Loyalty programs can be a mixed blessing. When they work as advertised, they can lock in consumers and build relationships; when they fail, they vex shoppers and sour relationships.
"You don't want consumers to be frustrated with points that they can't use," said Spencer Hoffman, a partner at Lovell Minnick, a private equity firm with offices in Philadelphia, Los Angeles and New York. Lovell Minnick just made an investment in the Toronto-based Engage People, a loyalty and incentive company that sells web hosted and delivered loyalty, sales and incentive programs for a mix of clients in airline, telecom, financial services and other industries.
In the airline industry, for example, changes in sales strategy have made it harder to rely on rewards programs that offer free or reduced price flights.
"The reduction in capacity has makes it hard for consumers to redeem offers," said Jonathan Silver, CEO of Engage. "Airlines are booked to capacity."
Engage's Loyalty Redemption Globally product enables participants in loyalty programs to redeem and earn loyalty on most e-commerce sites, paired with traditional fulfillment and data analytics. This enables loyalty marketing to be broader and more personalized than traditional miles or discount-based loyalty programs that rely partly on excess capacity.
The companies did not disclose the size of the investment. Lovell Minnick, whose portfolio includes wealth management, business lending and other financial services, sees an opportunity in a marketing trend that's deemphasizing loyalty as an affinity branding exercise and moving the strategy toward a value proposition, where engagement translates into an open currency of sorts.
"It's becoming a complex value proposition to differentiate a company by how it offers a rewards program by offering something of value," Hoffman said, adding the incentive and redemption is driven by rise of data in transaction and point of sale technology. "That trend relies more on the payment than ever before."
There are also financial benefits to a company using this type of loyalty program, since consumers can be engaged for repeat business with a flexible rewards program while the merchant can continue to improve capacity and inventory management.
"The issue was these 'points' were a kind of fuzzy money that didn't result in a major value for an airline or a hotel," Hoffman said. "You want consumers to be able to redeem these rewards in a way that creates a positive connection with the brand and do so in a cost effective manner."
Less inventory could theoretically limit opportunities for promotions and discounts, but it can also increase both the efficiency and power of promotion, said Thad Peterson, a senior analyst at Aite Group.
'With tighter inventory management there's more accurate knowledge of items that are selling well or poorly and the ability to quickly deliver offers in near real time can create value," Peterson said. "Loyalty is finally moving to the point of sale and FIS and Verifone just introduced a very elegant loyalty program. As that capacity expands and becomes much more robust, we can expect to see much less latency in the offer delivery channel, which has a dramatic impact on customer conversion. Both areas of technology will have significant positive impact on merchant top and bottom lines."
Other companies are also selling technology that turns loyalty programs into a more flexible and open currency. Sionic Mobile delivers a virtual currency based on purchases that can be used at a merchant network or for charitable giving. Sionic's sales pitch is based partly on mitigating the challenges of the EMV migration at the point of sale. FIS and Verifone are separately collaborating to broaden the availability of rewards programs in an effort to encourage redemption.
The inventory play doesn't work for all merchant categories, according to Raymond Pucci, associate director of research services for Mercator Advisory Group. Quick service business, for example, don't rely on inventory for merchant rewards, but more on coupons tied to other mobile point of sale technology such as order ahead.
"These loyalty programs rely on frequent traffic, so they are built for coffee shops or other quick service restaurants where people go in once or twice a day."