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When partners in your loyalty program hurt your business
Many loyalty reward programs add partner firms to boost customer loyalty and increase sales, but are these partnerships always mutually beneficial?
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Loyalty reward programs have become the most widespread customer relationship management tool employed across industries and markets globally. In 2018, this market was valued at USD 2617 million, and is expected to grow by 23 per cent by 2024, according to a report from Orbis Research.
However, loyalty programs often remain unused beyond the first purchases. To avoid this and rather gain a competitive advantage, companies increasingly offer so-called partnership loyalty programs.
The key here is how members gain points by purchasing from partners, such as airline customers earning frequent flier points by purchasing their clothes from retailers who are partners in the program.
BI Norwegian Business School Associate Professor Matilda Dorotic and colleagues have studied effects of partnership loyalty programs on sales of partners. They looked at a European partnership loyalty program consisting of 33 partner companies from 16 different industry sectors.
“It turns out that participating in partnership loyalty programs can be a double-edged sword for some companies and a booster for others,” says Dorotic.
The power of synergy and the threat of cannibalization
The researchers found that partnerships could create both positive synergies and cannibalizations of sales when customers are encouraged to cross-purchase from other partners in the loyalty program.
“Since members earn points by purchasing from partners, they are encouraged to adopt partners in the partnership to earn rewards faster. It's a “your customer becomes my customer” effect in which firms get new customers from the partnership membership base,” Dorotic explains.
On the other hand, customers are also able to switch among partners without forfeiting rewards, particularly if the partnership features competing firms.
“This can potentially lead to the cannibalization of sales among partners, where a firm’s existing customers may start purchasing more from other partners and less from the focal partner,” says Dorotic.
Rich get richer
Considering the financial costs of running loyalty programs, many firms are prone to consider joining loyalty programs with other firms. But they need to carefully consider whether they will benefit from a potential partnership by analyzing potential gains versus costs.
Based on her research, Dorotic emphasizes that this evaluation should also include a thorough evaluation of a company’s position compared to the composition of the existing partners in the partnership.
“We found that strong partners, who are typically adopted by many members, enjoy a 'rich-get-richer' effect due to their ability to attract new customers from the partnership and reinforce their existing purchases,” Dorotic explains.
In her study, strong partners like a department store and gas retailer received some positive synergies and some negative effects on sales from smaller, more specialized partners, but in turn they can hurt future sales of smaller partners.
In other words, when customers purchase from a strong partner one week, they are less likely to make a purchase from a smaller, specialized partner in the week after. On the other hand, positive effects on sales occur between smaller partners who are not direct competitors.
What firms have to consider
However, since there are often more small than large partners in these partnership loyalty programs, Dorotic’ research shows that the cannibalization of future transactions among partners is more frequent than synergies.
“Before entering a partnership, companies should therefore consider if any competing firms are already part of the loyalty program partnership and in what way the main, established partners in the partnership may affect the cross-purchasing of companies’ existing customers”, says Dorotic.
Reference:
Matilda Dorotic et.al.. Synergistic and cannibalization effects in a partnership loyalty program. Journal of the Academy of Marketing Science, 2020. Doi: 10.1007/s11747-020-00759-7
