Background
American Express (AXP) recently launched a multi-sponsor coalition program called Plenti in which sponsors (e.g., Exxon, Macys, Rite Aid, and ATT) issue loyalty points which can be redeemed across them and are valid for 3 years. In 2014 we were negotiating participation contract with Rite Aid. Under their existing loyalty program (Wellness+), Rite Aid issued reward dollars (+Ups) which were valid for 2 weeks and could be used only within their stores. Rite Aid was concerned that if they join Plenti that they will issue a large number of loyalty points which will be redeemed at other partners especially the “Grocery partner” and they will be effectively subsidizing the program for them.
Challenge
As part of the negotiations, our
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We used Census data to estimate customer shopping frequency at sponsors and geographic overlap. We estimated approximately 70% of coalition members stay in Rite Aid’s footprint while only 40% of members will be enrolled through Rite Aid. The analysis implied $30-$40M redemptions will happen at other sponsors within Rite Aid’s footprint.
We estimated we could influence redemption behavior at Rite Aid by running promotions (e.g., 1000 points are worth $12). So by spending $2-$6M we could influence $10-$30 of redemptions at Rite Aid.
As we discussed with Rite Aid, their concern was more around losing margin on sales associated with point redemption. At 30% margin it implied risk of $3-10M risk each year
Result
We combined the information and agreed with Rite Aid to reimburse them for margin shortfall if points redeemed in stores was less than points redeemed outside their stores and also proposed annual cap of $3M-$9M, with claw backs if are able to outperform in subsequent years.
The structure helped address Rite Aid’s concern and at same time limited our risk to $2-6MM each year which was significantly lower than the revenue
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