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Coalition loyalty

Are coalitions the future of European loyalty?

As the market for customer retention and loyalty programmes matures in Europe, a question that is increasingly being asked is whether the coalition and multi-partner approach is going to prove the sustainable model for the future.

To provide some key insights, we interviewed the chief executives of the two market leading programmes currently running in Europe: AIR MILES in the UK and Germany's Payback programme. What emerged from these interviews provides a fascinating marker for the future in the context of coalition programmes within European markets and global trends. They highlight some interesting similarities in their views of key success factors and an unswerving focus on being customer driven.

In an increasingly competitive retailing environment, even the largest single brand customer retention programme is fighting to win a permanent place in the mind and wallet of their membership. A coalition programme built around the spending habits of the membership, that provides rapid and multi-channel earning capability with exciting, emotionally satisfying and achievable rewards within a short time frame, looks a winning combination.

The successful integration of partnership programmes and the accurate segmentation of the database created will divide the winners from the losers in the future. The key factor for success will be a clear understanding of the consumer derived from a permission marketing approach and continual tracking of membership spending patterns to ensure the best partner coverage of the 'customer wallet'.

Payback

The Loyalty Partner Payback programme (www.payback.de) was launched in March 2000. With joint ownership of Lufthansa, Metro AG Group and Roland Berger, it has taken on the challenge of operating in the legislatively-restricted German market and building a coalition customer-loyalty programme in an environment that many observers consider one of the toughest to penetrate.

With 7 million active card users and an average of 750,000 new members signing on per month, Payback has become Germany's leading bonus system. Its popularity is due to its expansion across different sectors of the economy and different media. Card users collect points from well-known companies in all branches of the economy, both online and off, and redeem their points for cash or products from the Payback Shop.

26 partners have now joined the programme. So far, a total of more than 3.2 billion points - equivalent to a total of DM 61 million - have been collected.

"By 2004, we expect twelve million customers are going to be using the Payback card" says Alexander Rittweger, founder and managing director of Loyalty Partner GmbH.

pgw: What are the key strengths of the Payback programme?

Rittweger: "From the outset we wanted our customers to be able to collect points and access services on the Internet, too. The combination of offline and online collection for consumers and partner companies was crucial. We also felt that it was very important to build an attractive partner portfolio that is dictated by the sectors in which our members spend their money rather than any pre-conceived ideas of brand synergy.

"The popularity of the Payback customer bonus programme shows that we were right in positioning it to take in different branches of the media and industry. We plan to systematically extend our market leadership, in particular by integrating further highly attractive partners."

pgw: How important is it to have "engine" sponsors to facilitate earning opportunities in the programme?

Rittweger: "A programme such as Payback has to be present in all key industries relevant to the consumer, i.e. both from a high frequency as well as a high added value perspective. Participating partners have to convince through their sheer market size and premium image. To ensure this, we constantly monitor the wishes of our cardholders as to which further companies and services they would like to see integrated in the programme. We look at branding, marketing and operational excellence of the companies identified and then approach those that will offer the best overall deal to our membership."

pgw: How successful are coalition programmes in Europe?

Rittweger: "Loyalty coalition programmes present a strong track record in Europe, with household penetration rates peaking at over 50%. The extent of their success depends, however, on the degree of commitment displayed both by partner companies and programme operators. It is difficult to find players who combine both a broad reach among consumers with in-depth customer understanding. This vacuum was, in fact, one of the reasons for the birth of Payback. We regard it as crucial that a programme be managed professionally, with a clear branding towards the consumer, reliable operational fulfillment, and state-of-the art information technology in order to generate a win-win situation for both consumers and participating partner companies."

pgw: What have been your key challenges with the programme?

Rittweger: "We find the market to be very receptive for players with a well-knitted business model. Some companies in the beginning underestimate the operational and intra-organizational complexity of such an undertaking. We try to bring across the message that this business is about more than just printing cards. In our view, a comprehensive, quality monitoring cycle is essential to service partner companies' needs adequately, while keeping the consumer happy, and, therefore, active. In this respect, major challenges are:

• To define the programme in a way that it is the partners' individual programme while maintaining its coalition character.
• To convince them of the great synergy potential as a result of joint marketing efforts, production and operational fulfillment and customers acquisition/management processes without giving up their own control and influence within the programme.

"The importance of a neutral third party as the manager of a coalition programme cannot be stressed enough. Neutral programme operators take in the standpoint of the consumer and broker between the participating partner companies' interests. Thus, they help the programme maintain its attractiveness and fairness to the consumer as the 'consumers' advocate'. Further, a coalition programme has to lower the cost for a participating company to 40-60% of what it would have to expense to build a programme of its own."

pgw: What is the future of coalition loyalty in Europe?

Rittweger: "We see the coalition loyalty issue as one of rising importance within the next year. The rapid consolidation in certain retail markets as well as the new possibilities with custom-tailored one-to-one marketing instruments make this unavoidable. At the end, those programmes will survive that bring lasting added value to the consumer and whose cards manage to conquer a durable place in consumers' wallets. Premium partners and top offerings are key."

AIR MILES UK

AIR MILES (www.airmiles.co.uk) is the UK's leading multi-collection loyalty programme. It was developed in 1988 by Loyalty Management International and acquired by British Airways for the UK market to support its frequent-flyer Executive Club as a wholly owned subsidiary.

The programme enables more than six million members in the UK to collect AIR MILES by shopping with some of the programme's 100 high street partners, including Shell, NatWest, Sainsbury's, Scottish & Southern or by shopping on the Internet. They can then spend their miles on hundreds of travel and leisure offers, including flights, package holidays and days out.

To collect AIR MILES fast, members take advantage of the programme's multi-collecting possibilities. Simply by shopping at more than one of AIR MILES' partners, members can increase their balance every time they buy food, petrol, gas, electricity, and spend online for books, CDs, computers and financial services. Customers can also double their points if, for example, they use their NatWest credit card to pay for their shopping at Sainsbury's.

With a minimum redemption of just 80 miles, there are more than 1,000 different ways to enjoy their AIR MILES. Collectors can enjoy flights, hotels world-wide, package holidays, ski holidays, cruises, car rentals, hundreds of days out across the UK from London attractions to special activities, weekend breaks, cinema and theatre tickets and meals out.

The programme has recently created a separate currency of BA miles for its BA Executive Club membership and there have been several changes in its senior management. The new managing director for both programmes is Drew Thomson, who was previously head of business support for sales and marketing at BA. He is the third managing director to be appointed in the last eighteen months.

We interviewed Mr. Thomson at the Crawley AIR MILES headquarters to obtain his views on the two programmes and coalition marketing in general.

"We are working through transitioning the management structures of both programmes together," says Mr. Thomson, "and we recognise that we still have a communication hurdle to overcome in getting our memberships clear as to what BA miles and AIR MILES will represent."

"BA miles is intended to be the currency for our Executive Club which has a broad range of benefits for the members," he explains. "The rationale for this change was to create a currency for the frequent-flyer programme that was specifically a frequent-flyer currency and not a consumer loyalty currency. We wanted to create a mileage offering in BA miles that was not only comparable with other frequent-flyer offers , but appropriate to the BA Executive Club, which we believe to be the best full service frequent-flyer programme in the world."

As for the AIR MILES programme, Mr. Thomson identifies two of its many key strengths: "The breadth of the AIR MILES redemption offerings is second to none, including the entire BA travel and holiday network at our disposal, plus deals with other leading airlines that we are adding to in a continual process. We also offer a very wide range of non-travel redemption offers built around days out, general leisure and entertainment," he says.

Reviewing the member collection opportunities, Mr. Thomson refers to a major announcement regarding an AIR MILES online partner to cover the 'bricks and clicks' retailing strategy for the future.

"We offer our members the opportunity to collect on all the things they would do every day in many different sectors," he states.

With regard to the competitive environment of loyalty programmes, Mr. Thomson observes: "We offer a broader consumer offering than tight fitting sector specific loyalty programmes." He indicates that AIR MILES is reviewing the European strategy and he feels that, while no real true Pan-European competitor exists, European coalition loyalty programmes tend to be strong in their own market.

The challenge to create an umbrella approach over market specific offers still exists. His comments about the relative development of Europe versus the USA was an interesting insight into his thinking for the future.

"Pan-European players will very definitely emerge. From my perspective, if you take the USA market as an index of 100, in terms of loyalty, the UK is probably sitting at about 60 and Europe is at about 30 as an entity, not as individual components. If you look at the size and scope you have in Europe it is an obvious place in which to try and identify whether you could create a Pan-European programme that, in size and scope, could easily reach the size and scope of the AAdvantage programme in the United States."

The theme of learning from the experience of the USA market was a recurrent one in the interview. Clearly Mr. Thomson believes that, in terms of the future development of consumer loyalty programmes in Europe, the example of the AAdvantage and AOL covering many different sectors for collection has created a compelling consumer proposition.

"With AIR MILES, we have set very strong foundations for doing that with the partnership base we have," he says, "but if we want to grow that, we have to start thinking broader than just the UK, and linking with bigger European partners."

Asked about the importance of having an 'engine' sponsor for a coalition programme, Mr. Thomson was emphatic: "Absolutely, totally fundamental to the success of the programme. You must have a couple of opportunities that generate enough mileage to get yourself a meaningful and valuable redemption. Credit cards, supermarkets and telco companies are absolutely central to the proposition."

With regard to the impact of technology in facilitating customer loyalty and how this may alter the consumer proposition in the future, Mr. Thomson has this to say: "Technology advancements will fundamentally change the way we do business with our collectors. The multi-platform capabilities both now and in the future will create a much deeper relationship with our collectors, giving them the opportunity to talk to us whenever they feel it is appropriate twenty four hours a day, seven days a week. We will, however, retain people in this scenario since a voice at the end of the phone is still what a lot of consumers want."

AIR MILES is already developing additional technology that will allow collectors to interact with the programme via a mobile phone, as well as the existing web site. The database and segmentation capability will be crucial in determining who succeeds in the coalition market space.

"I think it is absolutely critical that, in time, as we interact more with our customers we target them with offers which ultimately come down to whatever that individual wants·. We need to get down to a level of personalisation where individuals feel the programme is designed for them. We have already started it and it is basic. We segment our statements down, we segment our communications down, we segment our online audience down so that they get offers as relevant to them as the knowledge we currently have about them.

"The move is very much towards permission marketing and that is what we support," Mr. Thomson continues. "I am a big fan of being very open and up-front with customers, and I would like to see a world where the relationship is far more open. You tell customers what you know about them, you ask them what they want to tell you and you reward them for doing so."

When asked to consider the differences between running a major coalition programme in Europe versus a similar customer proposition in the United States the response was very clear.

"I think the single biggest difference are the cultural differences (within Europe) although Europe is often seen by US observers as a single State, a Pan-European programme will probably be a set of a lot of local programmes relevant to a local market. We have a far greater complexity of segmentation to wrestle with the versus the Advantage programme operations in the USA."

Mr. Thomson's vision for AIR MILES is built around a better understanding of the customer and using knowledge about customers that is relevant to their interests and needs. He is realistic about the challenges of gaining this level of customer trust and the data manipulation and understanding issues.