Metzner Schneider Associates, Inc.

Marketing Partnerships and Coalition Programs

Among the most effective methods of extending a company’s engagement with its customers are marketing partnerships and participation in coalition programs. Both of these approaches have been used successfully in Europe and North America. However, there are important questions that must be asked to ensure that these opportunities generate the desired result, and avoid the potential for negative outcomes. The following article discusses how these techniques work, and the potential advantages and disadvantages of each.

Marketing Partnerships

Marketing partnerships are formed when one company joins with another to promote a particular product or service. Although partnerships can be formed between products of one company, the typical partnership is between two separate entities that have complementary offerings. These joint efforts can occur between a consumer product and a component manufacturer, or two non-competitive companies.

An example of a product/component partnership is the “Intel inside” co-promotion for computer makers such as Dell and Hewlett-Packard, where the consumer product – the computer – highlights a major component made by a different entity. Neither works without the other; together they constitute the product that a consumer buys. But in this example, the relationship is not exclusive; Dell and Hewlett Packard sell computers that contain chips from other manufacturers in addition to Intel.

More common are arrangements between two businesses that market to the same audience but have different product offerings, such as partnerships between airlines and hotel and car rental companies, or even airline alliances where two airlines serve different geographic markets. Credit card companies form partnerships with multiple other marketers to create
“co-branded” offerings. In each of these cases, the marketing partners promote their own offerings separately, but have come together to leverage their strengths and resources for a particular time and/or product. Usually one partner takes the lead in managing the marketing of the relationship, either on a campaign basis or for the duration of the arrangement.

Marketing partnerships such as these have a number of advantages:

They allow each partner to access the customer base of the other (though each partner generally retains “ownership” of its own customer base, and does not actually provide contact information to the other partner)
They leverage marketing funds by combining the power of two brands
A single product offering may be created that exceeds the value of the individual parts
Companies can continue to market independently, as well as jointly
Depending upon the structure of the partnership, either or both partners can gain valuable marketing data on consumers, for use in planning and future marketing

At the same time, there are potentially less desirable situations that can arise from poorly-executed partnerships, which require careful thought and planning before entering into such an arrangement. These can include:

Customer confusion caused by lack of clarity around from whom to purchase or who to contact in the event of a question or problem
Failure to properly acknowledge the status of a customer, by having one marketer partner promote to the existing customer of their partner as a new prospect
Making offers to prospects that are better than benefits provided to existing customers, thereby creating dissatisfaction
Unwinding a partnership can cause issues when customer expectations have been set, and disputes among the partners as to which company “owns” the customer

In determining whether to enter into a marketing partnership, companies must carefully assess where the value lies for them. As an example, the co-branded credit cards between airlines and credit card companies have proven immensely popular. In these cases, the credit card company purchases miles or points from the airline, and offers them as an incentive for potential card holders to acquire and utilize their card. Usually the credit card issuer is responsible for the marketing; the airline provides access to its customer base and its branding, in exchange for payments from the card issuer.

However, the loyalty that is generated from these partnerships is a result of the airline relationship, not the credit card. If an airline determines to discontinue one relationship and establish a new one with a different credit card issuer, the vast majority of the cardholders will follow; they are much less loyal to the bank that issues the card than they are in earning their airline currency. Therefore, a bank must determine that the value it receives from participating in this partnership exceeds the cost of buying the miles and the marketing expenditure while the arrangement exists; there is little to no residual benefit to the bank if the partnership ends; and there is likely to be limited if any opportunity to sell card holders on additional products from the bank not tied to the partnership.

At the same time, the airline must be cognizant of the fact that switching providers for the sake of a better financial deal will cause some disruption for its customers, and therefore must choose its partner carefully. And selecting a partner strictly on the basis of financial incentives can prove to be problematic if the bank does not honor its commitments to the customer or provides poor service; such negatives are much more likely to reflect back on the airline than on the financial institution.

This example points out a number of the key considerations to take into account in establishing a marketing partnership:

financial proposition
ability to leverage the relationship
consequences if the partnership is ended
expectations of the customer

Too often, partners approach each other from the standpoint of what is the advantage of a partnership to them, rather than to their partner. The most successful marketing partnerships stem from a selling proposition around “What is in it for you” – and for the customer - as opposed to “What is in it for me.”

Coalition Programs

Another way the many companies attempt to realize the benefits of partnerships is through participation in coalition programs. These have been very successful in Europe and in Canada, less so in the United States, for reasons that will be explained below.

In the basic coalition, a number of unrelated companies join together to promote participation in a single program. Customers are able to earn a form of currency that allows them to purchase discounted or free products or services from many or all of the program sponsors, or to apply purchases from any of the partners towards earning some other kind of benefit or credit. Examples of coalition programs are Payback in Germany, AirMiles and Nectar in the UK, AirMiles in Canada, and UPromise in the United States. Some of these programs, such as the AirMiles program in the UK, were originally started as marketing partnerships (in the case of AirMiles, British Airways in the UK),and later divested into separate businesses that took on their own life. Additionally, in some cases, a major sponsor/participant in a coalition program may have its own program as well; Lufthansa was a major shareholder in PayBack, while operating its own Miles and More frequent flyer program with multiple partners.

The major distinction of a coalition program is that it is a company unto itself, with its own profit and loss statement, usually an ownership independent from its participant companies (although they may often have an equity stake in the venture), and one which does not offer its own product. Coalitions are really exchanges, buying currency from one partner, selling them to another, and keeping some of the difference for itself. Coalitions operate on behalf of their participants, and often determine their offerings and marketing by consensus, or at least in consultation with all of their partners, but ultimately decisions on marketing and benefits are made by the management of the coalition itself.

Coalitions provide their participating companies with a number of distinct benefits:

Rather than relying on the perceived value of two brands, they are able to leverage multiple brands, thereby potentially reaching a very broad audience
Participation is usually much less expensive for a participating company; rather than running an in-house program with its own staff and marketing budget, each participant shares expenses with other participating companies and expense management is the responsibility of the coalition program manager. In most cases, a participant company’s financial obligation is limited to a variable expense based on the amount of currency it buys (usually netted against the value of benefits it provides), though there may also be a minimum fee for participation

Some of these programs have been very successful; published accounts suggest that 50% of consumers in the UK are members of Nectar; the participation rate of AirMiles in Canada is upwards of 65%. The programs in Europe, the UK, and Canada tend to limit participation of competitive companies, so being part of the program puts forth the opportunity for companies to realize significant share advantage among consumers that are highly motivated by earning coalition benefits.

At the same time, there are significant considerations that companies should take into account before participating in a coalition program. Chief among these are:

The loyalty of the consumer is to the program, not the marketer. If one major retailer decides to end its participation, a competitive company may take its place, and realize a shift of market share driven by the consumer’s membership in the coalition program
The customer data belongs to the coalition, not the marketer, so the opportunity to track, measure, and promote based on behavior for any individual partner is limited; this information could potentially benefit a competitor in the event that partner participation in the program changes
Flexibility for any individual participating company is limited; it is at the mercy of the consensus and ultimately the program manager as to how the program is marketed
Because the coalition manager is in business for themselves, participating companies must give up some profit margin; the value of what they purchase from the program must be greater than the value that they receive, so that the coalition manager can make its own return

Despite some of these issues, coalition programs have proven popular; in addition to the consumer participation numbers noted above, coalition programs have received a lot of financial market attention. A number of airlines have looked to divest themselves of their programs in the process realizing a financial gain, or at least begun operating them internally as separate businesses. AirMiles in the UK was originally the British Airways frequent flyer program, and spun off into its own entity (British, while still a major sponsor of AirMiles, then re-introduced its own internal program, partly to mitigate some of the negatives of the coalition), Nectar in the UK was just purchased by Canada’s Aeroplan, itself divested from AirCanada, for £350MM. American Airlines and United Airlines in the US operate their programs as separate businesses; both are said to be looking into divesting part or all of the programs into the financial markets, at which time they will likely take on much more the look of coalition programs.

There is a reason, however, that these programs have not become anywhere near as well established in the US as they have in other areas, which is instructive in evaluating whether the dynamics of participation are favorable for partner companies.

AirMiles has tried to become established in the United States at least twice, failing to gain penetration both times. Other coalition programs, both for online and traditional retailers, have also been introduced; some, such as the online program MyPoints, have continued to exist without making a significant impact on the market; many others have failed completely. The only program built around products sold through traditional retailers that has gained widespread acceptance has been UPromise. While there may be many causes for the failure of this approach to catch on, the primary one revolves around competition, both among programs and among products and retailers.

In the United States, the airline programs, such as American AAdvantage, United Mileage Plus, Delta SkyMiles and to a lesser extent those offered by the other “legacy” airlines, and the credit card programs, such as American Express Membership Rewards and Citi Thank You, have fulfilled the role that coalition programs do in other geographic regions. These sponsored programs are so large, and have so broad a partner network, that a stand-alone coalition program simply cannot compete. It is estimated that there are over 1.2 billion point/mile program memberships in the United States, or an average of four memberships for every person. In addition, most of these programs are not exclusive; they will allow multiple providers of similar products and services to be partners. It is simply not possible for a separately operated coalition to compete.

Additionally, unlike in many other countries, there are no restrictions on promotions and discounting in the United States, and there is also no lack of competition among retailers and providers of products and services. So companies can offer their own programs and promotions without needing to rely on participation in other programs, and if a company does not participate in one of the rewards programs, there are many others from which to choose.

The coalition programs work best in an environment where promotional activity is more constrained, and there is limited competition between providers. With less competition, there is a measureable opportunity to shift market share, and to retain those customers that have been acquired. That situation simply does not exist in the United States. UPromise has gained some penetration because it offers a unique value proposition, the opportunity to earn credit towards future education. This idea has caught on, but it is unlikely that more than one company could be successful with this concept.

How to evaluate marketing partnerships and participation in coalition programs

In summary, any company considering marketing partnerships or coalition membership should ask itself several questions:

Will my participation enhance my brand or put it at risk?
Will I get a return on the cost of participation or the investment in marketing that is greater than other ways of promoting my product or service on my own?
Will I gain a competitive advantage?
What happens if the partnership ends or I withdraw from the coalition?
Will I maintain or lose control over my customer relationships and data?

Only after satisfying yourself that these questions can be answered to the advantage of your company should you enter into these relationships. If the idea is worth pursuing, partnerships and coalition memberships can offer a way to leverage your marketing spending.

By Richard Metzner - This article was originally published in Effective Executive, a publication of Icfai University

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