The Solution for Marketers to Thrive in an Open Loyalty Economy

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By Richard Postrel, Founder & CEO, Swift Exchange 10/27/2012

In the classic tale Ali Baba and the Forty Thieves, the magical phrase “Open Sesame” unlocks a secret cave filled with riches. Loyalty marketers today, however, don’t need magic to unlock the door to new treasures. It’s already open. And the secrets to revealing it, and a whole new way of doing business, can be found by mirroring another industry. But first, let’s examine the source of this new treasure.

Driven largely by the proliferation of new technologies, particularly mobile and cloud-based computing, a new open-loyalty economy is emerging. It’s rooted in the idea that loyalty rewards can function, in essence, as a fungible currency within an expanding network of programs and merchants working together to provide what consumers clearly want—greater ease and flexibility in earning and redeeming rewards.

We’ve already seen an increase in the number of programs that allow members to convert or transfer points from one program to another, and we’ve seen a growing number of currency-plus-cash programs. Programs that allow consumers to redeem rewards currencies at the point of purchase are also on the rise. In addition, a large selection of programs allow for earning outside of their location—through bonus malls, deal sites, limited time partnerships and so on.

The open exchange of rewards currencies across a network of programs is the next logical step in the industry’s evolution, and many programs already are taking that step. According to the September 2012 SWIFT EXCHANGE and COLLOQUY paper titled An Open Economy: The Evolution of Loyalty in the United States, 88% of the top eight airline programs and 91% of the top eleven hotel programs allow conversion to at least one other program in a different industry. All of the top eight airline programs and 64% of the top eleven hotel programs accept conversions from at least one other program. In the financial services industry, 33% of twelve top programs enable their reward currencies to be used like cash directly with at least one merchant online.

And why not? The ubiquity, flexibility and transferability of points and rewards within an open loyalty economy create a three-dimensional win—for program operators, merchants and consumers. Consumers can redeem their points more easily—even at the point of purchase on their mobile devices—on a wider range of reward options. Merchants enjoy increased sales, alternative distribution of promotional dollars and, as covered in the 2011 SWIFT EXCHANGE and COLLOQUY white paper titled Buried Treasure: Forecast of U.S. Consumer Loyalty Program Points Value, access to $48 billion in perceived value of new rewards currencies issued each year. Program operators benefit from increased customer engagement, reduced costs for setup and delivery of rewards, improved consumer experience and, perhaps most importantly, acquisition of new customers through partner merchants and loyalty programs.

An open loyalty economy enables further industry expansion. In simple terms, rather than everyone vying for a piece of the loyalty pie, constituents work together to grow the pie for mutual benefit. So how does one gain access to and take advantage of this new open economy? The answer may very well lie in borrowing tools from the trading industry.

Lessons from the Trading Floor

Though the benefits of this new open-loyalty economy are clear, it might be less obvious how programs can capitalize on these possibilities. At this point, there are very few models of success to follow within the loyalty industry. But we can learn by examining the history, principles and operating model of the trading industry. The similarities between the world of loyalty and the world of trading may seem limited at first glance, but a deeper look unveils significant parallels. In particular, the evolution of the trading floor can guide us through the next stage in loyalty’s evolution.

  • Turn to automation. In the old days, trades were established and executed in only one fashion—over the telephone. For most of us, it’s hard to even remember what that was like given today’s highly connected digital world. Once electronic trading and automated tools systemized trading among the major players, the pie grew significantly. Trading firms could instantly handle more volume, more efficiently, in a shorter period of time. In the loyalty industry today, programs largely operate in siloed environments with a finite set of partners that are limited by the number of relationships a program’s personnel can manually handle at once. Limited collaboration limits growth. Just as automated systems revolutionized the trading industry by drastically increasing efficiency, new emerging platforms empower merchants and loyalty programs of any size to reap the benefits of systematic collaboration. In loyalty, just as in trading, automation begins to grow the pie.
  • Embrace inclusiveness. There was a time when the vast majority of trading was limited to major firms like Shearson Brothers, Merrill Lynch and Smith Barney. Small and individual investors lacked the access needed to meaningfully participate in the industry. Enter the Internet and a small company called TradePlus, which made its first stock trade in 1983. Suddenly the public could make trades on services like America Online and CompuServe. TradePlus (now better known as E-Trade) and others helped migrate the industry down the pyramid all the way from major firms to individual consumers who can now handle their own trades directly. The pie grew as the trading community grew. The loyalty industry is at a similar inflection point. The loyalty leaders own the market, which is highly saturated and commoditized. The other players lack the resources and technology to have a meaningful impact. Letting smaller merchants and programs participate grows the market for everyone and sets the stage for infinitely more partnerships. In an open loyalty economy, once all players have access, more customers will arrive from the many new sources.
  • Diversify and differentiate. Smart investors diversify and differentiate their portfolios both to mitigate risk and strengthen performance. As automation and participation increased, so too did the opportunity for different types of trades and trading relationships. In loyalty, we should follow this example when building a network of partnerships. Given the fluid nature of the arrangement, marketers can create different types of partnerships and collaborations to bring diversified and unique programs to market. The key to remember is that differentiation is not static; it’s constantly changing. The open economy increases the rate of change in differentiation so it forces creativity and becomes less about each individual offer and more about who is giving the most value most consistently.

Five Ways to Grow the Pie

With these insights from the trading industry in mind, new questions emerge: How to quickly and easily execute new partnerships? How to maintain control of your customer, data and the redemption process? How to maintain brand identity within a network of programs and merchants? Taking another cue from the trading industry, the key is to look for technology that provides the following five services necessary to deliver your efforts.

1. A digital, real-time control center: Just as E-trade provided an easy-to-use, automated system to connect investors, you need to be able to connect your program with other reward providers as well as with merchants interested in participating in your network. A control center that is easily accessible any time of day, any day of the week is needed to create and manage the partnerships within the network that you choose.

2. Tools for total control: You need to be able to set and maintain the parameters of all your partnerships. Technology can empower you to establish currency and discount value, set business rules, segment customer groups, tailor pricing, and select the types of merchants you’re seeking as partners. Once everything is in place, the partnerships and deals can be developed based on everyone’s business objectives. Relationships are created that would not have existed before—small players with large ones, unrelated industries that rarely connect.

3. A robust data measurement process: One of the great advantages of this type of open- economy arrangement is access to much more—and much more meaningful—consumer data, allowing you to target your messaging and offers with far greater accuracy. This arrangement can provide psychographic and cross-vertical data not available today.

4. A multi-channel platform to communicate with customers. Collaboration and meaningful, differentiating offers are worthless if customers don’t know that these new deals are available to them. The network that brings together the programs and merchants must also be capable of reaching consumers with highly targeted, relevant messages and marketing the scope of options and deals in which the consumers can participate.

5. Redemption execution and management. Finally, you need a way to facilitate the offer and execute the deal efficiently—without significantly changing current behavior. That is, make earning and using rewards convenient in the existing shopping patterns of your customers. In this new, more customer-centric program, technology must alleviate customer pain points, making redemption and promotions as easy to understand, and perform, as possible.

All of these capabilities might sound tantamount to magic in classic adventure tales. Not so. By using these types of technologies, the trading industry has created a whole new way of doing business, one that has enlarged the pie for everyone. The loyalty industry is evolving in much the same way. More than possible, an open loyalty economy is inevitable, and the tools for facilitating it are at the fingertips of early adopters today. And like Ali Baba, we’ve discovered what it takes to open the secret door that conceals the treasure.

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