Benefits and Limitations of Traditional Multi-vendor (Coalition) Loyalty Rewards Programs

Introduction to traditional loyalty programs

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With the confluence of AI and blockchain technologies, the next technological wave for loyalty rewards programs is upon us. To understand the present day change and its opportunity, it is important to trace the history of traditional loyalty programs and their existing challenges.

Loyalty rewards programs have existed for centuries. One of the first instances of loyalty rewards reportedly began in 1793 when copper tokens were issued by American merchants. With each purchase of goods, merchants would issue these copper tokens to allow customers to redeem discounts on the next purchase, thereby incentivizing customer retention. Copper tokens were soon replaced by stamps, which could be redeemed against a catalog of products.

Fast forward to the 1980s, American Airlines launched the Frequent Flyer programme, which marked the beginning of the modern loyalty rewards era. Instead of boosting revenues by acquiring customers through travel agents (which was the predominant channel at the time), the rewards program allowed American Airlines to directly incentivize repeat purchases, thereby increasing the LTV of customers.

This set the foundation for the first loyalty coalition program where American Airlines partnered with Holland American Line, Hertz and British Airways. The coalition rewards model has since spread to other sectors, allowing consumers to exchange or use their rewards across partnering businesses.

The ability to use rewards across businesses creates more perceived value to the consumer, making it easier for businesses to operate effective rewards programs. In contrast, closed rewards programs have more limited offers, making them less attractive for consumers and more difficult for businesses to sustainably generate value.

Examples of existing coalition programs:

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Below are some examples of loyalty rewards coalitions categorized by sector:

Airlines:

• Air Miles (Canada): Partners include airlines, hotels, car rental companies, retailers, and financial services providers.
• Avios (United Kingdom): Partners include British Airways, Iberia, Aer Lingus, and various hotels, car rental companies, and retailers.

Retail:

• Nectar (United Kingdom): Partners include Sainsbury’s, Argos, eBay, and British Gas.
• PAYBACK (Germany, etc.): Partners include retail stores, online marketplaces, travel agencies, and financial services providers.

Financial Services:

• Membership Rewards (United States): A program by American Express that partners with airlines, hotels, and retailers for point redemption.
• Citi ThankYou Rewards (United States): A program by Citibank that partners with airlines, hotels, and retailers for point redemption.

Fuel and Convenience:

• Fuel Rewards Network (United States): Partners include Shell, Mastercard, and various restaurants and retailers.

Telecommunications:

• Telco Loyalty Coalition (Indonesia): A coalition of telecommunications companies offering a shared rewards program.

Limitations with Existing Coalition Programs

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Despite the potential benefits of increased customer engagement and loyalty, these programs also come with associated costs. The most common costs associated with multi-vendor loyalty programs include the following:

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1. Program development and implementation: The development and implementation of a multi-vendor loyalty program requires significant investments in time and resources. A study by Biesdorf et al. found that the initial setup and development cost for a coalition loyalty program could range from $5 million to $50 million, depending on the scale and complexity of the program. This cost includes program design, legal and regulatory compliance, integration with partners, and the establishment of a clear rewards structure.
2. Technology infrastructure: Multi-vendor loyalty programs require a robust technology infrastructure to manage and track customer data, rewards, and transactions across different vendors. For example, a study by Kabadayi et al. found that technology infrastructure costs for coalition loyalty programs could represent up to 20% of the total program cost.
3. Data management and analysis: Collecting, storing, and analyzing customer data are crucial for the success of multi-vendor loyalty programs. According to a report by McKinsey & Company, data management and analysis costs can account for 15–25% of the total loyalty program expenses. These costs include data storage, analytics software, and the hiring of data scientists and analysts.
4. Marketing: Promoting a multi-vendor loyalty program involves various marketing expenses, such as advertising, public relations, and in-store promotions. An article by Palmatier and Steinhoff reported that marketing expenses for coalition loyalty programs could represent 10–30% of the total program costs.
5. Partner management: Managing relationships with multiple partners in a coalition loyalty program can be complex and time-consuming, requiring dedicated resources for contract negotiation, performance monitoring, and dispute resolution. A study by Cao et al. found that partner management costs could account for 5–10% of the overall program costs.

Additional Limitations of Traditional Coalition Loyalty Programs

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While the value and benefits of a truly open rewards program are substantial, traditional coalition programs are presently ill-equipped to maximize such value:

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• Power inequality: In addition to substantial costs associated with multi-vendor loyalty programs, it is difficult to prevent these programs from being dominated by the largest party in the coalition, thereby limiting the negotiating power of smaller participants. This can lead to economic inefficiencies in the system that reduce the value generated by opening the rewards program.
• Scalability: It is difficult to construct a highly scalable multi-vendor system. Economies of scale only work in favor of a certain number of vendors, after which the complexity of management and administration increases costs considerably. Additionally, the openness of these programs is further reduced by businesses wanting to exclude, or selectively include, perceived competitors.
• Friction in harmonizing points systems: Centralized coalition management, conflicting technical systems and power inequalities lead to high friction and costly inefficiencies in harmonizing point systems across coalition members. Fungible rewards (e.g. points) are the mainstay of these coalitions, and yet harmonizing the points systems across the coalition to enable open rewards is incredibly high-friction.
• Open Redemption Costs: In order to provide a reward that can be redeemed across businesses and brands, such coalitions generally rely on: (i) either adoption of a common platform reward or; (ii) require each business to effectively purchase each others’ rewards to enable a pseudo cross-brand redemption. Both solutions tend to increase the actual redemption cost of the loyalty points of a business. This cost can of course be offset by higher CLV, but there exists a more optimized solution.
• Brand Dilution: In a coalition program, partners share the loyalty platform and branding, which may have an influence on the individual brands’ value and may also create confusion among customers. The risk is that this can lead to reduced customer engagement and loyalty, ultimately affecting the program’s long-term profitability.

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We developed Frictionless Open Rewards^TM in order to give businesses all the benefits of being a part of a colton rewards program with none of the tradeoffs.