Merchant Funded Rewards: Boon or Bane?

  • Aug 30, 2011

vendor funded loyalty programs--good or bad?Austin, Texas: It appears that more and more companies are looking at merchant-funded reward programs in an effort to encourage customer loyalty.

Financial institution with their debit card programs, for one, has been aggressively courting companies to fund their rewards program. For example, Best Buy is offering a $5 rebate while using one bank’s debit card while making a purchase at Best Buy.

Are these merchant funded programs a wise idea?

I tend to view programs where the rewards are redeemed at a third party site as a poor way of building a brand. After all, when Bank A chooses to use the Best Buy rebate, whose brand is being built, Bank A or Best Buy?

They would be much better off using Best Buy and other retailers to fund the program, but have the points be able to be accumulated and redeemed at their home site, where one of the rewards could be a $25 Best Buy gift certificate.

Using merchant funds is ideal when it is incorporated into a long-term program that remains the brand of the issuer, a la airline mile point programs.

With airline mile programs, vendors help to fund the program, with points able to be earned for such non-flight related purchases as car rentals, hotel stays, consumer product purchases, etc.

There is synergy involved that enhances the program when the rewards offered by many vendors, each who pays for the program at large– while the branding still remains that of the hosting company.

Whose program is it?

For many years, we had run a loyalty program for a Fortune 500 consumer products distributor, where the buyers at a trade show were awarded points for making purchases at the show, instead of separate programs and incentives run by each vendor. Each vendor funded the program, usually at 1%-5% of dollars spent at the show.

It was a tremendous success. In fact, many times, a buyer would walk up to the prize redemption program to redeem points, only to find out that they can get a bigger and better reward for another 5,000 points, for example. That person would go to one of the vendors’ booths and buy enough product on the spot to earn those additional 5,000 points.

It was a win-win-win program.

1: The buyers won by getting free merchandise.

2: The vendors won by getting immediate trade show sales that they might have lost to a competitor or that they would not have ordinarily gotten. In fact, many vendors used this as an opportunity to unload off-season merchandise and overstocks, in addition to new product introductions.

3: The host company won by increasing revenue by an average of 22% over the 6 years that they ran the program and keeping both buyers and vendors happy.

The program belonged to the host company, but it was 100% merchant funded. It was well run and kept its branding intact. In fact, the points and the program had the host company’s name in it.

Unfortunately, several years later, a new buyer came along and changed the program structure. That program immediately lost its luster when they decided to let each vendor participate if they wanted, but said that each vendor was also free to have their own incentive program instead.

What happened, as you can guess, was that some vendors had prize drawings, others gave cash “spiffs”, others gave points– and the program had zero synergy. Each vendor was competing with each other for attention, and the program crashed within 2 years, which led to the end of that trade show completely.

Once the brand gets confusing, the program has lost one of its critical objectives.

Last week, I was called in to meet with a marketing executive for a trash recycling business, where points were being offered to the consumer for recycling–based on pounds recycled at each pickup. It was well planned and they had spent a literal fortune designing the program that allowed each garbage truck to have an RFID reader that awarded points on the spot, which went into the consumers account.

The problem was not that the points were 100% merchant funded. The problem was that customers were able to redeem their points at dozens of local vendors, for such things as 2-for-1 desserts at an Italian restaurant , 10% off at an office supply store, 15% off a remodel of your kitchen, $ off your next hair cut at a hair salon, etc.

It was a total mishmash of incentives–with the bottom line being that each point had no base value.

In addition, most of these offers were no better than what they saw in the daily newspaper or Valpak mailing, which greatly reduced the perceived value of the points and ruined its exclusivity.

And, there was no branding. Was the program the recycler’s, or was it the Italian restaurant or office supply company’s program?

There was absolutely no synergy.

The recycler should have allowed the vendors to pay in to the program through advertising on their website and on the trucks, then had point redemptions at their own site. Sure, some of the rewards could be $25 gift cards at some of these merchant stores, but all paid through the host’s program.

Bottom line, it is fine to get merchant funding for your loyalty program. But the program must be run where the funds are accumulated and earned for redemption at the host’s site.

This cements the branding.

It creates a real value for the points.

It gives the host company the ability to offer dream gifts and rewards beyond what they could have done without the vendor or merchant funding.

Make sure your loyalty incentive program remains your program.

Do not let it become watered down, no matter how tempting the merchant funding seems at first.

Happy promoting.

  • Category: Blog, Loyalty Marketing/Frequency Programs
  • Tags: debit card incentive programs, digital incenitves, digital reward, financial industry incentives, incenitve programs, incenitve reward, incenitves paid for by vendors, loyalty programs, merchant funde