At first glance, coalition loyalty programs seem advantageous. However, the coalition program has pitfalls for members and partners.
Two Types of Coalition Program
Coalition programs are very popular in many Western countries including Canada and the United Kingdom, but much less so in the U.S., where there is only one program of its kind. Overall, there are two kinds of coalition loyalty programs, one that is fairly common, and one that we only see on occasion. The first type of coalition program on the market is when a promoter literally invents a program by linking several companies, who then act together to provide the same rewards to consumers. Two examples of this kind in Canada are Air Miles and Aeroplan.
The second type of coalition program is less obvious. It quite often springs from a situation where a business, already successfully operating a loyalty program, decides to expand its horizons by adding partners to its so-called private program. For example, if Starbucks decided to add a few partners to its program who could also issue “stars” (rewards used by Starbucks).
For a business seeking to join a coalition program, there are numerous advantages to taking part in an Air Miles or Aeroplan type of loyalty program:
- an access to a vast database of clients (more than 10 million members for Air Miles and more than 4 million for Aeroplan)
- a turnkey program
- a loyalty infrastructure that’s already in place
- multiple partners
Air Miles Saga
Yet, the recent Air Miles saga unveils the limits of such a loyalty strategy… In order to improve its profitability and to reduce financial risk (estimated between 180 and 250 million USD1,2), the parent company of Air Miles, Alliance Data of Texas, announced in 2011 that unredeemed points of 60 months or more would expire January 1st, 2017.
Thus far, this is where the situation stands: a class action suit was launched by members; legislation by some Canadian provinces; and the incapacity of Loyalty One, the company managing the program in Canada, to respond to consumer queries regarding miles exchange requests. This issue created many problems that will most definitely become a topic of study across university faculties such as management, marketing and public relations.
These problems led Alliance Data to reverse its decision last December 30th, a few days before the deadline. Recently, the company decided to increase the number of miles necessary to exchange for a vacation or a cruise package, which would mean a 20% decrease in the value of miles2.
There’s a good chance that this story is far from over, as the impact on the program’s members represents only part of the equation. Air Miles business partners should have been able to measure the damages caused by the loss of consumer confidence in Air Miles currency. Business partners of this coalition must have felt shaken and even frustrated when faced with the cavalier manner in which they and their clients were treated by Air Miles. Numerous Canadian partners have been issuing miles for more than 15 years and paying millions of dollars annually to Air Miles for the purchase of those miles.
A second part of the equation could play out over the next few months, as numerous Air Miles business partners are most likely in the process of revisiting their options and evaluating the legal implications of the modifications of the terms and conditions of the program. This, on top of the impact of these modifications for their own reputation with respect to their customers.
Will some partners terminate their contract with Air Miles or simply not renew their contracts?
The Problem With Coalition
This misadventure communicates the dangers of becoming a business partner with these loyalty programs – dangers which can often be difficult to predict. The Air Miles case illustrates the extent to which a currency issuer can derail a program by changing the rules of the game, as well as the terms and conditions of the program.
And what of Aeroplan? Recall that this program was equally tempted, years ago, to set an expiry date to its loyalty currency, and that they had to renege on their decision following pressure exerted by members. Today, Aeroplan is also at a defining moment in its history with the expiry of its contract with Air Canada, their biggest client. An article was published on February 17th in Les Affaires and sums up the situation very well3.
Hopefully the new agreement between Aeroplan and Air Canada will not be at the expense of program members, and management of Aeroplan will take into account the impact that a decline in a program’s currency can have, not to mention an erosion of trust from its members.
Organizations regularly modify rules or terms and conditions within their business process. Professional sports are an outstanding example of this. In hockey, baseball or professional football, changes to rules are often proposed with the mission of improving the product for the clients. However, in all cases, these kinds of changes are made following approval from partners (the teams), numerous customer surveys and testing in lower level leagues. A loyalty program that does not validate significant changes to its terms and conditions with its issuing partners is destined to experience significant pushback from program members and face unsatisfied partners.
We, at R3, believe that the development of a private loyalty program still remains the best option for a business that is considering implementing a loyalty program. The best programs generating the most engagement and value for their clients are from a private strategy. Case in point: Tesco, metro&moi, Starbucks and Optimum from Shoppers Drugmart.