Many loyalty programs do not stand alone. Frequent flyer programs and hotel loyalty programs take on partners such as other airlines, hotels, restaurants, banks, and retailers. Other programs, such as Fuel Rewards in the US and Air Miles in Canada, are by design a coalition of businesses that come together to share a common program currency and reward structure. For consumers, such coalition programs are great because they allow consumers to earn points faster through many different means. But what about the participating businesses? Is it worthwhile to be part of such a program? If you do, should you set a generous point earning and redemption policy? In today’s Research Focus feature, I find some answers in a recent Marketing Science Institute Working Paper (Report No. 19-101) by Professor Stourm and her colleagues.
What Did They Do?
The researchers looked at a credit card based coalition loyalty program in Europe. In the program, card holders earn points by shopping at various partner businesses. Each participating business decides its own reward ratios, from less than 1% up to 3%. When a preset reward threshold is reached, consumers are automatically issued a reward voucher that they can use toward future purchases. Participating businesses can choose whether they accept reward vouchers or not. Accepting reward vouchers comes at a short-term cost as the program operator reimburses only 90% of the values of the vouchers.
In their analyses, the researchers focused their attention on one particular European city. They studied 1,636 consumers that used their card at least once across 40 partner stores located in the city. The research team was interested in finding out whether offering rewards created positive or negative impact among these partner stores, what businesses benefited, and how point devaluation as a result of an overall program policy change affected the landscape.
What Did They Find?
As a baseline, offering a higher reward ratio at one store had a negative impact on other stores in the partnership. But not all stores were affected to the same extent. How much a store was influenced by other stores in the coalition depended on:
- Does the store allow reward voucher redemption? Stores accepting reward vouchers were less vulnerable to the negative spillover from partner stores.
- Product offering similarity. Stores that carried similar product categories were more likely to experience a synergy from each other. Slightly over half of the store-to-store effects between stores selling the exact same product categories were positive. That is, for these stores, at least half of the store-to-store effects represented synergy rather than competition. This synergistic effect was much less likely between dissimilar stores with no product category overlap. Only 36% of the cross-store effects were positive among unrelated stores.
- Geographic proximity. Stores that were close to each other were more likely to experience a synergy. However, stores that competed in the same product categories AND were located near each other did not enjoy synergy. They negatively affected each other instead.
During the study period, the coalition loyalty program put into place new policies that de-valued the program points. The research found that stores on average became less influential on each other. What’s more, the effects became more similar across the board. Accepting the reward voucher no longer insulated a store from negative spillovers.
What Does This Mean for Marketing Practice?
This paper confirms that there are indeed competition among businesses that belong to the same coalition loyalty program. But careful choice of partners may neutralize the negative effect and create a synergy instead. So before joining such a program, you will want to carefully study the makeup of existing businesses in the coalition. You will want the other businesses to either sell similar product categories as you or are located close to you to create scale, but NOT both simultaneously. If you are an early member of a coalition loyalty program, it may be advisable to maintain some level of exclusivity so that there are no other stores just like you located in your vicinity. Similar stores from farther away are OK though, as even similar stores located within the boundaries of the same city in the study still could positively affect each other. It just cannot be really close.
When selecting how you want to reward program members, it pays to be a little more generous by allowing consumers to redeem their rewards at your business. Although accepting reward redemption comes at a direct cost, it can help your business be less vulnerable to other coalition members’ negative influences. The cost of the redemption itself may be offset if it helps you attract new customers or if it motivates consumers to indulge and spend more at your store.
As far as setting your own reward ratio is concerned, setting a higher reward ratio will make your business put a damper on others in the coalition. But having more clout this way will not insulate you from being vulnerable to others. In the research, there were some stores with high clout but also high vulnerability, and some stores with high clout but low vulnerability. So do not rush to set a really high reward ratio just to stand out from competition. It makes participation in the program more expensive to your business and may also trigger others to raise their reward ratios, resulting in essentially a price war where everyone may lose.
Caution
The specific European city context of the research deserves some attention. Although we do not know exactly which city it was, my own travel in European cities suggests that they are much more densely populated than a typical US city. People are much more likely to be on foot than driving a car. I suspect what is considered “far” in that setting may be quite different from a sprawling suburb in the United States. So geographic proximity expectations will need to be adjusted. The likely defining distance is that the two stores should not be competing for the same customers within their geographic radius.
The researchers also warn us about the possibility that geographic closeness may not mean much in the age of online shopping. So if you are an online business, you may not want many other online businesses selling the same things as you do in the coalition loyalty program. Without a physical distance to separate you, these competitors would be quite literally next door to you, accessible by simply the tapping of a few keys.
Reference
Stourm, Valeria, Eric T. Bradlow, and Peter S. Fader (2019), “Market Positioning Using Cross-Reward Effects in a Coalition Loyalty Program,” Marketing Science Institute Working Paper Series 2019.