Canadian Retailers Not Optimizing Loyalty Points Programs: Experts

Date:

Share post:


Photo: ShutterstockPhoto: Shutterstock

Photo: Shutterstock

By Michael J. Armstrong and Aaron Luntala Nsakanda

How many “points” have you collected so far this holiday shopping season?

Like millions of consumers, you likely belong to at least one loyalty rewards program. These programs give you “points,” “miles” or some virtual currency when you buy from specified airlines or retailers. You can later redeem your points for rewards that might range from cheaper groceries to exotic vacations.

Of course, such rewards don’t represent corporate generosity. Like inspirational brand reputations and slick e-commerce websites, rewards programs encourage you to patronize certain businesses instead of their competitors, although some question how well they work.

The programs also gather data about your spending habits. This lets businesses promote their products to the most promising prospects.

Some loyalty programs are huge. AccorHotels, which operates Novotel, Fairmont and other brands, has 27 million members. Marriott International has 110 million.

(China could make even those figures look small. Its experimental social credit programs might some day cover its entire population. But those reward a different kind of loyalty.)

The most complex programs involve alliances of otherwise unrelated companies. Air Miles Canada members can shop at thousands of participating stores. Aeroplan has partners representing more than 150 brands. And in Europe, Miles & More includes 300 businesses.

A “host” company runs each of these programs. It tracks your points while managing interactions among the partnering businesses.

Hosts handle the details

For example, suppose you stay overnight at a participating hotel. The host company will subsequently credit points to your account.

But the host also collects revenue from the hotel. In effect, the host sells points to the hotel, which then gives them to you as an incentive for staying there.

Later, you might redeem some points to book a flight. The host reduces your point balance while paying the airline on your behalf for the ticket.

In between accumulation and redemption, the host company tracks your points and holds the cash. To you, the points are an asset. To the host, however, they’re a liability it must some day redeem.


Screen Shot 2018-12-12 at 4.09.24 PM.pngScreen Shot 2018-12-12 at 4.09.24 PM.png

In Canada, the outstanding points balance reportedly approaches CDN$16 billion across all loyalty programs combined. In the U.S., Marriott alone has US$5 billion outstanding.

Some points go unredeemed because, for example, they expire or the owning members quit. This “spillage” benefits the host company, which keeps the previously collected cash. Consequently, hosts can boost profits by adjusting programs to increase spillage. But such measures can anger consumers.

Advance arrangements needed

Before any transactions can occur, the host company and its partners must negotiate the numbers of points earned per purchase or redeemed per reward. They often also commit to specific numbers of rewards redeemed per year per partner.

Aeroplan, for instance, promised to buy $581 million in Air Canada tickets in 2017 for anticipated rewards.

This presents a problem. Host companies must make these arrangements in advance. But only later will they discover how many rewards consumers want from each business.

Of course, hosts can simply pre-arrange for more rewards than they expect to need, to ensure a safety margin. But that’s expensive, as some rewards will go unused.

We worked with doctoral student Yuheng Cao and associate professor Moustapha Diaby to study this rewards-supply planning problem. We created mathematical models to simulate point accumulation and redemption in a loyalty program over time. We then used the models to evaluate potential host company decisions.

Uncertainty hurts performance

One study examined the effects of uncertainty about future demand for rewards. Not surprisingly, higher uncertainty tends to reduce profits for the host company. It becomes more difficult to accurately plan reward needs in advance.

Less obviously, performance also suffers if hosts try to limit their annual rewards budgets or their outstanding points balances. To cap point balances, hosts must purchase more rewards at higher prices. That reduces immediate profitability. Conversely, with restricted budgets, host companies must pay out fewer rewards. That increases their future liabilities.

Both problems worsen as demand uncertainty increases. Hosts increasingly lack enough flexibility to handle demand surprises.

This implies hosts should try to reduce demand uncertainty where possible. They might do this in advance through improved forecasting.

Or as the year unfolds they could offer discounts on underused rewards. For example, suppose an airline normally charges 25,000 points per ticket. It might temporarily cut that to 15,000 for flights on unpopular days.

Options could compensate

Alternatively, hosts could include “options” clauses in their agreements with their loyalty program partners. With this strategy, host companies would still agree to buy a set number of rewards from each partner. But the contract would also give hosts the option to buy more rewards later if demand ends up being higher. Hosts would pay extra for that privilege.

This approach would mean loyalty program partners absorb more of the program’s risks. In exchange, they’d get more of the program’s revenue.

We explored this option contract concept in another modelling study. Our results suggest options contracts should indeed perform better overall than traditional fixed-size contracts.

Options are particularly valuable in large loyalty programs facing high demand uncertainty. They let host companies spread their greater risks across many redemption partners.

By comparison, the common practice of prearranging extra rewards is less effective in those cases. It leaves many rewards sitting unused at many partners.

Overall, our research suggests that reducing uncertainty about redemption demand, and using reward supply option contracts, would both benefit hosts. They could increase their profitability while controlling their rewards budgets and accumulated points liabilities.

This article was originally published by the Conversation.


Michael J. Armstrong is an Associate professor of operations research, Goodman School of Business, Brock University. He teaches courses on quality improvement, game theory, and operations management.


Aaron Luntala Nsakanda is an Associate Professor of Management Science and Supply Chain Management, Sprott School of Business, Carleton University

LEAVE A REPLY

Please enter your comment!
Please enter your name here

More From Retail Insider

Iconic Flo’s Diner in Toronto’s Yorkville Forced to Close After 33 Years Amid Landlord Dispute 

Retail Insider interviewed Flo’s co-owner who discusses the “heart wrenching” situation where he is being forced to close his business that began on Bellair Street in 1991.

Anatomy of a Leader: Teresa Spinelli, Owner of Alberta-Based Italian Centre Shop Ltd.

Spinelli discusses her leadership of the popular retailer which has expanded over the years, describing how she struggled to run the company at first and grew to love it.

Upscale Canadian Fashion Brand SMYTHE Expands with New Standalone Calgary Store [Interview/Photos]

It's the second store location for the Toronto-based brand, which is seeing success with its exclusive womenswear collections.

Toronto’s CF Sherway Gardens Hits Sales Milestone with Exciting Retail Growth and Future Plans [Interview]

The shopping centre is adding new retailers as sales per square foot hit an all-time high, with plans to re-tenant Nordstorm as foot traffic grows following Eataly's opening in the mall a few months ago.

ECS Coffee Opens Canada’s Largest Coffee and Espresso Equipment Gear Showroom and Retail Space in Toronto [Interview]

The new Etobicoke location is unique to Canada if not North America, according to its founder, with coffee roasting, equipment showroom, over 500 varieties of coffee, Youtube studio and various in-store experiences. He has plans to expand the concept nationally.

New Loblaws City Market Opens in Vancouver’s ‘The Post’ Building, Adding Grocery Competition to the Downtown Core [Podcast]

Craig and Lee discuss the opening of a new Loblaws City Market in downtown Vancouver's renovated Post building, and they explore its potential impact on local grocery shopping.

Loblaw Announces $2 Billion Investment in Canada for 2024 with Dozens of New Stores and 7,500 New Jobs [Expert Comment]

The retail behemoth will be growing substantially this year, following backlash over profits as inflation continues to impact Canadians.

Dubai-Based Asian Street Food Concept ‘Wok Boyz’ Expands into Canada with Plans for Multiple Locations [Interview]

The company's founder says the popular concept, with personalized meals, has an opportunity to grow substantially with its high-quality ingredients and theatrical flare, complete with fiery customer-facing woks.

Calgary Surge Basketball Team Launches Innovative Pop-Up at CF Chinook Centre to Boost Community Engagement [Interview]

The retail activation, which opened this month, is resulting in heavier foot traffic in a quieter part of the mall.

Upscale Pusateri’s Fine Foods to Close Yorkville Grocery Store in Toronto After 20 Years

The 5,500 square foot store opened to much fanfare in 2003, with valet parking, private chefs and pricey goods. 

Loblaw and Walmart Could be Forced to Adhere to Grocery Code of Conduct with Legislation [Op-Ed]

Sylvain Charlebois says that it's rare for all of Canada's political parties to agree, signalling a shift that could force grocers to comply amid record inflation.

Factory Direct to Shut All 14 Stores Amid Bankruptcy, Liquidation to Begin Saturday

The company, founded in 1995, is one of Canada’s largest privately owned discount retailers which struggled with declining sales and increasing costs following the pandemic.

What to Expect for the Canadian Retail and Hospitality Sectors in 2024 [Video Interview]

Michael Kehoe provides an expansive overview of what's expected for Canada's retail industry in 2024, and how the commercial real estate industry is becoming more dynamic than ever.

Anatomy of a Leader: David Lui, CEO of Kit and Ace and Co-Founder of Unity Brands

Lui has an extensive background in retail with over 30 years of experience and is known for his award-winning brand transformations, e-commerce and digital knowledge along with his passion for scaling businesses.

Robotic Retail Gaining Traction in Canada, But Some Consumers are Being Left Behind [Op-Ed]

Automated retailers without in-store staff are opening across Canada, such as Aisle 24, RC Coffee and PizzaForno -- but consumers without smart phones, credit cards, or with vision issues may not be able to access these retailers says a researcher.

Oakridge Park Announces 1st Luxury Retailers, Attracting Top Brands to Vancouver [Podcast]

Craig and Lee discuss the latest Oakridge Park announcement, highlighting the addition of luxury and upper contemporary brands to Vancouver's retail landscape and how it will impact downtown.

Interview on What it Takes: Lee Valley Tools Named Top Retailer in Ontario for Customer Service

The company's COO Jason Tasse discusses the retailer's secret sauce for having an engaged workforce, while also discussing plans to expand with more stores and retail concepts.

Survey Data Shows Canadians will Prioritize Romance Over Budget Cuts This Valentine’s Day [Interviews]

David Litwin of Moneris notes that Valentine's is an interesting bellwether for what businesses might expect from consumers for the rest of the year.

Anine Bing to Open 2nd Canadian Storefront at the Four Seasons Hotel in Toronto 

The US-based women’s fashion brand recently opened its first Canadian store at Yorkdale, and will open its second location in a downtown luxury hotel. 

Retail Burnout Crisis in Canada: The Call for Empathetic Leadership and Proactive Solutions Amid Operational Strains [Feature]

It's never been more difficult to work in retail, with store managers burning out amid lower staffing numbers, increased task and store robberies. Two industry experts discuss the situation.

RECENT RETAIL INSIDER VIDEOS

Advertisment

Subscribe to the Newsletter

Subscribe

* indicates required

RECENT articles

Iconic Flo’s Diner in Toronto’s Yorkville Forced to Close After 33 Years Amid Landlord Dispute 

Retail Insider interviewed Flo’s co-owner who discusses the “heart wrenching” situation where he is being forced to close his business that began on Bellair Street in 1991.

Anatomy of a Leader: Teresa Spinelli, Owner of Alberta-Based Italian Centre Shop Ltd.

Spinelli discusses her leadership of the popular retailer which has expanded over the years, describing how she struggled to run the company at first and grew to love it.

Upscale Canadian Fashion Brand SMYTHE Expands with New Standalone Calgary Store [Interview/Photos]

It's the second store location for the Toronto-based brand, which is seeing success with its exclusive womenswear collections.

Toronto’s CF Sherway Gardens Hits Sales Milestone with Exciting Retail Growth and Future Plans [Interview]

The shopping centre is adding new retailers as sales per square foot hit an all-time high, with plans to re-tenant Nordstorm as foot traffic grows following Eataly's opening in the mall a few months ago.

ECS Coffee Opens Canada’s Largest Coffee and Espresso Equipment Gear Showroom and Retail Space in Toronto [Interview]

The new Etobicoke location is unique to Canada if not North America, according to its founder, with coffee roasting, equipment showroom, over 500 varieties of coffee, Youtube studio and various in-store experiences. He has plans to expand the concept nationally.

New Loblaws City Market Opens in Vancouver’s ‘The Post’ Building, Adding Grocery Competition to the Downtown Core [Podcast]

Craig and Lee discuss the opening of a new Loblaws City Market in downtown Vancouver's renovated Post building, and they explore its potential impact on local grocery shopping.

Loblaw Announces $2 Billion Investment in Canada for 2024 with Dozens of New Stores and 7,500 New Jobs [Expert Comment]

The retail behemoth will be growing substantially this year, following backlash over profits as inflation continues to impact Canadians.

Dubai-Based Asian Street Food Concept ‘Wok Boyz’ Expands into Canada with Plans for Multiple Locations [Interview]

The company's founder says the popular concept, with personalized meals, has an opportunity to grow substantially with its high-quality ingredients and theatrical flare, complete with fiery customer-facing woks.

Calgary Surge Basketball Team Launches Innovative Pop-Up at CF Chinook Centre to Boost Community Engagement [Interview]

The retail activation, which opened this month, is resulting in heavier foot traffic in a quieter part of the mall.

Upscale Pusateri’s Fine Foods to Close Yorkville Grocery Store in Toronto After 20 Years

The 5,500 square foot store opened to much fanfare in 2003, with valet parking, private chefs and pricey goods. 

Loblaw and Walmart Could be Forced to Adhere to Grocery Code of Conduct with Legislation [Op-Ed]

Sylvain Charlebois says that it's rare for all of Canada's political parties to agree, signalling a shift that could force grocers to comply amid record inflation.

Factory Direct to Shut All 14 Stores Amid Bankruptcy, Liquidation to Begin Saturday

The company, founded in 1995, is one of Canada’s largest privately owned discount retailers which struggled with declining sales and increasing costs following the pandemic.

What to Expect for the Canadian Retail and Hospitality Sectors in 2024 [Video Interview]

Michael Kehoe provides an expansive overview of what's expected for Canada's retail industry in 2024, and how the commercial real estate industry is becoming more dynamic than ever.

Anatomy of a Leader: David Lui, CEO of Kit and Ace and Co-Founder of Unity Brands

Lui has an extensive background in retail with over 30 years of experience and is known for his award-winning brand transformations, e-commerce and digital knowledge along with his passion for scaling businesses.

Robotic Retail Gaining Traction in Canada, But Some Consumers are Being Left Behind [Op-Ed]

Automated retailers without in-store staff are opening across Canada, such as Aisle 24, RC Coffee and PizzaForno -- but consumers without smart phones, credit cards, or with vision issues may not be able to access these retailers says a researcher.

Oakridge Park Announces 1st Luxury Retailers, Attracting Top Brands to Vancouver [Podcast]

Craig and Lee discuss the latest Oakridge Park announcement, highlighting the addition of luxury and upper contemporary brands to Vancouver's retail landscape and how it will impact downtown.

Interview on What it Takes: Lee Valley Tools Named Top Retailer in Ontario for Customer Service

The company's COO Jason Tasse discusses the retailer's secret sauce for having an engaged workforce, while also discussing plans to expand with more stores and retail concepts.

Survey Data Shows Canadians will Prioritize Romance Over Budget Cuts This Valentine’s Day [Interviews]

David Litwin of Moneris notes that Valentine's is an interesting bellwether for what businesses might expect from consumers for the rest of the year.

Anine Bing to Open 2nd Canadian Storefront at the Four Seasons Hotel in Toronto 

The US-based women’s fashion brand recently opened its first Canadian store at Yorkdale, and will open its second location in a downtown luxury hotel. 

Retail Burnout Crisis in Canada: The Call for Empathetic Leadership and Proactive Solutions Amid Operational Strains [Feature]

It's never been more difficult to work in retail, with store managers burning out amid lower staffing numbers, increased task and store robberies. Two industry experts discuss the situation.