I have been obsessed with loyalty programs for over 15 years. Through those years, my focus has come from the consumer’s perspective and specifically on how to extract the most value out of these programs as possible. As I gain more perspective through the years, I am more and more interested in how these ecosystem functions. This includes what retailers get out of the arrangement.
I had originally thought that loyalty programs were there to drive the spending behaviour of consumers and to incentivize loyalty through miles and points that could later be redeemed for whatever the retailer had to offer. If you were an airline, you would offer flights. If you were a hotel, you would offer free or reduced cost accommodations. If you were a grocery store, you would allow your points to be redeemed for free groceries. Each retailer that started a loyalty program would provide whatever goods or services they had on offer as a way to cash in these loyalty points. As the years rolled by, we saw more and more creative ways for consumers to use their points.
Ulterior Motives
As an example, Aeroplan began to offer ways to use your miles for gift certificates for restaurants, toasters, televisions, and for a time, you could even bid on experiences.
I had always thought that the reasons for these creative ways of using your miles were associated with the fact that outstanding points in a loyalty program serve as liabilities on the company’s balance sheet. While this is true, there are deeper reasons that programs offered new ways to use your points balances. It was all in an effort to make their programs your preferred program to collect points in and that was for good reason.
If these programs were able to drive your behaviour not only would they earn your loyalty, they would learn a great deal about their consumers. This is an incredibly important part of the equation that I hadn’t considered too deeply because loyalty is only one aspect of the entire equation. In our world, information is king and we have been giving away our information to these loyalty programs for decades without even considering how much it is worth.
Think about your gas station’s loyalty program. You fill up with a tank of gas and while you’re filling up, you see a sign atop the pump that says something like “Purchase 2 Kit-Kats in-store and receive an additional 200 Petro-Points”. These promotions happen all the time but let’s look at the data they collect on you as a member of their loyalty program. How do they collect that information? Well, you insert your card everytime you fill up, I mean you want the points right?
- They know how often you fill up your tank and based on your fill up amount, fuel grade, and frequency of fill, they may even be able to derive what kind of car you drive
- The know your geographical preferences for where you fill up
- If you fill up your tank with premium gas and then switch to regular, they can start to determine your price sensitivity as a consumer
- Based on whether or not you go into the store and purchase the 2 Kit-Kats from the offer, they can tell whether 200 Petro-Points moves the needle for you or not
- Based on how many points you have in your account and how often you use your points, they can determine how much utility you gain from the program
- Based on how you redeem your points, it can be determined what you find valuable as a consumer, especially if there is a wide range of potential rewards
- Based on all of the information they gather, they can tailor offers that will have a very high likelihood of success
Okay fine. They get all this information but is it really valuable? Well, consider for a second how much Google knows about you and what their services cost. Any time you plug in a search into Google, or YouTube, they keep a record of it. Ever look to see what steak restaurants are in your area on Google Maps only to start seeing ads for the Keg pop up in the sidebar of your Google Search for the next week? What’s interesting is that all of Google’s main services are free but how does a company that gives away its services for free make $25.8B in 2017? It sells your information, your preferences, and their analysis of how you think to the highest bidders.
Loyalty programs, in essence, do the same thing except they do it to serve their own purposes for marketing and sales.
Intense Competition
The challenge for any company that has a loyalty program is whether or not they can resonate with their potential and current customers. The reason for this is that the average Canadian is enrolled in 12.2 loyalty programs, which speaks to how many programs there are available and how fragmented loyalty can be, especially in Canada.
This fragmentation also makes it incredibly difficult for new entrants to succeed because the cost to implement and administer these programs is extremely high and with so much choice for consumers, return on investment (ROI) can be quite low. With a low ROI, spending vast amounts of money on a new loyalty program is hard to justify.
With that being said, not having a loyalty program could be like taking a leg off a three-legged stool.
Order Winner vs Order Qualifier
When I did my MBA, one of the things that really fascinated me was something I learned in one of my Strategy courses and it had to do with earning business with your consumers. The lesson was on Order Winners and Order Qualifiers. Most people haven’t heard these terms before so I’ll delve into it a little deeper.
Order Winners are things that a company does or has that make it different and unique to its consumers. It’s the answer you give when someone asks you why you pay large sums of money to go to Disneyland when Legoland is just down the road. It’s the secret sauce that companies use to justify what they charge.
In contrast, an Order Qualifier is the bare minimum that a company has to provide to you as a consumer for you to even consider paying for their goods or services. If you love pizza but don’t have a car, you are never going to give your business to a place that doesn’t offer delivery. In this case, the delivery service is the Order Qualifier.
Order Winners eventually become Order Qualifiers so companies are always forced to innovate. Let’s look at OpenTable as an example. OpenTable is a service that allows you to make reservations for restaurants online or through their app. It saves you from having to call all around town to see if you can get a table for 4 people for lunch on a Friday.
When OpenTable first launched, only a few restaurants jumped on board but the ability for a consumer to make reservations without wasting time calling around became an Order Winner for those restaurants. Consumers started to see the utility and convenience of the service and began to embrace the service. The restaurants that used the service, started to see increased revenues from the influx of customers that used the OpenTable service simply because they were listed on the OpenTable website. Even if the restaurant wasn’t a place that the consumer had ever heard of before, they would consider booking it because of the convenience the OpenTable service offered.
As time went on, more and more restaurants started to use the service and it got to a point where OpenTable wasn’t an Order Winner anymore, it was an Order Qualifier.
When I was in Business Development, I had to make at least 3-4 restaurant reservations a week and if the restaurant wasn’t on OpenTable, I wouldn’t even consider eating there. I just didn’t have the time to call and see if I could get a reservation, especially if I could easily make a reservation with OpenTable and could still choose from over 100 restaurants.
Why am I telling you all this? It’s because in Canada, having a loyalty program has become an Order Qualifier. If you are a large business you have a loyalty program. Think about it. Every major grocery store has one:
- Loblaws/Superstore – PC Optimum
- Safeway – Safeway Club/AirMiles
- Co-op – a cooperative so you earn cash back each year as part of your membership
- Metro – metro&moi
- SaveonFoods – MoreRewards
- Sobeys – AirMiles
In order to play in this market, you need to have a loyalty program because if you aren’t severely undercutting your competition on price, why wouldn’t I shop at your competitor that offers me points that I can cash in for free groceries or merchandise in the future?
The Future – In Two Parts
The future of loyalty (in my opinion – but I think it’s an educated opinion) lies within two major aspects which are tied together. The first being Coalition Loyalty Programs and the second being Blockchain Loyalty Programs. I believe that the popularity of Coalition Loyalty Programs will spur the adoption and integration of the Blockchain for loyalty.
Coalition Loyalty Programs
Your first question might be “What is a Coalition Loyalty Program?”
Coalition Loyalty Programs (CLP) are actually programs that you likely participate in and didn’t know they were CLPs. In their simplest form, these programs allow you to earn points across multiple retailers and cash them in for the goods and services offered by these retailers. Aeroplan and AirMiles are the best examples of these types of programs in Canada.
Think about all the places you can earn Aeroplan Miles. Home Hardware, Avis, Budget, Costco, etc. Now, look closely when you go to Aeroplan’s page “Use Your Miles”. See how you can actually use your Aeroplan Miles for goods and services from the same providers you can earn at?
Essentially these CLPs are creating a quasi-currency that allows you earn points that you can use across multiple vendors/retailers. This does a couple of things. First, as a consumer, you are more likely to shop at these retailers because you can start amassing a large number of points in a singular currency and you can cash in those points for something you want from any of the partners within the program. With the ability to earn at multiple partners and cash in for various rewards, CLPs are able to almost be all things to all people.
The second thing this does is it allows smaller firms to offer a loyalty program. As an example, Primus, a smaller player in the Canadian telecom industry, could never afford to implement its own loyalty program so it turned to Aeroplan to join its CLP. As a result, they can offer Aeroplan Miles as an incentive to use their services. I personally used Primus for my landline back in the day because of this feature. At the time, this was an Order Winner for me.
CLPs are increasing in popularity because of their power and the relatively low barrier to entry for smaller retailers. CLPs are easily the fastest growing sector in the loyalty market with 78% growth since 2015.
The Blockchain
One of the large benefits of Coalition Programs is that you are able to easily earn and redeem your points across multiple retailers for a wide range of rewards. While you may have a wider variety of rewards to chose from in CLPs, it still isn’t perfect and you are definitely limited in what you can use your points for.
While you may be points rich in a program like Alaska Airlines Mileage Plan, it doesn’t help you when you want to make a downpayment on your next car. But what if it could? What if you could assign a value to these miles and points and use them like a real currency? How great would that be?
This is actually all possible through the use of Blockchain Technology. It’s a simple yet complicated concept so rather than explain it through words, I’ll point you to a good YouTube video that hits the high points.
The fundamental shift in thinking is actually around what these programs issue as currency. Rather than points or miles, loyalty programs would issue a token which would be a cryptocurrency. Like BitCoin or other blockchain based currencies, all transactions within the program would be verified against distributed ledgers. This opens up the world of possibilities.
Currently, if you wanted to trade your Aeroplan Miles for Cathay Pacific Asia Miles, you would actually need to either find a partner to trade with or an intermediary like Points.com to facilitate a trade. The way the systems are set up now is that if you tried to find someone to directly trade with, you are completely reliant on trust because these currencies are not directly transferable. What you would actually have to do is book travel for your trading partner using your Aeroplan Miles with the hope and expectation that he will do the same for you using his Cathay Miles. Most people do not have this level of trust with strangers so they employ a third party to ensure the transfer is completed as agreed. If you did not have this third party facilitating the transfer, one you booked a ticket for your trading partner, there is no guarantee that you will receive your agreed upon return.
Enter the blockchain.
Rather than use a third party, the blockchain records the transaction into one ledger (once it is verified) and then distributes it across thousands of other ledgers that are distributed around the world. Now that thousands of ledgers show the transaction, it becomes virtually impossible to pass off nefarious transactions as legitimate. By having a decentralized ledger, you also eliminate the need for a third party middleman to ensure that transactions can be trusted.
In the above Aeroplan for Asia Miles example, once these currencies were exchanged, the rights to the points tokens would immediately be recognized and your exchange of you Aeroplan tokens would result in ownership in your trading partner’s Asia Miles tokens.
Here’s another video that demonstrates what might be possible using crypto-assets and the blockchain as it relates to loyalty.
Years In The Future
Some may believe that the era of using tokens and crypto-assets to rewards loyalty might be years in the future but I’m here to tell you that it’s much closer than you think. Singapore Airlines has announced that they will release a blockchain based app for their frequent flyer program, KrisFlyer, by August of 2018. This will allow loyalty users to ultimately use their KrisFlyer tokens at point-of-sale terminals to purchase goods and services from participating partners.
I believe Singapore Airlines is the first airline to fully embrace the blockchain for loyalty but I can guarantee that they will not be the last. In fact, American Express is strongly exploring the use of blockchain technologies for payments with loyalty close behind.
What Does This Mean?
The interesting thing about cryptocurrencies is that you can embed rules into the tokens themselves so whoever issues the token has the ability to control what you can do with it. If Alaska Airlines issues an Alaska token, they can embed within the token rules like this can be used at Vendor A, B and C but not D, E or F. This can be extremely powerful because it gives the issuer the ability to administer their tokens without worry that they will be used in unintended ways.
Recently, Alaska Airlines issued limitations on redemptions of Alaska Miles for travel on Cathay Pacific, JAL, and Hainan within 72 hours of departure due to fraudulent activity. They quickly changed their stance on that but in the future, rather than rely on customer service representatives to enforce these types of rules, the token itself could enforce the rule.
For consumers, this means that the cryptocurrencies issued by airlines may someday be used for other things that are completely unrelated to the airline industry. Perhaps in the future, you could actually use your frequent flyer tokens to pay for your dog’s vet visit or perhaps braces for your kid. As a consumer, this makes a lot of sense because you have earned your rewards, why not use them for things you actually want?
By having your frequent flyer miles and points as tokens, you are able to trade them like you would exchange foreign currencies.
Now v Then
Right now when I decide which program to invest my time and effort into, I think about my future goals and make my decisions based on those plans.
For those that don’t have definitive plans, I always recommend joining a program with the most flexibility, like American Express and their Membership Rewards Program or SPG and their Preferred Guest Program. As both offer a large amount of frequent flyer transfer partners, their currency is more “valuable” because it gives you flexibility.
In the future, what will rule the day is that same idea of flexibility. Programs will be strong and desirable based on what you can do with your token and this is why I am hopeful.
While token issuers have the ability to lock down their tokens, they do so at their own peril because people will not find their programs attractive. Programs with the most flexibility will ultimately be the ones people flock to so my example of trading your tokens for a vet visit or braces for your kids … may not be that far-fetched.
Conclusion
I know that this is a heady subject but I am relying on the fact that a lot of my readers are as nerdy as I am. I wanted to share this information with you because I find it fascinating and I am almost 100% certain that these cryptocurrencies will the future of frequent flyer program in the very near term.
I for one cannot wait to explore this brave new world.