A Pointed Exchange About Points Exchanges

  According to the respected British business magazine, The Economist, loyalty points represent the second-largest currency in issue, behind only the U.S. dollar. More than 100 million consumers receive promotional currencies for spending on everything from mortgage payments to flights and hotel stays to gallons of milk, according to the magazine.
  Unlike their use of dollars, euros, pounds or yen, however, millions of consumers never do anything with their loyalty points, many of which are earned on cobranded credit and signature-based debit cards ("The Case for Easier Redemptions," August). By some estimates, up to 50% of points earned on credit cards go unredeemed.
  For many companies offering loyalty points, what started as a program for their best customers has attracted infrequent or transient customers. For example, frequent-flier credit cards that aimed to keep business travelers loyal to a single carrier often dole out miles that never expire to leisure fliers who rarely, if ever, reach even minimum award levels and sit as liabilities on airline balance sheets.
  In response to consumer demand for a more level playing field in the loyalty game, entrepreneurs and established companies have invented new services that help slow earners earn tangible rewards and sponsor companies rid themselves of liabilities while also building customer loyalty. At least that's the intention.
  One of the first such providers was Minneapolis-based MilePoint Inc., which debuted in 2000 as the brainchild of former Lacek Marketing loyalty card executives. It offered free magazine subscriptions in exchange for so-called bundled loyalty currencies, or aggregated points, miles or other exchange systems from various programs.
  MilePoint quickly attained a following and inspired the 2001 launch of Points.com from Toronto-based Points International Ltd. The independent points exchange, which already had the American Airlines AAdvantage and US Airways Dividend Miles frequent-flier programs as exchange partners, acquired MilePoint in March. Included in the deal was MilePoint's partnerships with Delta Air Lines' SkyMiles and Northwest Airlines' WorldPerks frequent-flier programs and Starwood Hotels & Resorts' Preferred Guest program.
  Points.com maintains a successful exchange in which multiple currencies can be traded for a single award or even other currencies. Points.com claims it has helped loyalty card sponsors burn more than four billion points and miles.
  Meanwhile, online auctioneer eBay Inc.'s Anything Points program has become a clearinghouse for point redemptions involving the Sprint and Hilton HHonors loyalty programs and several airlines represented by Points International. Through Anything Points, eBay members earn points redeemable for payments on eBay auctions. The points may also be exchanged for airline miles and currency within other programs.
  Given that credit card rewards programs carry significant numbers of points on their books year after year, Points International President Christopher Barnard says exchanges should hold particular appeal.
  "A card's perceived value increases markedly after a redemption," he says. "By offering the opportunity to exchange into one of the six other, on average, programs that the cardmember is active in, the credit card is able to add desirable, flexible and economical rewards, thereby increasing the card's perceived value."
  Barnard adds that "a positive customer experience should positively influence" customer acquisition market share for card issuers.
  For Points International, the operating philosophy is "earn and burn," similar to any loyalty program from a single sponsor. Participants "earn" credit card points by trading in or "burning" airline miles, or vice versa.
  "If a consumer is 1,000 miles away from a free trip through his or her favorite frequent-flier program, the ability to use some points from a (different) credit card or gas program should be very attractive," says Barnard. "Certainly there may be strong loyalty to the airline program; however, if the (credit card) program is instrumental in unlocking this value, loyalty will certainly accrue to it as well."
  Consistently adding new partners and offerings historically has "proven to be an effective method of keeping (loyalty programs) alive and attractive," Barnard adds.
  But some industry experts say rewarding consumers with low point balances denigrates the concept behind loyalty cards and the perceived value of the sponsoring brands. Participation in a points exchange "ultimately becomes a trap, a bottomless pit" that bleeds away brand identity and customer loyalty, says Robert Passikoff, president of BrandKeys Inc., a New York City-based brand research and consulting firm.
  Passikoff, however, understands why many companies want to participate in the newer exchanges. In today's commercialized environment in which practically every space is an advertising venue, "brands have an increasingly harder time being able to define who they are and how they're different," he says.
  In addition, accumulated rewards liabilities are forcing companies to carefully examine their marketing programs, with many seeing participation in exchanges as a way to improve their balance sheets.
  "Don't think that American Airlines wouldn't like to make all of those miles disappear overnight," Passikoff says.
  But Passikoff claims that using points exchanges is the easy route for companies-easier than differentiating services that would enhance the value of their loyalty programs. "Marketers are not known for being proactive," he says.
  Kelly Hlavinka, practice leader of the Colloquy group at Milford, Ohio-based marketing services provider Frequency Marketing Inc., agrees.
  "The reason everybody gravitated in this direction in the first place was a quick fix to what the airlines created-a lot of earn partners without attention paid to the burn side," she says. "Points.com and MilePoint are that quick fix."
  According to Hlavinka, by joining a points exchange, loyalty card issuers attach a monetary value to their currency, stripping it of its ability to build on the aspirations of program members, with a possible result being fewer incremental sales. Currency consolidators, she says, "have made it clear that you can devalue your currency. See how fast the value declines when your customer tries to transfer points to another card program or cash out for a magazine subscription."
  The 'Holy Grail'
  In eBay's Anything Points, for example, each point dropped into a member's PayPal (eBay's payment service) account for use in an eBay auction registers as a mere 1 cent.
  "The stretch between the perceived value and the actual cost of points is greatest in the travel industry," she says. "It really is the Holy Grail. It's what everyone else tries to strive for, so that's why it's heartbreaking. And the people going on (points exchanges), those are the people who should not be able to redeem."
  In contrast, Hlavinka tells the story of a successful point-burn initiated Verizon Communications Inc., the big New York City-based Baby Bell, for its Business Link loyalty program. When members stop spending with Verizon, they forfeit their points. All points also have expiration dates. But the program's rules haven't reduced redemptions, according to Hlavinka.
  Mary Pociask, a senior marketing manager at Verizon, said at a recent conference that BusinessLink has two million customers and has generated a 21% increase in retention.
  To combat disloyalty, issuers involved with points exchanges need to remind consumers when they are associated with the company that was the source of the original points, marketing experts say. In this vein, mail or telephone marketing messages that say, "we hope you enjoy your reward" can recognize customers' patronage and remind them of how they earned the reward.
  Loyalty consultant Emma Warrillow of Toronto, Ontario, describes another alternative: the virtual coalition. In Canada, PetroCanada's Petropoints and the Loblaw grocery chain's President's Choice Rewards allow exchange between the programs. These loyalty card issuers chose to retain their own branding in expanding burn opportunities rather than hand the branding off to an independent like Points International, MilePoint or Anything Points.
  And low-point rewards don't necessarily appeal only to low-value cardholders, according to Warrillow.
  "Consumers all have their own hot buttons," she says, adding that some high-value cardholders prefer frequent and regular rewards earned at low-point levels. Others like nearly unattainable carrots to work towards.
  Card marketers "need to analyze their customer bases to figure out where their high-value customers are on this continuum and design their programs accordingly," she says. "The key is in ensuring that the consumer identifies the reward with the original brand. There is no question that aggregators can destroy the loyalty component of any program."
  As the rewards market evolves, some companies will search for something in between a traditional program and full-blown participation in exchanges, perhaps variants on the coalition idea noted by Warrilow.
  "The pure points-exchange businesses appear to be consolidating, not growing," says Lars Holmquist, executive vice president of business development and consulting at Roswell, Ga.-based Enhancement Services Corp., a subsidiary of transaction processor Total System Services Inc. (TSYS) that provides proprietary loyalty programs for credit and debit card issuers. "However, smaller, 'mini-coalitions' will emerge as program operators seek to broaden the appeal of their programs and share the costs. Coalition partners will be carefully selected to be complementary to one another and not sacrifice any of the brand equity or loyalty associated with each."
  Credit and debit card issuers, however, are less likely than many loyalty card program operators in other sectors to participate in exchanges or mini-coalitions, Holmquist says. He cites the cardholder's charge volume and ensuing profitability as the reason. "Most issuers are not concerned with expiring points if the cardholder has not provided incremental spending behavior to the issuer."
  But if a once-profitable cardholder has shifted spending away from the issuer, that issuer could indulge the errant by making rewards more accessible through limited points exchanges, fee waivers or special promotions, according to Holmquist. Such promotions might include double points giveaways or reduced points for standard awards in order to inspire retention and a return to profitable behavior.
  A Marketing Tool
  "Points exchanges are potentially useful as a tactic at either extreme of a loyalty program-members that have more points than they know what to do with or members that have too few points to generate a meaningful redemption," Holmquist says. "However, for the majority of program members, why would a program sponsor wish to transfer the points and potentially the loyalty to another institution? A program sponsor that actively uses its loyalty program as a marketing tool will not be attracted to a points exchange."
  Yet Beverly Hills, Calif.-based Hilton Hotels Corp.'s Hilton HHonors loyalty program seems to buck that advice. Hilton HHonors is a charter partner in eBay's Anything Points, launched in May 2003, has offered its own rewards exchange since 1994, and has long participated in American Express Co.'s Membership Rewards points-transfer option. HHonors points and airline miles and Amtrak Guest Rewards points or Diners Club's Club Rewards points also mix in swaps. And on eBay, Hilton program members can trade in HHonors points for Anything Points and vice versa.
  Mary Beth Parks, vice president of marketing for Hilton HHonors Worldwide, says the HHonors Rewards Exchange came out of a desire to give members more flexibility with point redemption. HHonors' policy of distributing points and miles-called "double dipping" by the Hilton people-tapped Hilton's established relationships with major airlines and frequent-flier credit card issuers.
  "To help establish and tap into rewards for customers, one of the most effective ways is to join an exchange," or in HHonors' case, several exchanges, she says.
  Exchange systems haven't been a 100% success for Hilton. HHonors had a role in MilePoint that ended in autumn 2003. "The relationship didn't work for us," Parks says, declining to elaborate.
  Point-Burn Opportunities
  Overall, Parks defends HHonors' commitments to multiple points exchanges, but she says the hotel company employs other point-burn opportunities. These include combining points with cash and running occasional rewards sales during which usual awards are available for reduced point requirements.
  "Fundamentally, the loyalty programs themselves really enhance brand value," she says. "The points exchanges are the icing on the cake. Ninety percent of members use their HHonors points for free stays at our own brand."
  In other words, Hilton doesn't see that any harm has come from its participation in points exchanges, some for a decade. Potential harm for program sponsors "really depends on the customer base you're talking about," she says. "The majority of people participating in HHonors still are more frequent than the general public. People really have a desire for the program's own awards first."
  Barnard from Points International weighs in with a final word of wisdom behind points exchanges. "The consumer has made a conscious determination of value and executed the transaction" through the exchange, he says. "If this transaction offers the consumer value, it can only be to the benefit of the (participating) program in terms of increased loyalty."