Brand-Loyalty Myths, And Why Teaming Up Beats Going It Alone

For many people, the simple rewards card can hold a lot of myths.

While most of us recognize it as a wish granter, a device that will eventually recognize our loyal behavior over time, those who spend less with a particular merchant equate their rewards card with the magical land of Brigadoon, revealing its shining prize once every 100 years.

But imagine if that rewards card acted more like a magic genie, granting us several rewards for one mere rub, or swipe, of the card. Imagine if you earned 100,000 loyalty points for making purchases from Delta Air Lines, Hilton Hotels and Hertz Rent-a-Car, and then redeemed those points toward a flat screen television at Best Buy, or a week’s worth of groceries at Kroger.

This, in fact, is not a myth.

This kind of partnership of brands--as if Delta, Hilton, Hertz, Best Buy and Kroger all joined forces to form a dream rewards team--is the basis of a concept called coalition loyalty. A model that allows consumers to accumulate thousands of points on purchases of gas, groceries, apparel, travel and beauty products, and then redeem them at any of the participating merchants they choose.

And the kicker: the consumer does not have to use a credit card to earn the points. He or she can make the purchases using cash, personal check or debit card.

This kind of universal loyalty program is available and quite popular in many countries, including neighboring Canada, where my company operates the AIR MILES Reward Program, and the United Kingdom, where Nectar dominates the market. But coalitions do not exist in the United States. The U.S. market is dominated instead by what is known in the industry as single-operator loyalty programs, those managed by individual brands such as Starbucks, Nordstrom, or Target.

Why? It stands to reason that if customers can accumulate reward points across scores of merchant locations, and then get a reward faster, they would change their shopping habits to earn more of that currency. Around much of the world, prominent brands are adapting their proprietary programs to capture the value of multi-partner coalitions. As a result, coalition programs are thriving, with memberships estimated at more than 1 billion and an annual average growth rate of 12 percent, according to Finaccord, a British market research firm.

My hunch is that the sheer size of the U.S., combined with the regionality of many merchants, contributes to its lack of a coalition. Perhaps the missing component is the coalition operator--the company that would hold and manage the data, issue the rewards and sponsor collaboration between the participating companies. But the capabilities are certainly out there.

Indeed, in the U.S., the ubiquity of loyalty programs alone could be enough to force a movement toward coalition. According to COLLOQUY, the research arm of LoyaltyOne, the average U.S. household is enrolled in more than 18 loyalty programs, but participates in only around eight. At some point the number of competitors, combined with the consumer’s limited ability to engage in multiple programs--not to mention the wallet’s inability to hold all those cards--will dilute the appeal of single-issuer programs.

Yet many would-be partners still cast a hairy eye on the coalition model, fearing it will instead dilute their brand integrity or reduce customer sales. They see its value as a myth.

In fact, there are several myths involving coalition loyalty. I’d like to dispel three of the biggest:

Shared data is lost data: Merchants sometimes fear that sharing data with other companies will depreciate the value of the information. But in reality, when a merchant’s data is supplemented with information from transactions across multiple categories, the insights become richer. Coalitions yield data that is more descriptive, predictive and practical than anything a lone retailer might store. A company with access to coalition data can gain a view of its customers’ shopping behaviors, travel patterns, mobile use and media responsiveness, as well as qualified data about high-potential non-customers. Shared data is smart data.

Shared brands become diminutive: Retailers love to get their logos into customer wallets, but that’s not how brand loyalty is built. If the true measure of brand commitment is awareness, sales growth and customer retention, then coalitions ultimately make retail brands stronger. The coalition’s umbrella brand has only one purpose: To increase the number of people enrolled and build the mechanism to collect and redeem points among the partners. This allows coalition merchants the flexibility to promote their brand to a broader base of customers with greater scale and relevancy than they could do on their own. Coalitions are the call to action.

Shared customers are unfaithful customers: It has been proven around the world that members who shop within a coalition are more likely to consolidate their purchasing with merchants in that network. This “network effect” inspires a higher rate of cumulative purchasing, for increased spending and basket size, among the individual brands. The network effect also encourages more frequent shopping across the coalition, because it builds and maintains top-of-mind awareness. In every case, a shared customer is a more active and engaged customer.

Some companies have been able to distinguish the myths from the truth, and are experimenting in measured steps. The recently announced Safeway-ExxonMobil fuel rewards partnership is a good example. But these two-party partnerships are still quite limited in terms of the data they can collect to understand the consumer fully, and in terms of what they can offer.

In truth: Coalitions are the way forward for creating shared value and loyalty. There’s no genie, wizard or Brigadoon about it. We’ll just have to wait and see which companies are first to realize the potential.

FastCompany