In the “Wild Kingdom” of loyalty programs, the highest level of loyalty taxonomy would categorize program models as either Proprietary or Coalition. The two kingdoms are composed of unique traits and capabilities, though they share a common purpose. Which one of these models is the most effective to build customer loyalty, while delivering the highest stakeholder return? That question has sparked endless debate among marketers.

Many industry observers arrived at the opinion that the coalition program offered a more potent value proposition for its members while being cost effective to operate for participating brands. No matter which side of the argument you chose, almost everyone agreed that coalition was powerful, but not the right fit for all brands. It was also agreed that coalition loyalty only worked well in markets outside the United States.

Now, with the difficulties encountered by Aeroplan in Canada, the transformation of Nectar in the UK, and the closing of Plenti in the US, the entire business case for coalition loyalty is under scrutiny. More brands than ever are asking if coalition loyalty is even an option to be considered in 2021 and beyond.

“It might seem really easy to give the prognosis that coalition loyalty is dead,” says Mike Hughes, CEO of Exchange Solutions, a Loyalty Solutions provider. “It’s much more nuanced than that and you need to look closely at each participating brand’s consumer engagement strategy to understand whether a coalition loyalty program is a good fit or not. In some cases, teaming up a few large and complementary brands in a coalition loyalty program makes more sense than going it alone.”

The most concise description of coalition loyalty entails the participation of multiple brands in key market sectors who agree to share a common promotional currency, the member data collected, and the expenses required to operate the program. The essential group of pillar brands in a successful coalition should be composed of most or all the following: grocery, banking, fuel, telco, department store, and specialty retail.

Coalition programs have powerful advantages for participants. Combining the marketing strength of multiple brands and their existing customer lists creates an immensely larger acquisition funnel for every partner as well as powerful cross-brand promotional opportunities.

For consumers who actively participate in the coalition, patronizing multiple partner brands across the network, there is a higher-than-average opportunity to earn rewards. We describe this as having a higher “earning velocity”, where coalition members can earn rewards at faster rates than they could by collecting loyalty currency at individual brands.

There is plenty of evidence circulating which supports the benefits of coalition programs:

• AirMiles has reported 14 percent higher card activation rates for its financial services partner, 40 percent higher spending rates, and 20 percent lower card acquisition costs.
• German coalition operator Payback reported that its fuel retail partner increased new customer acquisition rates by 12 percent.
• Payback also reported that, for members patronizing two or more partners, shopping spend per member increased 25 percent.
• Bonus Peru reported member activity rates of 75 percent and reward redemption rates of 81 percent.

Contrasting these positive results, coalition programs are complex to operate and difficult to sustain over the long haul. Establishing a third-party operator to manage the coalition is a best practice. This governing body owns aggregated customer profiles, transaction data, and manages all aspects of operations. The potential for friction between partners and the operator is ever-present.

Loyalty Solutions provider Exchange Solutions suggests that retailers go beyond a one-size-fits-all approach when considering whether to join a coalition loyalty program or manage their own proprietary loyalty program. The key to a successful coalition program is getting alignment of the participating companies on the objectives of the program and how the coalition loyalty program will engage with consumers. Coalition loyalty programs with relatively few participants (2-3) that have complementary products and desired consumer experiences are most likely to be successful.

Individual partners impact coalition loyalty results differently over time

Traditionally, the financial services or grocery partner dominates point generation in the coalition. In one program we know, 71 percent of all points were generated through grocery visits. As one or two partners begin to dominate the coalition, struggle for power and control among partners can create conflict. Some partners may demand an increasing level of category exclusivity. If this tension is left unchecked, the grocery CMO may soon be asking “can’t we do this ourselves?”.

Some coalition operators (the third parties) have unintentionally fueled the fire of partner defection by raising fees and struggling to show evidence that the coalition can deliver better value in aggregate than the partners could generate on their own.

Maintaining alignment among partner goals is another challenge to long term retention of coalition partners. Although pillar partners may share consensus views on business objectives when the program launches, individual needs may change over time and threaten the stability of the network.

In the US and other markets, it’s a challenge to achieve sufficient geographic market coverage to engage a broad customer base. Finding a grocer or fuel and convenience retailer with nationwide coverage in the US is almost impossible. The task is easier in wireless and financial services, even in some retail categories, but it’s safe to say that the partner group will not have equal representation across a wide geographic market. That means members will be forced to split their spending across the coalition by category and as this happens, the value of the coalition for the member erodes.

“Coalition programs with a large number of participants with a wide range of products and consumer bases, are not able to engage consumers in a meaningful and personalized way because that type of coalition program naturally encourages a transactional relationship with their consumers due to the diversity and sheer number of participants,” says Hughes. “A more focused coalition loyalty program with a small number of participants that is built on a theme like everyday spend — think gas and grocery — where the brand participants are aligned around frequency and repeat purchases provides a much more compelling value proposition. Unlike that smaller, more focused model, the large consortium approach to loyalty cannot meet each brand’s objectives since they don’t have access to or ownership of the consumer data, don’t understand who their consumers are, and are set up to compete with other coalition participants for share of wallet. It’s a challenging model to say the least.”

The principal reason coalition programs have thrived outside the US is due to population density and the concentration of major brands in city centers. Pillar brands have full coverage in key cities that are home to most of the economically attractive population. At our last count, there are over 12 coalition loyalty programs with market tenure of 10 years or more, and all operate outside the US.

Air Miles in Canada and Spain, Dotz in Brazil, Bonus in Peru, and FlyBuys in New Zealand are some of the longest standing programs in operation today. Surprisingly, there are new entrants in the markets, with GK Rewards in Jamaica and LifeMiles in Colombia being launched or revamped in the past five years. Both are unique breeds in the coalition kingdom, with GK representing an “umbrella” program and LifeMiles a “strong partner” program.

Business conglomerates which own businesses in the pillar categories are rarely found, but Grace Kennedy is that unique animal in the Caribbean. The 100-year-old food and consumer product company owns a grocery, bank, money transfer business, hardware store (until recently sold), and more in the Jamaican market. GK Rewards was born from a desire to create brand equity and customer loyalty across all lines of business.

Life Miles began as a pure frequent flyer play and has added a large portfolio of partners that have it behaving just like a coalition today. We term this the “strong partner” model. In the US, American Airlines, Delta and United have passed through a similar evolution. The end result is that the largest of the FFP’s are essentially a network of brands with the airline in the center.

The traditional coalition structure and business model may be giving way to these new variants. Recent struggles of Nectar, Aeroplan and Plenti are examples of coalition implosions whose collective impact could be interpreted as extinction events for these beasts of the loyalty kingdom. Nectar transferred control of its scheme to partner Sainsbury’s, Aeroplan (Canada) was purchased by Air Canada, and Plenti closed its doors.

Based on this activity, are coalitions still viable, and how does a brand rationalize remaining in a coalition loyalty program model versus trialing a proprietary program? How should brands rationalize the selection of a coalition model as its entry point into the customer loyalty game?

“We believe there is an opportunity for coalition loyalty programs to be successful in the US and other markets, provided the brand participants have complementary products, similar consumer bases and an overarching theme (everyday spend, health/wellness, etc.) around which they want to engage consumers in a personalized way,” says Hughes. “In addition, just as we use personalization and deep data analytics to understand consumer behavior on an individual basis for our proprietary loyalty program customers, the future version of a successful coalition loyalty program must also allow brand participants to access consumer data and incorporate program wide data analysis to understand each individual consumer’s behavior.”

These areas of development will chart the course for the future of coalition loyalty:

Sophisticated partnership development

• Creating partnerships with complementary brands can expand the impact of any brand’s proprietary program.
• You don’t have to gather a full-fledged set of pillar brands, just assemble the select few that complement your offer and meet the needs of your customer base.

Technology-driven “marketplace” models, some based on blockchain

• Point exchanges implemented through cloud-based marketplaces will allow brands to connect with one another and deliver flexibility, choice, and added value to members.
• The intersection of blockchain technology and loyalty marketing may flourish here.

Next generation data management

• The data collected through loyalty program operations is now regarded as an asset class that brings significant financial benefit to the brand that owns it.
• Consumers understand the value of their data and the emergence of data privacy and protection regulations reinforce these beliefs.

There isn’t a definitive answer that will satisfy the marketers who debate about whether coalition or proprietary programs are the best choice as a customer loyalty model. Each brand must review its market aspirations, competitive playing field, and financial objectives against the pros and cons of each model. Engaging that process in a comprehensive process will lead to the best decision for your brand.