Jan 29
A New Frontier of Growth in Commerce
In a world where economic uncertainty looms and consumer spending wanes, acquiring and retaining customers has never been more crucial. In a globalized society, customers interact with 50+ brands every day and the key to success of any business is differentiation and delivering maximum value to customers.
Loyalty programs, designed to incentivize customers to shop more, often fall short due to a lack of meaningful use cases of the reward points earned. As a result, billions in loyalty points go unused and customers are reluctant to sign up.
When loyalty programs do work, they subsidize customers’ purchases in the hopes of increasing spending in other areas. Therefore, the increase in revenue must always be weighed against the increase in cost per purchase. For example, a Panera Club membership costs $130/year and offers unlimited coffee refills for $8.99/month. In this case, Panera only makes money if subscribers purchase food alongside the drinks or if they don’t come to Panera as often. Low-subsidizing rewards like $1 vouchers or 10% discounts may be less costly, but the most enticing and differentiating rewards tend to drive up the cost per purchase.
The solution is to outsource the utility of points and cost per purchase to other businesses through loyalty partnerships. In a loyalty partnership, two or more reward programs partner with each other, increasing the utility of reward points — which will attract more purchases — and enabling businesses to acquire target customers more effectively. Here’s how it looks like:
For example, Juice Press allows the redemption of 10 Asics Points for a Free Green Juice. Juice Press taps into Asics’ health-focused customer base to increase sales, while Asics expands the utility of its points, attracting more purchases. Loyalty partnership fuses loyalty programs and partnership to serve as both a retention and customer acquisition tool. This is going to be the most efficient growth mechanism of the 21st century commerce
This is an example of a one-way partnership where only one party offers cross-rewards redeemable by the partner’s points. This is usually for an unbalanced partnership where one party is larger than the other. In this case, there is a low probability of utility-motivated purchases — extra purchases purely motivated by the desire for cross reward redemption — from the partner’s customers, and a partnership fee is usually charged by the reward issuer to the partner. Partnership fee is paid per redemption and the value can be fixed or in a percentage off the transaction amount. Figure 1 shows how Asics charges Juice Press 10% off of transactional value for every reward redemptions as a partnership fee.
In a two-way partnership, shown in Figure 2, both parties enjoy increased sales and expanded utility of reward points. This is typically a more balanced partnership where both parties are of equal size. Since there is a high probability of utility-motivated purchases from both sides, partnership fees can be more lenient or even non-existent. Friendly reminder that businesses can create custom partnership structures here.
A lone cook may deliver a culinary masterpiece, but a solitary effort can only accommodate so many diners. Yet, a brigade of chefs, each offering unique culinary prowess, and supportive cast of kitchen hands can expand the offerings and feed 100 diners daily. Nylon allows businesses to assemble an alliance of cooks to maximize the value delivered to businesses and customers.
In a future where customers prefer to shop at a place that offers the most value for them, loyalty partnership helps brands deliver more value by expanding the use cases of reward points and provide the most cost-efficient path to acquire new customers and increase sales. We can’t wait to share more details with y’all in the next coming weeks.
Per aspera ad astra.
