What do Air Miles, Bumped, PAYBACK, Plenti, and the S&H Green Stamps have in common?
Although these loyalty programs come from different eras and different geographic regions, they share one common design component: instead of being offered by a single or dominant firm, the programs allow members to earn points (or stamps) by buying from a large number of businesses in the alliance.
These loyalty programs are called coalition loyalty programs or multi-vendor loyalty programs. The idea is that by joining forces, companies can offer a more appealing program to members at a lower cost while enjoying cross-selling opportunities.
How do such programs affect consumers’ purchases? What do they mean to the businesses involved?
In this article, we offer some insights to these questions based on a research study recently published in the Journal of the Academy of Marketing Science. In the study, the researchers analyzed member purchases in a multi-sector coalition loyalty program in Europe. They found the program to be a mixed blessing for participating businesses.
Before diving into the research findings, let’s first take a quick look at why a coalition loyalty program may be a mixed blessing.
Pros and Cons of a Coalition Loyalty Program
What’s good about a coalition loyalty program
Coalition loyalty programs have many attractive qualities:
- It reduces the entry barrier of setting up a new loyalty program. Businesses that join an existing coalition loyalty program can enjoy a ready-made member management platform without making substantial investments into building, acquiring or maintaining their own system.
- It offers an existing member base to draw from for customer acquisition. Assuming members of the coalition program will want to buy from multiple businesses to maximize their points, businesses can acquire new customers that already buy from other businesses within the alliance.
- It is appealing to consumers. Not only is a coalition program potentially attractive to businesses, but it can also be appealing to consumers. Members have many ways of earning points toward free rewards.
What’s not so good about a coalition loyalty program
There are inherent flaws in a coalition loyalty program model too:
- It encourages program loyalty but may not increase loyalty to a specific business. Since members can earn points buying from any business within the coalition network, loyalty to a specific business is not required. This is a major difference between a coalition loyalty program and a traditional sole-proprietary loyalty program.
- Customer cannibalization can happen within the network. This is especially likely when a coalition program allows direct competitors (e.g., restaurants in the same area) to join the network. But even in programs without direct competitors, partners in the network can unintentionally “steal” business by diverting members’ spending power.
- Negative customer experiences may spillover. When members receive bad service from one member of the coalition, such incidents could create a negative ripple effect on the entire program. This has been shown in a previous research study in the retail context, although that study also found program benefits to serve as a buffer for the service failure impact.
How do the pros and cons of a coalition loyalty program balance out for participating businesses? This is the question Dr. Dorotic from the BI Norwegian Business School and her co-authors aimed to answer.
The researchers studied an European coalition program with 100+ diverse participating businesses, such as department stores, restaurants, and hotels.
Members earn points by using their card at the branches of these businesses. The points they accumulate are turned into reward vouchers that can be redeemed at participating businesses.
The research team studied a total of 13 customer cohorts that joined the program over a 13-year period. Each cohort had close to 1,000 members, and the researchers analyzed their transactions over the first 24 months after joining the program.
Rich Gets Richer
One important finding from the research is that bigger businesses in the coalition tend to gain more in transactions from the program.
On average, the larger the existing customer base of a business, the more new customers it attracts. A 10% increase in existing customer base leads to an average of 8.33% increase in transactions by new customers.
This increase in new purchases has further downstream effects in the following month. A 10% increase in transactions by new customers translates into an average of 2.5% gain in transactions by new customers and another 2.3% increase in transactions by existing customers for the next month.
Cross-Partner Effects: Synergy or Cannibalization?
The study calculated the cross-partner impact among 16 types of businesses within the coalition. The image below summarizes the findings. The cells show the impact from the business type listed at the top on the business type listed on the left. Green means a positive synergistic effect, and red means a cannibalizing effect.
For example, if we want to find the effect of restaurants on apparel stores, pick restaurants at the top, and go down to the apparel stores row, we’ll see that the cell is colored green. That means that restaurants in the coalition create a positive synergistic effect for apparel stores in the network.
It is clear from the colorful picture that the impact of one partner on another in the coalition is quite diverse. Both synergy and cannibalization exist. Some partners, such as department stores and gas stations, cannibalize all other businesses. At the opposite end, some other partners, such as jewelry stores and drugstores, create a boost in almost all other partners’ businesses.
Across the diagonals of the table above is the impact of direct competitors within the same business type on each other (e.g., one department store on another department store). Not surprisingly, all of those effects are negative, showing cannibalization.
What else mattered?
For purchases by new customers
Besides existing customer base, another factor that made a bigger impact was the hedonic vs. utilitarian nature of the business: a business offering leisure/for-pleasure products or services on average attracted 22.5% more transactions by new customers than a business offering practical products/services.
Two other design components had a surprisingly small average impact on new customer transactions. One of these is whether the business accepted reward vouchers at its establishments. The other is how many points are offered per money unit spent. Averaged across partners, both factors had fairly negligible effect on transactions made by newly acquired customers.
For purchases by existing customers
Repeat transactions made by existing customers show a somewhat different picture. Positive influences included:
- being a founding partner in the program;
- points earned per money unit spent; and
- hedonic (for pleasure) products or services.
Negative influences included accepting reward vouchers and purchases made by new customers in the previous month, possibly because relatively new customers tend to buy less in an early stage of the relationship.
This research study only looked at a single coalition loyalty program in Europe. So we caution against overly broad generalization of its findings, especially in terms of the exact magnitude of the impacts.
However, we expect the diverse effects of a coalition program and its partner businesses to exist in other contexts too, particularly in light of other research studies on coalition loyalty programs (see Table 1 in the full paper).
If you are a coalition program manager, it would be wise to choose the businesses to be involved in the program carefully, rather than taking a “the more the merrier” approach. We would also recommend the assessment of cross-partner effects through customer analytics at regular intervals. Businesses that consistently cannibalize other businesses within the network should be carefully reconsidered.
If you are a business thinking about joining a coalition loyalty program, you should closely examine the types of businesses already in the coalition. You will want to avoid programs that put you at a size disadvantage relative to other businesses in the program. You will also want to avoid programs that have your direct competitors in the network.
Although we try to cover the key insights from the research study, we highly recommend that you read the original paper to get the most complete information. Here’s the reference, including the link to where you can download the paper:
Dorotics, Matilda, Dennis Fok, Peter C. Verhoef, and Tammo H. A. Bijmolt (2021), “Synergistic and Cannibalization Effects in a Partnership Loyalty Program,” Journal of the Academy of Marketing Science. https://doi.org/10.1007/s11747-020-00759-7.