The Revenue Mechanism Behind Multi Brand Loyalty Programs

A multibrand membership reward program, allows customers to earn & use points on flights, shopping, hotel bookings, fuel, movie tickets & more. In India, we have companies as Payback, Intermiles & so on that are in the business of reward program. These companies act as the central issuing entity and control the points earned and redeemed by shoppers at various brands that are partners in the reward program umbrella.

Lets move on to see how the revenue mechanism behind the multi brand reward program work & which are the category of shoppers, who should seriously consider owning a multi brand loyalty card.

Earning & Redeeming Points at Partner Brands:

When a shopper start to shop with partner brands, the central issuing entity will credit points in the shopper’s membership account. The number of points a customer earn from a purchase is decided by the central issuing entity and varies from brand to brand & what is purchased.

Let’s assume that a customer shops at a partner brand & uses the earned points to pay for the purchase instead of cash payment. Would this partner brand lose revenue in this sale, as customer uses only the earned points for purchase? If a partner brand starts getting more of customers only to redeem points than to shop and earn points would the alliance be a loss making deal for the brand.

This doesn’t happen, as the central issuing entity will inturn make payment to the partner brand and a liability transfer is done at the weighted average value per redeemed point. Hence a brand under the reward program always makes its money, either through direct payment from customer or the liability transfer against the redeemed points from the central issuing entity.

How does the Central Issuing Entity Earn through the Program?

The central issuing entity charges a commission from its partner brands on every purchase a reward program customer makes with the brand. The percentage of commission varies with brand & the category of product sold. The main revenue stream for the central entity is the commission from the alliance partners. The number of point a customer earn on a unit of purchase, depends entirely on how much commission percentage the partner brand is willing to offer to the central issuing entity.

When a customer redeem points with a partner brand, the central entity makes a settlement to this partner brand from the revenue it has earned as commission. If the central entity has to pay back for the redeemed points, would it still be a profitable business for the central entity?

To understand this, let’s consider a customer booking a hotel room through the reward program & makes cash payment. The point he earn through the transaction would be a mere triple digit reward point. Whereas when the customer wish to book the same hotel room through the reward points that he has accumulated, he needs to spend points that would be in multiples of ten thousand or even higher depending on the property. This explains the fact, reward programs make a customer to spend at several partner brands to earn decent points before the customer could redeem the points on benefits of his choice. As the customer spends more and earn points, the central issuing entity starts making sizeable commission & the payment it has to make to its partner brand for the purchases made using redeemed points (by the shopper) will only be a small percentage of its earnings.

Multi brand reward programs are meant for people who are frequent shoppers and make high value purchase. High value & frequent purchases will make a shopper earn more points in a shorter period so that enough points are available for redemption.

By Harish Kumar K