3 types of merchant funded loyalty programs
31 October 2022
Philip Shelper

A merchant funded loyalty program involves a third-party partner (or merchant) covering the cost of the benefits provided to the member. This is generally because of the loyalty program promoting the third-party partner to the member, leading to the member transacting with that partner.

A number of programs have built their entire strategy around affiliate, recruiting members to spend online via advertisers to earn cashback. Most major coalition programs, particularly frequent flyer programs, have adopted affiliate earn as part of their wider program offering.

In exploring merchant funded programs, three design variations are considered: affiliate, card-linked and gift card-linked.

1.      Affiliate merchant funded program:

Affiliate is a digital business model connecting thousands of advertiser and promoter businesses globally. The promoter business publicises the advertiser to their marketing database. The members click through to the advertiser’s online store and transact. The advertiser pays a percentage of the total amount spent by the member to the promoter, known as affiliate marketing revenue. The promoter rewards the member with cashback or points funded by the affiliate marketing revenue.

The percentage return provided in the form of affiliate marketing revenue can range from 1 per cent up to 20 per cent and even more, making it an attractive extension for points programs where the average earn rate may only be a 1 or 2 per cent return. Advertisers often run short-term promotional campaigns which increase the percentage return, making it increasingly attractive.

Two challenges faced by program operators utilising this affiliate marketing framework include payment delays (to avoid situations where members return items after affiliate marketing revenue is paid, many advertisers align the affiliate marketing payment with the official refund period, which can be up to 90 days) and onerous member processes (members must remember to follow a certain process to ensure they earn their cashback or points which commonly requires the member to sign into their program account, find the logo of the relevant brand and click through to their online store to transact).

ShopBack Shopback[1] have partnerships with over 1,300 large brands which pay a commission for any purchases made on their ecommerce stores which are linked to Shopback members. Shopback shares the commission with the member that made the purchase in the form of a cashback. Cashback accumulated in a member’s ShopBack account can be withdrawn into member’s bank accounts via Paypal. Shopback also have a ‘Toolkit’ for members to install so they ‘Never miss a Shopback opportunity’ and do not have to remember to go to the Shopback website and click through to the brands site to gain the cashback. The toolkit includes either a Google Chrome or Firefox browser extension which enables an automated pop-up when a member visits the online store of a participating advertiser. Members click an ‘activate’ button to link their Shopback account prior to transacting to access the cashback on their purchase. The browser extension approach used by Shopback has been instrumental in boosting member engagement with affiliate programs. However, there is mixed feedback among the advertisers, with some opting out as they believe they would have gained the member sale (with the member already on their website when the browser extension pop-up notifies them to activate) without the need to pay commission to Shopback, thus unnecessarily eating into profits.

2.      Card-linked or bank account-linked merchant funded program:

This approach involves the linking of a credit/debit card or bank account to a member account.

For card-linking, when the member uses the registered card to transact with a participating merchant, the transaction data is routed from Mastercard, Visa or Amex to the program operator, and an agreed percentage of the total transaction is retained (similar to affiliate marketing revenue). The program operator can use the retained revenue to reward the member with points, cashback or credits etc.

For bank account-linking, any transaction made via the member’s bank account is redirected to the program operator, allowing them to identify transactions made with participating retailers, and apply the relevant reward. The participating merchant can then be invoiced for the cost of the reward at some time in the future.

This approach provides some advantages over affiliate marketing. The benefit is provided to the member real-time (or at the latest within 24 hours) instead of having to wait up to 90 days. The member can spend online, but more importantly in-store, expanding the flexibility of shopping options. The member does not need to follow specific processes to earn, but simply pays with the registered card or bank account.

Hooch Rewards Hooch[2] is a hospitality perks app with over 250,000 global partners spanning hotels, restaurants and bars. Members download the Hooch app and link their credit card, then when members travel and dine with a partner as they normally would, they earn TAP Dollars instantly. Rewards are instantaneous and secure due to Hooch using blockchain technology to facilitate and encrypt the transactions. Members receive up to 10 per cent back on purchases in TAP Dollars which is funded by the merchant partners. Liquor brands like Bacardi and Paramount use the Hooch app as an advertising platform to connect with relevant target customers.

3.      Gift card-linked merchant funded program:

Gift cards are typically sold to loyalty programs (and other retailers such as supermarkets) at a discount to the face value amount. Loyalty programs have developed app solutions which allow members to register a credit or debit card and purchase a variable value gift card for a specific brand in real-time. The gift card barcode displays in the app and can be scanned at the checkout, completing the sale. The gift card discount is used to reward the member with points or miles. Discounts can range from 1 per cent up to 15 per cent for different brands.

United MileagePlus United MileagePlus offers MileagePlus X,[3] a payments app which allows members to earn miles across hundreds of retailers across the US. Members register their credit/debit card in the app. When they are transacting, they search for the participating retailer and enter the amount they wish to spend. In the back end, the system purchases a digital gift card of the same variable amount, and presents a QR code in the app for the member to scan to complete the purchase. MileagePlus buy the gift cards at a discount. They use the discount to cover the cost of the miles they award to the member, making the rewards cost neutral. The model is clever in two ways; firstly, the discounts provided on gift cards are often quite generous (5-10 per cent or more can be common), meaning the member receives a healthy miles bonus, and secondly, gift card affiliate suppliers have already negotiated the relationships with the gift card providers, making it easy for MileagePlus to build out a rapid expansion of their coalition without having to negotiate individual agreements. MileagePlus X offer over 270 popular brands, such as Panera Bread (earn 5 miles), Krispy Kreme (earn 4 miles), Sephora (earn 3 miles), Apple iTunes (earn 2 miles), and Walmart (earn 0.5 miles).

In Australia, we recommend trying PokitPal for a great card-linking cashback experience.

Happy hunting!

[1] Shopback, https://www.shopback.com.au/how-we-work, accessed 29 June 2020.

[2] Hooch, https://hoochrewards.com/, accessed 29 June 2020.

[3] United, https://www.united.com/ual/en/us/fly/mileageplus/earn-miles/mileageplus-x.html, accessed 29 June 2020.

<a href="https://loyaltyrewardco.com/author/philip/" target="_self">Philip Shelper</a>

Philip Shelper

Phil is the CEO & Founder of Loyalty & Reward Co, the leading loyalty consulting firm. Loyalty & Reward Co design, implement and operate the world’s best loyalty programs for the world’s best brands. Phil had previously worked in loyalty roles at Qantas Frequent Flyer and Vodafone. Phil is a member of several hundred loyalty programs, and a researcher of loyalty psychology and loyalty history, all of which he uses to understand the essential dynamics of what makes a successful loyalty program. Phil is the author of ‘Loyalty Programs: The Complete Guide’, the most comprehensive book on loyalty programs on the planet.

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