Breaking the loyalty model

Japanese Internet services conglomerate Rakuten Inc., which made a splash in May with its $100 million investment in social media site Pinterest, rebranded its loyalty software company FreeCause to Rakuten Loyalty. The company also announced a partnership with Australian loyalty program flybuys, owned by Coles Supermarkets, that rewards members with loyalty points based on their online search activity.

Rakuten Loyalty recently received numerous resources from its parent company—CEO Michael Jaconi was coy about the specifics—however he said those added resources will allow the loyalty solutions provider to double in size and open new offices. The company currently has 55 employees (not counting interns) and plans to have 110 by the end of 2013.

We here at Direct Marketing News have covered a lot of issues around loyalty programs of late. There’s a glut of them in the market, meaning it’s hard to grab consumers’ attention. Additionally, many large legacy programs established before the proliferation of the Internet are wallowing in obsolescence.

Rakuten Loyalty CEO Michael Jaconi talks about the way in which disruptive technologies can affect loyalty programs today.

What exactly is Rakuten Loyalty?

We are [a] rewards acceleration platform. We want to deliver to consumers rewards that are meaningful and that trigger behavior…. We optimize existing loyalty programs.

What can loyalty programs do to innovate?

By rewarding consumers for day-to-day online action, like searching the web. What we’re seeking to do is to help optimize earn-and-burn opportunities. [Rakuten Loyalty] provides the opportunity to earn rewards for almost anything you can dream of. Anything that’s monetizable and trafficable, we can give consumer rewards for. That can be consuming video or filling out a survey.

How would that work?

We build different pieces of technology to give the searcher an authentication. A user searches on our [branded website]. Say that search engine is powered by Yahoo. Once he performs a search, we know the search came from him, or it can happen via plug-in, like on a browser.

What are the biggest changes you’re seeing in the loyalty world?

There’s a general shift in philosophy related to redemption, wherein loyalty programs five or 10 years ago saw breakage [Ed note: Essentially, currency points that aren’t redeemed] as their model. Companies based their strategies around currencies and consumers who use those currencies. At the end of 2011 there was $48 billion of unused currency. Of that, $16 billion is expected to expire with no one redeeming. I look at that and see a lot of opportunity there.

What sort of opportunity?

[Marketers running] loyalty programs now see that as consumers redeem, [the brand’s] value is so enhanced that even though redemption costs more, it’s the proper path because of the longer-term value. And that’s a win for the consumer, who sees more ubiquity and liquidity. It’s great for businesses that have the opportunity to leverage these currencies to deliver value for these consumers.

Are you noticing any interesting redemption patterns?

There are a number of paths here. Eighty to 90% of redemption in a typical airline or hotel goes to the service provided by that company. An airline sees 80 to 90% go to flights or upgrades. So that 10 to 20% that’s not for the core service of the company is for merchandise, gift cards, and other tangential and ancillary resources that the companies offer.

How do businesses determine if that’s the optimum ratio?

It’s fundamentally down to what the margin is and if you can deliver a service that’s disruptive or powerful enough to free liquidity. Customers are winning because they have new-found freedom and brands win because they can retain higher margins.

You mentioned that $16 billion in loyalty currency is expected to expire with no one redeeming. Why is that an issue?

With loyalty currencies, companies need to hold those currencies on their books. That is a liability. When things go unredeemed and they expire, that takes liability off their books. But the loser is the consumer. So if the consumer is losing, then there’s this Darwinian process wherein they will defect.

How would you assess the global status of loyalty?

There is a variable element to the propensity [for consumers] to earn or pursue loyalty avenues. Japan is up there, if I had to grade on the loyalty spectrum. The UK is also very high. Australia, based on initial results, is also formidable. The U.S. is not quite as high in terms of dedication to earnings of those currencies.

What’s wrong with loyalty in the U.S.?

There aren’t any programs in the U.S. that resemble Nectar in the UK, Air Miles in Canada, or flybuys in Australia. There just aren’t many programs in the U.S. that are as nationally dominant as you see in those markets.

Why is that?

Loyalty programs [in other parts of the world] are more powerful than U.S. programs because of their scheme. They’re founded on the power of groceries—which is such a frequent activity. And because these international programs are based on groceries, there’s a frequency element. [UK grocery chain] Tesco wrote the book on loyalty. Eight cents of every dollar in the UK for a time was spent at Tesco, which are all over the UK. The grocery coverage in that market is ubiquitous. There is no national U.S. grocery chain that has a model that is comparable today. We’re a big country geographically. The challenge of that is having a national web of connected partners to make that ubiquitous value proposition.

What about Walmart?

I think Walmart is similar to Amazon in that their model is dependent on lowest price. And they focus on that. I don’t know if those models would support a loyalty program.

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