Facebook entered the world of rewards last week, in direct competition with social media companies like Groupon, but as we mentioned to MSNBC good reward programs must do more than just offer reduced prices or trinkets.  Reward programs require well thought out strategies to increase spending and create loyalty for all parties concerned. 

In the context of payment cards, reward programs need to tie to account longevity, payment velocity and card spend.  Traditional programs that peg reward points to dollars spent usually work well because customers can make a logical connection between the two. They become even more powerful when tied to certain verticals, such as Chase’s Advantage card, which provides kickers to in increase the ratio of reward points to dollars.  Discover Card and others offer similar incentives.  In many situations, card issuers can defray rewards expense by aligning with merchants to offset costs.

We find that bringing in local merchants to the rewards creates a challenge to national card businesses, as American Express found out a few years ago when they cancelled their City program that offered special deals in major metropolitan cities such as Atlanta, LA, NY and San Francisco.  It is one thing for reward programs to align to national players such as American Airlines, Home Depot,  Outback Steakhouses and The Palm, but getting down to great local experiences such as jeep rides at the Grand Canyon or local restaurants in SoHo requires extensive staffing to create the relationships.  This is one of the reasons that smaller banks have an advantage against global issuers; the smaller banks can lever the in-market relationships  easier than large banks can.

As Groupon knows, and Facebook will soon learn, reward programs must have a meaning to the merchant involved in the offer.  Moreover, as the Groupon model proves, persistent merchant reward offers by themselves will not generate net revenue.  If you are going to localize, you need to be consistently working the offers to ensure relevance and make sure that the reward offer does more than just deeply discount products to one-time users!

Payment card issuers face similar business disruption with their debit card plans because their business models no longer generate enough revenue to support them.  Credit card issuers are intentionally enhancing their programs to make those cards more attractive than the debit products. 

Reward programs must do more than just cut costs.  They need to create relevance, improve product visibility and create long lasting relationships that benefit all parties.

For more information on rewards:

Debit Card Rewards: Gone Today, Here Tomorrow 

Lessons in Loyalty: A Look Inside the American Express Rewards Program

Just Rewards: Adapting the Credit Card Loyalty Feature to a Debit Card World