Enticements such as rewards, loyalty points and coupons seldom face pushback as a marketing concept, but there's been recent concern that these programs are devouring potential revenue from consumers who would be willing to pay full price.

It's a problem that confronts the largest banks, which are selling loyalty programs to premium credit card customers at a cost that threatens profits. And there are also signs that merchant funded rewards are getting more expensive.

One response has been to improve the targeting of the perk to the consumer, thus reducing costs for the loyalty program's operator by extending discounts only to the consumers that would not make a purchase otherwise.

Chart: Discounts matter

"We're seeing a trend toward large loyalty program sponsors trying to provide their program participants with more options than traditional in-kind redemption," said Trevor Rich, Principal at Lovell Minnick Partners, which has offices in Philadelphia, New York and Los Angeles.

Lovell Minnick earlier this year made an undisclosed investment in Engage People, a Toronto-based loyalty and and incentive technology company.

Engage sells Podium, an SaaS-based platform that manages rewards, sales incentives and employee recognition. The product is designed to shift travel reward point programs away from an excess capacity-based system to one based more on consumer shopping. It also allows program sponsors to better match the expense of discounts to redemption trends based on analytics, Rich said.

Engage also sells Local Redemption Globally, a tool that supports programs that allow redemptions on e-commerce sites.

"For banks, card issuers, airlines, hotels and merchants, loyalty is a form of marketing and client retention that's growing," Rich said. "At the same time, these organizations are under pressure to lower the cost of points and reduce the size of the liability on the balance sheet, particularly for banks where such liabilities impact capital ratios."

There are a number of other ways merchants and acquirers are getting creative to boost loyalty programs while promoting cost effectiveness.

Amazon has tied its cash back program to Amazon Prime, a move that broadens redemption options for consumers while squeezing more traditional card-based loyalty programs. LevelUp and Punchh are using mobile transaction data to inform marketing, while Google has partnered with First Data to link loyalty programs to Android Pay. And Sionic Mobile ties loyalty to charitable giving via a virtual currency.

"You want to optimize the yield, so ideally you would give an offer that's just large enough to entice the customer to buy, but not too large so that you don't give value away unnecessarily," said Zil Bareisis, a senior analyst at Celent. "Having said that, I don't know if any financial institutions are using it."

Another optimization play is to place a recommendation engine inside a wallet, suggesting which card may be most suitable for that particular transaction, given that some might offer extra rewards for certain types of purchases, Bareisis said, suggesting Wallaby Financial as an example.

Overall, the trend is to embed payments inside a larger menu or merchant services and marketing.

"One of the prevailing themes that we're seeing in private equity is a focus in vertically-focused integrated payments," Rich said. "For us it's really trying to find companies that have the combination of both value-added software to the customer with payments built into it."

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