Loyalty: Building Your Own Program or Joining an Existing One?
Loyalty programs, whether coalition-based or proprietary, continue to gain popularity worldwide, raising the question for businesses: should they create their loyalty program or join an existing one? This article offers a brief overview of both options, highlighting their features, strengths, and weaknesses. By providing insights into the world of loyalty programs, it aims to serve as a starting point for strategic discussions within companies facing this decision.
A. Coalition Loyalty Programs
In coalition programs, consumers make purchases within a vast network of affiliated merchants, earning program currency based on their transactions. They can later redeem this currency for rewards within the ecosystem of participating brands. Notable players in Mexico include Club Premier, led by Aeroméxico, and Payback, spearheaded by AMEX, both present in the local market since the 2010s. In the rest of Latin America, Puntos Colombia, driven by Grupo Éxito and Bancolombia, has gained prominence for its rapid growth and acceptance since its 2018 launch, becoming a regional benchmark. Additionally, the Brazilian program Livelo, launched in 2016, boasts over 25 million participants, possibly the largest program in the region.
The Appeal of Coalitions:
There are four primary reasons why participating in a coalition is an attractive opportunity and an alternative to creating your program:
1. Convenience: Loyalty programs are complex endeavors, demanding dedicated resources, specific technology, consultants for designing mechanics, careful financial planning, and the risk that they might become more costly if not designed correctly. Joining a coalition is highly appealing in this context. You don't need to manage the program yourself; it's already operated by a specialist team, and the cost is defined from the start, with no potential for cost overruns.
2. Acquisition of New Customers: Participating in a coalition promises to place your brand in front of thousands (if not millions) of customers from other participating businesses. This is intriguing because loyalty programs were originally designed to retain and grow your customer base, not as an acquisition strategy. However, these alliances suggest that the customers of other allies might also buy from you, making it an enticing proposition.
3. Data: One of the main selling points that coalition programs present to potential affiliated businesses is their vast transaction and customer data. They imply that instead of investing millions over years to build your 'first-party data,' you're buying into a club that already has it available.
4. More Attractive to Your Customers: Another criterion that often factors into the decision to join a coalition is the idea that in a proprietary program, benefits and rewards might be more limited and restrictive. In contrast, a coalition program with dozens of allies offers a vast catalog of rewards accessible not only to your best customers but also to those who spend less than the average. These customers could accumulate enough points by shopping at other businesses.
However, despite the appeal of these reasons, they should be viewed with a degree of skepticism. Not everything that glitters is gold, and if something sounds too good to be true, it usually isn't. For instance, the convenience of avoiding planning, management, and costs comes at the expense of control, flexibility, and the ability to tailor the program to your needs or those of your customers. While the idea of reaching new customers by placing your brand in front of millions of participants is alluring, it shifts the focus from retaining and growing your current customers, which is the core purpose of a loyalty program. While coalitions indeed handle vast amounts of customer data, they rarely share it openly with their affiliates and may charge for access. Moreover, communication within the coalition becomes another advertising channel where you have to pay to reach your audience, with limited feedback on results. Lastly, if your customers find more benefits among other participants, they become loyal to the program, not to your brand. In the best-case scenario, your brand loses prominence.
The goal of a coalition program is profitability, not securing the loyalty of its participants.
In addition to the mentioned objections, it's important to acknowledge that coalition programs are expensive endeavors and therefore need to be profitable. It's understandable, but this pressure often drives them to reduce the value of rewards, which, in turn, can lead to a vicious circle where small, insignificant benefits are no longer attractive to consumers. This is the most common complaint from companies that decide to leave coalition programs.
Despite these objections, it's essential to recognize that for many types of businesses and brands, coalition programs offer the only viable option to participate in loyalty schemes. However, understanding whether your company and business meet the ideal conditions for a proprietary program is a key consideration.
B. Proprietary Loyalty Programs
The main advantages for those choosing to build their loyalty program rather than joining a coalition are:
1. The need to identify their best customers and implement additional actions to retain them: Loyalty programs are not just promotions or standalone initiatives. They are an opportunity to identify valuable customers and work more effectively with them. The program represents the first step in a customer growth and management strategy. A proprietary program facilitates this focus from the beginning.
2. The desire to obtain and control the data resulting from the program: Paying for the creation and management of a proprietary program offers data that you can use. Paying a lower price but not obtaining information or being unable to use it ultimately costs more.
3. The goal of generating brand affinity, not third-party affinity: Customers should perceive that your company offers something extra for their purchases, recognizes their importance, and rewards their preference, affinity, frequency, and incremental consumption. The program is a way of saying thank you to your customers, and they will perceive it that way.
4. The ability to communicate directly with participants and manage the relationship, engagement, and growth: The primary goal of a loyalty program is to allow businesses to be at the forefront of customer relationships. Without intermediaries, it is proactive and can set growth goals directly with customers.
The Challenge and Risks of Creating Your Own Program
The main risk when creating an independent program is designing it as a mere copy of existing ones in the market. Often, companies believe that the program's only essential element is the mechanics of points or miles. This limited perspective can pose serious problems since the long-term viability of a program requires careful financial planning, a mechanics and value proposition that stimulates and motivates incremental purchases, and a management system based on best practices. The challenge is to be aware of the features, resources, and criteria that must be considered when designing the program and have someone who can guide the implementation team through each step. Failing to do so could turn the program into a high-cost, low-impact effort.
As mentioned, not all companies have the business conditions, margin, and experience that favor the success of a proprietary loyalty program. Knowing if your company is a candidate for one is a crucial consideration.
Conclusion
Loyalty programs, both coalition-based and proprietary, are more prevalent than ever. Technology has democratized their implementation, offering multiple models, mechanics, and program types to participate in. Participating in reward programs can be a key strategy for understanding customers, obtaining data, and using it to grow and extend their lifespan. Understanding whether your company and business are ideal for a proprietary program is the first step in assessing the type of program that would make sense to participate in or design. Making the decision to join a coalition program based solely on apparent advantages could be counterproductive in the medium and long term. Ideally, if you have what it takes, creating your program is the best choice because you'd be in control of it and its results. However, it's essential to do so with experienced specialists who can guide and advise on all the challenges, steps, and critical decisions. There's much more to explore regarding both program types, their business models, trends, historical evolution, and the behavior of other participants, such as consumers and operators. But that's material for another article.