Why coalition loyalty schemes are bad
Nectar is commonly known as a coalition loyalty scheme where a number of unconnected companies get together and offer a single scheme that covers all their companies. Nectar is the largest such scheme in the UK. One of the benefits of such a scheme is that most people don't want to carry round loads of loyalty cards for individual companies which is something we hope that the smartphone will fix. In general, whether it's the little stamp card issued by your local coffee shop or points given by major retailers who operate their own schemes you can be fairly sure that they'll be more generous than a coalition scheme like Nectar.
So what are the reasons?
Coalition schemes reward people who are loyal to other partners
If Virgin Trains East Coast were to improve Nectar by offering a standard class ticket for 500 points and a first class ticket for 1000 points it would be a much more appealing scheme for customers, almost as generous as the old scheme. The problem is although a free ticket is a nice reward for someone who's spent so much money with your company, it can also mean that those who have earned the points elsewhere and may not have spent a single penny on train travel. As all points would be treated equal it means that there's no way to distinguish someone who earned their points through Virgin Trains East Coast compared to someone who earned their points through BP, Sainsbury's, Homebase or other partners.
So what about the other option that had been suggested? Why doesn't Virgin Trains East Coast just offer more points per pound spent so that the value of the points are closer in value to the previous rewards points? Again the issue is that a customer can then choose to spend the points elsewhere on groceries, petrol, etc. This would be a real negative financial outlay if this happened (plus even if most people spent their points on rail travel the points are purchased from Nectar and they'd not get their money back until the passenger redeems).
So by definition a coalition scheme has to be mediocre. No company is going to go out the way to treat customers of other partners.
What do companies get out of it?
The way these schemes work is each company pays for the points that they issue out and these are then stored by the loyalty company (Nectar), when someone redeems their points the retailer is paid by the loyalty company. Obviously Nectar will charge for this transaction so it will cost a company more to purchase 1000 points than they receive when 1000 points are redeemed. Effectively Nectar is a currency but one which can be only traded through the loyalty provider.
Outside the key partners of Sainsbury's and BP a lot of smaller companies join Nectar because they believe that being attached to a well known scheme (that they're already a member of) will help influence people's buying decisions, this is why FirstGroup and Virgin Trains West Coast had some success introducing Nectar for their rail booking sites. As the rewards are not very generous it's likely the main people input their Nectar number is because it's better than nothing. Of course, when you've already experience a scheme that truly rewards loyalty then Nectar is just going to appear insulting as the comparison shows.
What problems does Nectar specifically have?
The Nectar partners are an odd bunch and often compete with each other. For example both Sainsbury's and BP do fuel, Sainsbury's and American Express both do credit cards. Virgin Trains and FirstGroup both sell rail tickets but only FirstGroup gives points for all rail travel (which makes you wonder why Virgin Trains even bothered to sign up).
One of the things rail operators should be doing is promoting the benefits of public transport, not just their own services but others too, because those less reliant on the car are more likely to travel by rail. This makes the decision of rail operators to partner with a loyalty scheme that encourages both driving (through the fuel points) and flying (through their easyJet partnership) seem like an ill thought out decision.
The other problem is you don't have control over the promotions the other partners are making. For example when Sainsbury's halved their earning on groceries, they offered a 10x bonus on fuel for about a month. This was to hopefully take people's mind off the drop in earnings elsewhere. This made their other fuel partner, BP, look poor in comparison so they launched some bonus offers of their own. Both of these offers meant that during that time, for Necar, driving was significantly more rewarding than taking the train.
Apart from poor rewards, what else is also bad for the customer?
Could coalition schemes work?
In general we think loyalty schemes work better if the individual retailer (or group of companies if connected with a common owner) has their own scheme. There's nothing to stop a company offering rewards with other partners (like East Coast Rewards did), but in general the scheme has to be rewarding enough to actually influence your purchasing decisions.
For it to work the companies involved in the coalition have to have some reason for working together, for example of group of local retailers wanting to encourage you to shop in their respective stores rather than the nearby supermarket. Airline schemes generally partner with airlines that either share alliance or have strategic codeshare agreements.
Just a reminder that articles within the blog section may not represent the official views of the Save East Coast Rewards campaign and are the views of the individual contributor.