European Coalition Programmes

(This article was first published in Colloquy retention marketing magazine in the USA in 2001.)

Are coalition multi-sector programmes the future for customer 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?

The European market structure does not currently provide much scope for pan-European retailer loyalty schemes within the context of retail 'bricks and high street' networks. This is due to the lack of true European networks by retailers, although some groups have a strong regional position and others carry their brands across several markets no single retailer group has a dominant pan-European presence. The major international oil company service station networks provide some pan-European coverage as do the frequent flyer/frequent stay programmes from the major airlines and hotel groups. The charge/credit card 'purchase' reward programmes operated by American Express and Visa/MasterCard branded bank-cards also offer some pan-European coverage.

The key benefits to a multi-sector loyalty program are the wide choice of retail sites in which the card can be utilised and therefore the greater likelihood that the customer will carry the card. Secondly the customer advantage of belonging to a consortia is that collection opportunities are greatly increased over the 'share of wallet' expenditure versus single brand independent branded schemes. The customer can therefore accumulate loyalty value at a faster rate and more quickly reach the point of redemption. Research from existing programmes supports the view that initial redemption under a loyalty scheme is more likely to encourage further 'lock-in' to the programme. The third advantage of this type of scheme is the opportunity to share expenses for both the scheme development and any database applications developed from the data collected.

The most obvious drawback to multi-sector loyalty schemes is that the customer associates the benefits that emanate from the scheme as being related to the scheme itself rather than the retailers who participate and fund the programme. Whilst this does not detract from the additional business that the scheme may generate for the retailer, it does have impact on the brand relationship and real 'one-to-one' marketing. The lack of compatible technologies can be another problem with multi-sector schemes although this can usually be resolved using an industry standard protocol or by adopting flexible software solutions that will facilitate greater integration of EPOS systems within retailers.

In order to provide some key insights for Colloquy subscribers, our European correspondent has interviewed the Chief Executives of the two market leading programmes currently running in Europe.

The Air Miles programme is a wholly owned subsidiary of British Airways and has been running in the UK market for twelve years. Whilst well established in the market it has recently appointed its third managing director in the last eighteen months and British Airways have split their frequent flyer membership off into a new programme called BA Miles.

The Loyalty Partner 'payback' programme was launched in March last year. 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 considered one of the toughest to penetrate.

What emerged from these interviews provides a fascinating marker for the future in the context of coalition programmes within European markets and global trends.

The Air Miles interview with Drew Thomson, Managing Director of Air Miles Travel Promotions Ltd

AIR MILES is the UK's leading multi-collection loyalty programme. It was developed in 1988 by Loyalty Management International who have also developed similar programmes globally and was acquired by British Airways for the UK market only to support their frequent flyer Executive Club as a wholly owned subsidiary. It enables over 6 million members in the UK to enjoy discounted holidays, flights, travel and free leisure activities, not by changing any habits but by simply ensuring everyday spending works for them.

AIR MILES' customers collect 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 the 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, say for example, they use their NatWest credit card to pay for their shopping at Sainsbury's.

To spend AIR MILES there are over 1,000 different ways to enjoy AIR MILES, and activities start from just 80 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 had several changes of 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. In November last year he was appointed as the Managing Director for both AIR MILES and the newly launched BA MILES. This is a challenging period in which to be taking over the leadership of the UK's largest coalition loyalty programme and Colloquy interviewed Drew at the Crawley H/Q of AIR MILES to obtain his views on the two programmes and coalition marketing generally.

"We sell dreams and deliver the promise" is the mantra by which Drew intends to develop both programmes. He explained the split into two programmes on the following basis.

"We are working through transitioning the management structures of both programmes together 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."

Drew explained further.

"BA MILES is intended to be the currency for our Executive Club that has a broad range of benefits for the members. 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 comparable with other frequent flyer offers and that was most appropriate to the BA Executive Club which we believe to be the best full service frequent flyer programme in the world."

Turning to the AIR MILES customer loyalty programme we asked Drew for his opinion on its key strengths in the helping it stand out from the crowd. Whilst the programme has many aspects he identified two in particular.

"The breadth of redemption offerings that we have within AIR MILES 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" stated Drew. "We also offer a very wide range of non-travel redemption offers built around days out, general leisure and entertainment."

Reviewing the member collection opportunities Drew then listed the long-standing AIR MILES relationship with some of the UK's leading providers within sectors. He mentioned the deal with The Royal Bank of Scotland/NatWest, with Sainsburys grocery group, with Shell on the petrol re-fuelling and Scottish and Southern energy utility. He also referred to a major announcement that would be made by AIR MILES with an on-line 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."

Asked about the competitive environment of loyalty programmes Drew observed that "We offer a broader consumer offering than tight fitting sector specific loyalty programmes." He indicated that AIR MILES is reviewing the European strategy and he felt that no real true Pan-European competitor exists but European coalition loyalty programmes tend to be strong in their own market. This he feels is still a challenge to create an umbrella approach over market specific offers. His comments about the relative development of Europe versus the USA was an interesting insight into his thinking for the future.

"I think 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 I think the UK is probably sitting at about 60 and Europe sitting about 30 as an entity, not as individual components. I think if you look at the size and scope you have in Europe it is an obvious place in which to look 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 Advantage programme in the United States."

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

"We in the UK with AIR MILES have set very strong foundations for doing that with the partnership base we have but if we want to look to grow that then we will 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, Drew was emphatic is his response.

"Absolutely, totally fundamental to the success of the programme, you have to have a couple of opportunities that generate enough mileage to get yourself a meaningful and valuable redemption. Credit cards, supermarkets and teleco companies are absolutely central to the proposition."

Colloquy then explored the AIR MILES view on the impact of technology in facilitating customer loyalty and how this may alter the consumer proposition in the future.

"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."

Drew explained that AIR MILES is already developing additional technology that will allow collectors to interact with AIR MILES via a mobile phone aswell as the existing web site. He then went on to explain that 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 that individuals feel that this programme is designed for them. We have already started it and it is basic, we already segment our statements down, we already segment our communications down, we segment our audience on line down so that they get offers as relevant to them as the knowledge we currently have about them."

He then continued to develop this theme which is clearly close to his philosophy on the way the AIR MILES brand will be developed for the future.

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

He continued to outline a scenario in which the customer controls his personal file and has the right to take it away from suppliers who do not add value for them. The Internet market is seen by Drew as a bubble that has now burst. Well established programmes such as AIR MILES with over six million customers built up during the last twelve years have demonstrated that they have created a trusted brand with consumers on which they can build for the future. An indication of this trusted brand was Drew's observation that their long-standing partnership with NatWest Bank is confirmed as continuing under the new ownership of The Royal Bank of Scotland.

The interview then explored the perceived value benefit of the AIR MILES proposition and the emotional relationship of the programmes was seen by Drew as critical in combating the 'cash-back' type benefits of some of their competitor offers. Asked about the future for coalition loyalty programmes Drew responded by emphasising the move towards an integrated off-line and on-line, closer coalition between the key members of the programmes.

"The future will be multi-lateral relationships with consumers were you will reward them for a set of behaviours in a holistic relationship to encourage you work across a set of partners as well as with them individually."

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."

The overall impression that comes across very strongly talking to Drew Thomson is his focus on the customer rather than any product. His vision for AIR MILES is built around understanding the customer better, using knowledge about them 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.

"Switching on the emotional engagement button due a redemption capability that is achievable is key to greater customer advocacy"

End of interview

The Loyalty Partner interview with Alexander Rittweger, Managing Director of Loyalty Partner GmbH

Loyalty Partner GmbH is headquartered in Munich and operates the Payback customer bonus programme. With 7 million active card users, Payback has become Germany's leading bonus system since its launch in March 2000. Payback's popularity is due to the fact that it extends across different sectors of the economy and different media. Card users can collect points from well-known companies in all branches of the economy, both online and offline, and redeem their points for cash or products from the Payback Shop. Twentysix partners have now joined the programme, including the online service provider AOL, Europcar, Galeria Kaufhof, dm drogerie markt, real,- and DEA petrol stations.

"Loyalty should pay" - this was the motto at the heart of Alexander Rittweger's business concept.

Mr. Rittweger is the founder and Managing Director of Loyalty Partner GmbH. The idea for Payback came about through Mr. Rittweger's work as a consultant to Deutsche Lufthansa, where he advised the Miles & More bonus programme. The then partner in the Roland Berger consultancy company gave shape to the seemingly simple idea of developing a bonus programme that extended across different sectors of the economy and different media by drawing up a sound and detailed business plan. Lufthansa boss Jürgen Weber was the first to be inspired by Payback. Roland Berger was also impressed by the idea, and so on April 1, 1998, Loyalty Partner was founded with three members of staff and no venture capital investor.

"Our first task was to find strong partner companies" states Rittweger. "The alliances had to cover different areas of the economy and different media. We have always remained true to our goal of only working with top companies from the world of retail and services." Metro AG, real,-, Galeria Kaufhof, Sportarena, Dea, Europcar, Apollo-Optik and four other top companies were sufficiently impressed with the Loyalty Partner idea that they joined the programme. Payback's key selling point was its modern concept of building customer loyalty. To date, the programme includes 26 companies. 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 Rittweger.

This would be an impressive penetration figure for the German market that has a population base of over 81 million. The programme was certainly fast out the blocks and after barely one month, a million customers were actively using the card. To date, seven million users are active members collecting points with Payback, on average 750,000 new members are signed up per month and Rittweger's team has grown to 100 Loyalty staff.

The Colloquy correspondent asked Alexander Rittweger what he felt were the key strengths of the programme?

"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" stated Rittweger. In May 2000 an online programme was launched with industry giants such as AOL, Consors and Booxtra. With a current volume of 800,000 card users won via the web, Payback is Germany's leading bonus programme on the Internet too. Last November, the Payback Shop was opened as an additional service for customers at this enables collected points to be redeemed for products.

"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" added Rittweger. The Payback programme is being systematically expanded. New partnerships are set to capture new areas of business. After the abolition of the Discount Act in Germany, which will take place around the middle of the year, Payback and its partner companies are set to offer a whole range of additional services. The plans include a status concept, similar to a gold card. There are also ideas for integrating a payment function and special purchases for specific target groups. Payback has also been designed right from the outset so that it can be extended quickly to international markets.

"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", explains Rittweger, "We plan to systematically extend our market leadership, in particular by integrating further highly attractive partners."

Colloquy then asked about the importance of a high frequency customer contact 'engine' partner in a coalition programme to facilitate the collection and redemption opportunities for their membership. The response from Rittweger was an interesting insight into the customer focus of this 'new on the block' player.

"A program 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. In order 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 program. 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."

We asked his views on how successful coalition programmes have been so far in Europe generally. His reply is a clear statement of the Loyalty Partner vision.

"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 program 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 program 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."

We also asked him what he felt they key challenges had been in creating payback.

"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"

he continued

"We then 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 program in a way that it is the partners' individual program 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."

Colloquy asked if he could expand on this point further.

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

We concluded the interview by asking Alexander Rittweger what in his opinion was the future of coalition loyalty programmes in Europe?

"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 programs 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."

End of interview

Colloquy commentary on the two leading coalition loyalty programmes in Europe

The views expressed in these interviews with the managing directors of Europe's largest coalition loyalty programmes highlighted some interesting similarities in their view of the 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 that is 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 data-base 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'.

AIR MILES and Loyalty Partner PAYBACK coalition programmes are well placed to exploit the trend in Europe towards this form of customer loyalty marketing. They are utilising technological developments to build multiple channel access for their members but understand that ultimately it is the customer who is in control in the 21st century. They understand clearly that it is more important than ever to create genuine, mutually rewarding relationships with customers.

Peter G Wray

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