Nov 18, 2005

The commoditization of points, miles and other loyalty currencies

How long can banks continue making these types of offers? A free iPOD, 0% interest on balance transfers, no annual fee, plus points for rewards. Price is the primary selling feature. This is probably as close as you can get to the textbook definition of commoditization.

In this ad, points are just another factor of price. Customers have learned to calculate the value of loyalty or rewards currencies like points, miles and cashback. They know that points are essentially another form of discount. There is no longer any real attempt to disguise points as something other than a discount. Loyalty currency has become simply another element of price differentiation and is now itself a commodity. Is this one of the reasons why Barclaycard withdrew from the Nectar loyalty points scheme in the UK?

In South Africa, at least four major rewards programmes have been shut down in the past three years, and a number of programmes have reduced the value of their points, making it harder for cardholders to accumulate rewards. In the UK, perhaps the most commoditized and saturated loyalty market in the world, a recent article describes the following state of the market: “Consumers have become disinterested in most loyalty schemes and the market is heading for a significant shake out with only a few existing programs surviving. The loyalty market is also ripe for new entrants who champion the consumer, utilise new technology to deliver a better consumer experience, create interesting new value exchanges and communicate on a true 1-2- 1 basis. Organisations need to raise and exceed consumer expectations of loyalty schemes and re-engineer their loyalty programs for the 21st century.” (see “Loyalty is pointless – or is it?”)

Here is another indication that points are a thinly disguised discount: in Australia, when the RBA forced a cut in interchange fees, banks responded by dropping their loyalty programmes, which they could no longer finance without the higher interchange rates. The message to consumers is clear: “pay higher fees and get loyalty points, pay lower fees and get no points”. This message is very transparent in credit card comparison tables like this one, which advertises a rewards program in which the customer can choose not to pay an annual fee, and get 1 point for every $2 of purchases, or pay a $55 annual fee and get double points.

A new report by PriceWaterhouseCoopers, Precious Plastic 2006, comments on a trend called ‘Massclusivity’, ensuring cardholders are given preferential treatment over other customers. According to PriceWaterhouseCoopers, the Massclusivity trend “abandons complex points schemes in favour of targeted offers that acknowledge customer loyalty, prompting the consumer to form an emotional attachment to the brand.”

This is something that I have been seeing and commenting on a lot recently. With perhaps one minor difference. To me, giving preferential treatment is not a trend. It is a fundamental idea at the heart of the original credit card schemes launched half a century ago, which eventually became known as Visa and MasterCard. You simply need to look at the choice of the name “Visa”, which indicated to early cardholders that the card would open doors and would be accepted everywhere, providing preferential treatment and convenience to the cardholder. To me, loyalty currency is a trend, preferential treatment is not. Like all trends, there is value in offering it to customers as long as there is demand for it. Some trends eventually become long term mainstream currents, but not always.


WL said...

It would be wonderful if this post could be expanded into a whitepaper ..

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