How Coalitions Help Support the World of Customer Loyalty

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It is the natural evolution of customer loyalty programs: Two or more companies with common goals unite to become partners in a joint network currency program.


They share acquisition, marketing and administration costs and reap the benefits in terms of increased share of customer, better customer information and lower operating costs. They are called coalition programs, and they are appearing all over the globe.


A coalition design must satisfy the needs of three critical groups: members (consumers), the program manager (the entity created to operate the coalition) and partners (the companies sponsoring the program). To be successful, programs must adhere to certain principles of coalition operation gleaned from success stories around the world.


Create aspirational rewards. Frequent-flier miles are the loyalty currency of choice around the globe for a simple reason: Their perceived value in the minds of consumers is much higher than their cost to the airlines and their partners. But frequent-flier miles are not getting any cheaper, and they are getting harder to use. With free travel becoming more problematic, what reward offering can satisfy the hopes and dreams of consumers and truly change their behavior?


One school of thought leans toward altruistic rewards, such as programs that hope to encourage families to shop with partners in order to fund their children's college funds.


But can these long-term goals overcome consumers' short attention spans and need for instant gratification?


Whether it is travel, entertainment or merchandise, make the reward something that enhances your customers' self-image and lifestyle. Make the offer compelling by making it substantial, worth the effort of changing behavior and stretching to achieve it. Aspirational rewards have emotional appeal. They create psychic income by bestowing a sense of self-worth. And they bestow a competitive advantage that can't be beat.


Be first to market. The rumor in Canada is that Shoppers Drug Mart, one of the country's largest pharmacy chains, is making noises about anchoring its own coalition program. The problem is that the Air Miles Reward Program has been so successful and ingrained in the minds of Canadian consumers that attempting to compete with it is daunting.


The entrenchment of Air Miles in the minds of Canadian consumers shows the importance of being first to market with a coalition model. The opportunity to create and sustain competitive advantage is huge. Consumers become vested in the program, which makes it tough for a competitor to steal them away.


Achieve critical mass. Besides a weak, cash-based value proposition, the primary reason why Provident Bancorp's MeritValu failed in 1996 was its designers' decision to build a coalition around one central sponsor and a slew of small merchant partners. Not only did consumers earn mere pennies by participating, but they also had to shop at any number of mom-and-pop stores just to earn those pennies. By failing to attract or sign any other major partners, Provident ensured that MeritValu would remain small potatoes to members.


To achieve critical mass -- the point at which the earning power and value proposition work together to drive member acquisition and participation -- a coalition program should have three major partners.


Partners should be category leaders, national players that contribute money, prestige and members to the program and share the risks and rewards. As the coalition grows, an ideal range of four to six major players should be the goal. If the partners are committed and the value proposition is strong enough, the program will ignite.


Use food and gas as the program fuel.The goal of any coalition program is to capture as much of the members' monthly household budget as possible. The wider the variety of partner choices a member has, the more likely he is to keep his dollars within the coalition -- provided the payoff is irresistible.


Perhaps no two categories are more important than food and gasoline. Both provide frequency of accrual, which is critical to sustaining program interest. Families spend an average of $120 per week on groceries and about half that amount on gasoline. While the merchants may only be able to fund points at a rate of 1 percent, the regular, frequent purchases help keep the program top of mind and fuel continued earning.


The annual reward value of grocery and gasoline purchases together may not match what is generated by retail, travel and entertainment partners. But the promotional value of those frequent and essential purchases cannot be overstated. Food and gasoline partners provide the weekly fuel that makes the coalition engine run.


Build/select the right information technology backbone. The planning and implementation requirements of the IT infrastructure behind a coalition program are substantial. Hundreds of questions arise.


How will data be collected and transmitted? Will the program allow members to interact across a wide variety of contact points? Will they be able to redeem for awards at point of sale? How will partners be given access to program data? How will analytical functions be driven? What kinds of member identification devices will be used? Will the data transfer occur in real time or batch transfers? Who will own the data?


The important thing is that whatever hardware and software packages provide the back-end support, the infrastructure must be flexible and expandable. The infrastructure must provide for the breadth and depth of bonusing required by the partners, it must be able to target incentives based on SKUs and it must provide for targeted messages based on any number of database variables and communication channels. A well-designed IT backbone will allow for low variable operating costs, making the coalition profitable for the sponsor and the participants.


Plan for the long haul.The hard truth is that every decision made at each stage of the design process begs numerous questions.


What is the coalition trying to accomplish? How will you benchmark success, and what factors will you use to gauge return on investment? How do you establish price points for partner currency? Can you balance the needs of low-margin players like grocers with those of high-margin specialty retailers? How will you manage and control all consumer touch points? How will you ensure that all partners are promoting the program consistently? Will promotional requirements be laid out in the contracts or will you rely on blind faith and providence? And what about the exit strategy? How can partners get out if the coalition is not working for them?


Just like a proprietary loyalty program, natural and economic forces can act as inertia, slowing coalition growth and profitability. The economy might go south. A major equity partner might bail out.


The program will follow its natural life cycle -- the enrollment stage, the participation and usage stage, the sustained stimulation stage -- but it will inevitably begin to decay from the day of launch.


You must design a coalition that is flexible enough to lead a long and healthy life. By balancing the needs of members, the program manager and program partners, your coalition can support a world of profitable, sustainable customer loyalty.


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