Coalition Programs

Coalition loyalty programs can be extremely effective. Coalition programs involve a group of dissimilar businesses working together to offer membership benefits.

Coalition Loyalty Programmes: the who, why, and how big?

By By Peter Clark (co-author, The Loyalty Guide)Published by The   Wise   Marketer in April 2006

There are two types of multi-partner programme: true coalitions and in-house programmes that have partners. Here we explore the strengths, weaknesses, opportunities and threats of true coalitions...

Tesco's Clubcard is a single operator programme that bloomed into a multi-partner programme, while built-for-the-purpose coalitions include Nectar (UK), Air Miles (various countries), Bonus Link (Malaysia), Gold Points (USA), PayBack (Germany), and Infinity (South Africa), among others. From here on, we're only talking about the true coalition loyalty model.

The four governing factors There are four essentials that a coalition loyalty programme must provide if it's to be successful:

1. Rapid market penetration A coalition programme should launch with a major partner in several of the key consumer sectors in order to quickly capture a significant proportion of consumers' spend. Ideally, these would include a major grocer, fuel retailer, bank or credit card, department store, and a mobile telecoms provider. 

2. Deliver attractive rewards One of the main advantages of a coalition programme for the consumer is that aspirational rewards can be earned within a reasonable time - even in as little as six months. This is because points can be earned on a large proportion of their normal monthly spend, if they buy from the right outlets. 

3. Be first into the market Generally, the first coalition programme in a region has an almost unassailable advantage. Once more than half of target households are signed up and have begun collecting, it is very difficult to tempt them to change to another programme. But there are exceptions: Nectar launched in the UK where Air Miles had already been for 13 years, but the founding partners brought huge existing member bases into the programme, in some cases automatically. 

4. Build reliable communications: Today's consumer wants to communicate via all sorts of channels: the mail, the internet, by telephone, by text message and even in person by face-to-face contact - all of which offer different strengths, weaknesses and costs. In general, partners save a fortune on marketing and communications - but they're also 'tarred with the same brush' if the programme manager's communications aren't up to the standard consumers expect.

Are coalitions a good or bad idea? Let's start with a few major advantages, then we'll move on to some disadvantages. The advantages of coalition programmes apply equally to consumer and partner.

Advantages include...

5. Consumers are interested in greater rewards Consumers' interest is most easily held by a loyalty programme that offers that magic word: choice. The opportunities to earn points are more frequent and varied, the rewards are bigger and can be more aspirational, and the range of rewards can be greater. 

6. Wallet space and consumer engagement The coalition's plastic card, token, or electronic ID is more likely to be carried all the time, and more likely to be used frequently. Each time it is used, it reminds the customer of the programme and further stimulates interest and engagement. 

7. Cost benefits and competitive advantages A major cost benefit - and often a competitive advantage - is that most of the development work has already been done by the coalition programme's operator, sparing partners the time, money, and manpower of developing a programme. But while the costs are usually borne by the operator, in some cases they may be shared by founding partners. 

8. A more complete and useful database The database is likely to be bigger, more comprehensive and probably better run than an in-house, home-built system - and the budget for data hygiene will be bigger. The database is central to the business of the programme operator - without an efficient and useful database, the operator has no business. 

9. Sector exclusivity nurtures market dominance The fact that one big player launches a major loyalty programme does not prevent its competitors from doing the same thing. In fact, it probably stimulates them to. But coalitions usually give each partner exclusivity in its sector, and if the coalition achieves significant market penetration, this puts the partners in a fantastically strong position. 

10. And beyond... There dozens more real advantages to coalitions that we haven't got room to cover here (but they're detailed in our new Loyalty Guide report) - for example: Concentrated, coherent promotions; broader data collection; shared marketing campaigns and segmentation; central and detailed analysis; higher penetration rates; it also works for high ticket/low frequency companies; rewards and points cost less; the IT and maintenance requirements are fewer; consumers have fewer cards to carry, and earn points more quickly; the sheer range of partners means a greater variety of rewards; and consumers only have to deal with one membership account.

There are some disadvantages, too - but not as many as there are advantages, and they can all be addressed with careful planning.

Disadvantages include...

11. What if the key player expands? One of the main challenges that a new coalition in the emerging markets would face is the significant and rapid encroachment of grocery retailing into broad-based non-foods, specialist financial services and other sectors. This is creating a block to new coalitions since the grocery player is a 'must have' partner for the frequency of customer contact and yet many grocery retailers internationally are now much less willing to give ground to other sectors and are also viewed as 'predators' by other sectors.

12. Who owns the data? This has to be contractually agreed when a partner enters the programme, and it varies from coalition to coalition. In a typical coalition data model, basket-level data is not kept by coalition programme operators. Partners wishing to analyse data to this level would have to maintain their own POS-driven databases (and they would own that data) - but data collected by the coalition's operator is owned by the operator, with access to limited information being negotiated and conducted through the operator. As a rule, a partner will not have direct access to data gathered by other partners. Marketing and data usage is usually done for partners by

the operator, at a cost. 

13. Where does the customer's loyalty really lie? Is the customer loyalty to the programme, or to each partner? It's likely that any partner dropping out of a coalition programme will lose some of its customers, particularly if replaced by another company in the same sector. 

14. Where does your reputation stand? As mentioned earlier, partners' customers will tend to regard the programme as if it were owned by the partner, so any disappointments or frustrations will reflect on the partner as well. 

15. How do you pilot a coalition? It is difficult, if not impossible, to pilot a coalition programme on a small scale before the launch. Because coalition programmes depend on their size, impact and broad cover of the customers monthly spend, if even one major partner is missing from the programme the results of a pilot would be meaningless.

All told, it seems that coalition loyalty programmes are the way of the future - an argument supported by our July 2005 'Loyalty Probe' survey, 'Where the future of loyalty lies', in which coalitions were among the top three options for future loyalty marketing initiatives (along with mobile phone-based marketing and instant rewards programmes).

How big will the coalition really be? We're often asked about "the size of the market for a coalition" in various countries. It's not an impossible question, but it's not easy either - mainly because the answer depends on several things: 1) the measure of market size (is it measured by cards issued, households penetrated, total spend, or number of customers); 2) the countries/regions included; 3) the sectors included (very different figures would come from grocery & fuel, general retail, and travel & entertainments); 4) what kind of loyalty programme it is (e.g. global, internet-based, sector-specific, affinity, special interest, and so on); and 5) whether or not the value proposition is attractive enough. The estimates for each country will also vary depending on culture, population density, size and culture, and economic conditions.

But we said it's not impossible. In fact, there are a few key variables you need to know, and then you can made a very reasonable estimate about how big any loyalty programme is likely to grow, year by year. Using historical data, plus original market research, The Wise Marketer developed a model that predicts future market sizes. In a nutshell, the model takes into account the available market size in any given country or region, along with the likelihood of reaching each of a range of minimum and maximum market penetration rates (during both the initial growth and long-term stages). Interestingly, the model placed Nectar at 50% - 60% household penetration after three years of operation, and that's exactly where the programme landed.

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