme operator allows other companies to become partners in its programme and actually  issue the programme's points.

The authors point out that these solutions can be cumbersome and slow and the fees involved may dilute the programme's value.

Most programme aggregators function in the US, where true coalition loyalty programmes don't exist. The authors predict a move toward classic coalition programmes and also toward 'cluster' programmes. Cluster programmes are what Swift Exchange and Professor Jim Lattin at Stanford University call the new wave of partnerships between rewards issuers and merchants to maximise programme value. Such initiatives work in this way: Issuers form 'clusters' with partners. Each reward issuer distributes its own currency and retains control of its customers and programme. Consumers aggregate currencies across the cluster for redemption. Merchants offer goods and services for redemption within the cluster. This creates value for all participants.

The concept of 'Cluster Programmes' re-invents the traditional loyalty partnership approach that most programmes follow, allowing issuers and merchants to maximise their programmes' value for each other while at the same time improving the customer experience. The next horizon of loyalty marketing, Gordon suggests, should employ cluster models that allow rewards programme operators to work together while still maintaining control over key components of their value propositions, branding and messaging.

"The problem for everyone with partner programmes today is that points transfer and conversion offerings often have long processing times, cumbersome customer experiences, and fees that dilute the value proposition," explained Nancy Gordon, chief operating officer for Swift Exchange. "Cluster programmes come from the need for collaborative engagement between companies to address consumer needs while preserving a level of independence and control to address the issuers' needs."

"Particularly outside the United States, alternative approaches will hinge on coalition-building," said Kelly Hlavinka, managing partner for Colloquy. "In coalition rewards programmes, operators balance the interests of multiple sponsors and customers, so these programmes attract marketers who want to mix currencies across platforms without diluting their value, who want to offer customers a wider variety of earn and burn options, and who are looking for richer data."

The 2011 Colloquy  Loyalty Census revealed that the cumulative number of loyalty programme memberships in the US, at that time, exceeded two billion, or more than eighteen memberships per household. Add to that the fact loyalty programmes, particularly FFPs, have become more complex, with many more options and more restrictions. The level of rewards earned is often not very encouraging: the average retail programme has a 2% funding rate - that means that a member who spends US$500 in a year will earn only US$10 over the period - not very inspiring.

And, as the findings in the '2011 Forecast of US Consumer Loyalty Program Points Value' (the outcome of a collaboration between Colloquy and Swift Exchange) pointed out, of the US$48 billion in total perceived value of points and miles issued in 2010 in the US for consumer-oriented rewards programmes, US$16 billion was left unused - an average of US$205 in value per active household.

The paper provides a tabular analysis of twelve US aggregator programmes; most of them aggregate some 100 or fewer programmes, but the biggest, Award Wallet, covers over 400. They all allow members to track balances and most allow them to track expiring points. Several allow members to book and/or search travel information, and several offer extra benefits, like being optimised for mobile phones, ranking search results,  providing travel apps, or providing flight information. Some provide a comparative search engine that provides advice on how best to redeem rewards with, or instead of, cash. The problem facing many loyalty programme members is that they belong to too many programmes to manage effectively.

The paper therefore concludes that companies hoping to make a lasting contribution in loyalty marketing must simplify the consumer experience and enable more immediate gratification. As a result, the report suggests, loyalty programmes in the US are likely to follow a natural progression toward a mixture of cluster and coalition-driven loyalty programmes.

The full white paper has been made available for free download from Colloquy's web site - click here (free registration required).

For additional information:
·  Visit Colloquy at http://www.colloquy.com
·  Visit Swift Exchange at http://www.swiftexchange.com