Cluster Marketing: The key to maximizing loyalty program value

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The good news about the current state of the loyalty industry is that in some ways it is more vital than ever, with new industry participants appearing continuously. The not-so-good news is that despite new entrants, the complexity of managing loyalty memberships has become only more challenging for consumers. On the surface, there has been a long-standing need for simpler ways to manage multiple loyalty memberships.  In response, the industry has seen the arrival of a new wave of rewards-tracking web sites aimed at easing consumer pain points through approaches that begin to leverage the power of collaboration. 

One way to regard the trend toward collaboration starts with a construction industry analogy: When crews pour the concrete foundation for a new project they work with “aggregate.” This custom mix of gravel, sand and other materials is uniquely formulated to withstand whatever particular internal and environmental stresses that structure will experience.  For this reason, a seaside retaining wall in San Juan will contain a very different aggregate compared to a building set along the San Andreas Fault line. 

Pressures at Play in the Loyalty Industry

We’re seeing the same effect in the loyalty industry today: a particular set of consumer stresses has created a demand for “rewards aggregators,” and a handful of startup companies in this field are attempting to alleviate certain consumer pressures.  We instinctively know the consumer pressures at play. Most of us are enrolled in a variety of loyalty programs with credit card companies, airlines, hotels, retailers and other industries. According to the 2011 Colloquy Loyalty Census, the average US household is enrolled in 18 different loyalty programs.  Some of these programs automatically earn rewards upon usage while others employ a key fob or a telephone number.  Imagine what it takes for consumers to manage and keep track of their accumulating reward points, not to mention understanding the fine print governing redemption. 

Rewards aggregators, many backed by venture capital, represent a significant development in the industry. For the most part, these sites, including Award Wallet, GoMiles and MileageManager, offer consumers a way to organize, track and manage various rewards programs as well as a comparative search engine that includes advice on how to redeem points and miles to achieve the greatest value.  The arrival of these rewards aggregators signals an extension of functionality and convenience in managing program details and redemption options. While these latest web sites provide solutions to ease consumer symptoms, they do not address the underlying, more fundamental problems that persist in the loyalty industry.  As such, these reward aggregators may actually be more like forerunners to fully collaborative loyalty solutions that have yet to enter the market.  

The deeper, long-term challenges that characterize the industry date back 30 years ago, when modern-day loyalty programs were first launched in the US.  Loyalty programs were designed as proprietary, single-company programs.  Proprietary programs allow reward providers to maintain full control of the consumer, brand and value proposition. But consumers often have difficulty accumulating meaningful value in any one program in a reasonable amount of time or redeeming for the rewards they desire.  Many proprietary programs began collaborating with other companies in order to provide greater earn velocity for customers.  Despite the consumer benefit, partner programs typically lack mechanisms to manage the rich data and insights through which partners can optimize offers.  Another form of collaboration arose in the form of point transfer and conversion offerings, but these offerings often have long processing times, cumbersome customer experiences, and impose fees that dilute the value proposition. Simply put, challenges are abound with the current partnership models in market today.

Coalition programs, the dominant rewards model outside the US, relieves consumers of having to manage multiple currencies by issuing one common currency across multiple reward providers for various activities within the coalition.  Consumers see increased earn velocity and have access to a much wider variety of burn options.  However, reward providers lose a certain level of independence, control and ability to differentiate.

Introducing Cluster Programs

All of the above paves the way for a fundamentally new marketing model for the rewards industry.  “Cluster Programs,” a model conceived by Richard Postrel, CEO and Founder of Swift Exchange, promises to bring the best of both worlds to all constituents.  The concept of cluster programs represents a material advancement for the industry as it relates to collaborative engagement.  Under a cluster program model, reward providers and merchants partner in unique ways to create powerfully fluid alliances.  Each reward provider distributes its own currency and retains control of its customers and programs.  Consumers have the ability to aggregate reward currencies across the cluster without losing value and can redeem or make purchases from cluster members as well as a wide variety of participating merchants. Revolutionary technologies now exist to make cluster programs a reality, bringing an innovative breakthrough to the traditional partnership approach. Finally, reward providers and merchants can maximize program value for each other as they transform the customer experience. 

A cluster program model is built upon four key pillars that will be instrumental in transforming the current state of the industry.

  • Collaboration with Control: Success will be exemplified by platforms that directly enable reward providers and merchants to strengthen the relationships they have with consumers, while still allowing reward providers to maintain control over key components of their value proposition, branding and messaging.
  • Simplicity and Value: The Cluster Program model aims to eliminate the long, confusing and inefficient reward redemption process altogether – making rewards as easy to spend as cash. A core component to this model is making rewards available to spend where consumers are already shopping, dramatically increasing both their value and customer satisfaction.
  • Privacy and Security: The rewards aggregators on the scene today require consumers to manually disclose the user names and passwords of their various loyalty program memberships.  At a time when cyber-security breaches occur with increasing frequency, highly secure, automated aggregation mechanisms must be in place that provide privacy and security of the highest order.
  • Utility: Loyalty programs must evolve to become less like solving a puzzle and more intuitive, with fewer restrictions and greater redemption flexibility.  The trend is toward broadening liquidity and utility of rewards currency, with the goal of removing the dreary, fragmented calculations of redemption mathematics. 

As pointed out in the 2011 Forecast of U.S. Consumer Loyalty Program Points Value (the product of a collaboration between COLLOQUY and SWIFT EXCHANGE), of the $48 billion in total perceived value of points and miles issued in 2010 in the U.S. for consumer-oriented rewards programs, an eye-popping $16 billion was left unused—an average of $205 in value per active U.S. household. If managing and redeeming rewards were easier, there would be far less unclaimed value on the table. 

The rise of rewards aggregators is an inevitable development: Today’s data-filled, “always on,” time-crunched and technically sophisticated environment has conjured them. The rewards aggregators arriving on the scene today may or may not survive, but the underlying value proposition they reflect shores up a crack in the industry’s foundation. Clearly there is a need for greater collaboration within the industry to address consumer needs while enabling a level of independence and control to address reward provider needs – far beyond the band-aid that the current set of rewards aggregators offer. The advent of cluster programs can deliver the fixes required in the near term, while affording the deeper transformative solutions needed in the long term.  Ask any construction worker: When the right aggregate elements are formulated for their intended application, those walls can stand for centuries.

About the author:

SWIFT EXCHANGE Chief Operating Officer Nancy Gordon is responsible for developing and implementing the company’s partner approach, business planning and go-to-market strategy.  Previously, she was executive vice president of consumer loyalty at Citi, where she led core loyalty programs and customer satisfaction efforts.

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