Structuring Loyalty

Ms Chan

Welcome back to Loyalty Unlocked! Today, we’re tackling one of the biggest—and trickiest—questions in loyalty: how should you actually structure a programme? Is it just marketing? Is it a cost line? Or can it be something much more powerful?

Mark Sage

And it’s not just a classroom debate. This was the exact question we had to answer standing outside the boardroom in Jardine House in Hong Kong, once the tallest tower in Asia - and with just 68 days until the launch of yuu Rewards - so the clock was ticking.

Ms Chan

and your description in the chapter sounds straight out of a film. You’ve got Victoria Harbour glinting in front, Victoria Peak behind, and you—sweating it out before pitching a loyalty platform to a boardroom that’s nearly 200 years old.

Mark Sage

Yeah, it felt like history and future colliding in one moment

Ms Chan

Quick confession before we get serious though—because if you’re listening and thinking, hang on, why do these two sound so smooth?… well, that’s because this podcast is AI-generated.

Mark Sage

Don’t worry—the war stories are real, the sleepless nights were real—but the voices and the script? Let’s just say they had a little technological help.

Ms Chan

Exactly. Think of it as loyalty storytelling with a dash of platform economics—our own little breakage margin.

Mark Sage

Nicely put. Right, shall we dig in?

Ms Chan

So, standing in that boardroom—what exactly were you asking them to back?

Mark Sage

We weren’t pitching a marketing campaign. We were asking Jardines to approve funding for a structural shift—a coalition loyalty platform that could connect banners, brands, and customers in a new way.

Ms Chan

And that comes with a hefty price tag?

Mark Sage

It does! Loyalty can run at half a percent or more of sales in grocery, higher in specialty retail. Add in systems, marketing, integration—it can easily run into the millions. So the question wasn’t just “Does this sound nice?” It was: “Does this pay back?”

Ms Chan

I remember Tim Mason, recently commented about his board experience at Tesco 30 years ago – saying that their year 1 ask when pitching Clubcard was about one fifth of their annual profit. So pay back will definitely be front of mind for the CFO and board!

Mark Sage

Very true – you can’t just say “trust me.” You need a structure that explains how loyalty creates value.

Ms Chan

Ok – so structure matters. Cost centre, profit centre, or—what you argue—a platform.

Mark Sage

Right. The old lens asks: “How much revenue does this business unit make?” But payback can mean something much more. In coalition and loyalty more generally, the direct revenue for the programme kind of misses the point. Yuu Rewards didn’t own stores or stock. Instead, it orchestrated: it set the rules, connected the partners, and enabled value to flow.

Ms Chan

Like Visa in payments or Uber in transport.

Mark Sage

Exactly. We weren’t a margin taker—we were a margin maker. And it’s this that means loyalty gives you leverage. With points you turn a blunt discount into something more powerful. Creating float, breakage, data, and customer momentum.

Ms Chan

You’re basically saying the "value" is in the leverage.

Mark Sage

Yes. The more transactions we orchestrate, the more value we compound — for members, for partners, and for the platform itself.

Ms Chan

Okay, let’s dig into leverage, because this is the CFO part. To play devil’s advocate — aren’t points just a fancy way of giving a discount?

Mark Sage

That’s the classic pushback. But here’s the flip. A straight 10% discount is gone the moment you give it — dead cost. The money stays in the customers pocket and you don’t unlock the margin.

Ms Chan

And points work differently? How?

Mark Sage

With points, you get the full revenue, you get the margin – and importantly you preserve price perception. The points themselves are obviously a cost, but generally less than the discount for the same behaviour unlock, and they are a cost that you defer. From this you can then create breakage, and control redemption. And ultimately turn what was a sunk cost into an asset.

Ms Chan

So a dollar of discount is just margin lost. A dollar of points can become float, margin, and — here’s the kicker — data.

Mark Sage

Right. With loyalty, you can issue points. To the customer, they feel like future value. To the business, they become leverage.

Ms Chan

Leverage how?

Mark Sage

Three ways. Firstly, points replace discounts—they feel better to the customer thanks to psychology, but they also cost less to fund thanks to breakage and redemption margin. Second, points create a currency—once they exist, you can layer new partners, new promotions, even new revenue streams on top. Lastly, every point earned creates data, which fuels targeting, insight, retail media, and financial products.

Ms Chan

So you’re saying: flip discount to currency and flip purchase data to platform income – essentially transforming data from being a by-product to actually being “the” product.

Mark Sage

That’s a great way to phrase it.

Mark Sage

And here’s another form of leverage: chasing points.

Mark Sage

Customers think they’re chasing rewards, but what they’re really doing is justifying partner investment. Every point a customer earns is proof to a brand that the system works. That attracts more partners, more funding, more campaigns. The pursuit of points by members is what flips into acquisition and revenue on the partner side.

Ms Chan

So leverage is like alchemy. You’re converting things that look like costs into assets that generate return.

Mark Sage

Exactly. That’s the compounding flywheel.

Ms Chan

Which is why I think CFOs sometimes misjudge loyalty. They see “cost” when actually it’s a system of leverage.

Ms Chan

Let’s go further. You talk about loyalty as capital-light. What does that mean?

Mark Sage

Well, a loyalty platform doesn’t need factories or warehouses, shops or stock. One app can run infinite campaigns. One points engine can serve millions of customers. And because it’s digital infrastructure, you can layer new revenue streams on top: retail media, financial services, payments.

Ms Chan

Like Shopify for eCommerce. Or Stripe for payments.

Mark Sage

Exactly. You’re building the rails, not the train. Which is a great segway into Theodore Levitt’s famous idea of Marketing Myopia.

Ms Chan

Oh, I love this one. He basically said companies die when they think they’re in the product business instead of the customer business.

Mark Sage

Yes. He used the railways as the example. US railway companies didn’t decline because people stopped travelling. Demand for transport actually grew. They declined because they thought they were in the train business, not the transport business.

Ms Chan

They clung to tracks when the customer just wanted to get from A to B.

Mark Sage

And it’s the same in loyalty. If you see loyalty as selling — just another way to squeeze customers for their loose change as Levitt says — it’ll always be seen as a cost. But if you see it as marketing — as building customer value — it becomes an engine for growth.

Ms Chan

So it’s being "customer-led" that makes loyalty become a growth engine?

Mark Sage

It is. Look at Tesco. Their loyalty programme Clubcard isn’t just marketing. 30 years on and it’s still driving the business through a customer lens. It’s how they understand shopping missions, shape store formats, ranging, and even set pricing.

Ms Chan

So that’s the difference between being in the “points business” versus the “customer value business.”

Mark Sage

And when you recognise you’re in the customer value business – then the platform economics start to make sense and you realise the value of that leverage. Those loyalty rails you’ve put in place are not simply to shift todays products, but instead, they let you create new revenue streams that bring tomorrow's customer value.

Ms Chan

I can see now why you’re so insistent that loyalty isn’t a cost. If you just look at the P&L line, you completely miss the flywheel.

Mark Sage

Loyalty isn’t the sidecar of marketing – it’s not an “Island off the coast of a brand” as Adam Posner likes to say. It’s the engine that makes the whole system move further, faster, and more profitably. The infrastructure that underpins it all.

Ms Chan

That’s a big mindset shift. From “loyalty as a marketing tool” to “loyalty as infrastructure.”

Mark Sage

Mindset shift is a good way to describe it. If you’re seeing loyalty as simply a marketing tool, you’ll try to minimise your costs rather than maximise your reach.

Ms Chan

But here’s the rub. Reach and influence are nice, but CFOs still want profit. How do you actually monetise?

Mark Sage

If you’re external, like Nectar in the UK was, you must monetise — through platform fees, data services, and selling points. At the basic level, the services you provide to the partners need to get paid for by the partners – but this could be breakeven. Typically your upside – your profit – comes from the ancillary value you get by leveraging data and customer engagement. Retail media, data services, etc.

Mark Sage

Even if you’re internal, like yuu Rewards, you face the same challenge – you still need to pay your way.

Mark Sage

But, your profit can’t come at the expense of your partners – it really has to come from the growth you’re creating for them. So, if you don’t prove that growth, you’ll be treated as a cost line.

Ms Chan

And once you’re seen as a cost line…

Mark Sage

…the budget gets questioned, the headcount gets squeezed, and eventually the programme gets starved.

Ms Chan

So the lesson is: whether you’re internal or external, it’s not simply about profit you make as a programme – although that’s important - you also have to show attribution.

Mark Sage

Yes – and that’s the thing about loyalty, a lot of the value you create doesn’t show up in your P&L. You’re helping to drive bigger baskets, more visits, shop across more partners. You’re reducing the cost of performance and brand marketing.

Mark Sage

You’re ultimately turning discount costs into points-fuelled lift - but all of that is on the partners P&L.

Ms Chan

And if you’re not tracking that, influencing it and ensuring attribution for it, then over time they just see you as a cost?

Mark Sage

Worse than that – they see you simply as a marketing resource. Something to be strip-mined in terms of selling more products. More offers, more emails, more push notifications. Not focusing on how to drive long-term value but focusing only on short-term needs.

Ms Chan

So really it’s all about getting it in balance – sharing in the upside - and I love your analogy of the three-legged stool—because it captures that real balancing act.

Mark Sage

Right. Most businesses serve two masters: shareholder and customer. But loyalty platforms? They serve three.

Ms Chan

So one leg is customers, one leg is shareholders, one leg is partners. And if one leg snaps, the whole stool falls over.

Mark Sage

Yes. And as we discussed, if partners don’t see commercial returns, they’ll stop funding. Equally though, if customers don’t engage, the programme collapses. If shareholders don’t see ROI, they’ll cut investment before the flywheel turns.

Ms Chan

And here’s where it gets real. Most programmes over-index on one leg. They shower customers with rewards but can’t prove partner value. Or they drive partner ROI but cheap out on the customer, so no one bites.

Ms Chan

Lets bring this analogy to life – where have you seen it working, or not working well?

Mark Sage

Well, there are many examples but I think Nectar is worth chatting around.

Mark Sage

At Aimia, we did our best to keep the stool balanced between partners like Sainsbury’s, the members and us as the shareholder. But when Aimia eventually sold the programme to Sainsburys, suddenly the partner and the shareholder were one and the same.

Ms Chan

I remember that, didn’t they then try and test some new programme designs?

Mark Sage

They did. With two of the legs having more aligned interests – arguably cost reduction – they started testing a design without a base earn offering for customers. Essentially reducing the value exchange for the other leg.

Ms Chan

Given they still have base points today, I’m guessing that didn’t work out so well for them?

Mark Sage

It didn’t. Fortunately, they were testing it, so found out that the stool would wobble pretty quickly, and then they rebalanced it.

Ms Chan

That stool metaphor is such a useful mental picture. Every CFO listening can imagine a wobbly stool. The message is: if you only focus on “your” leg, you’ll end up on the floor.

Mark Sage

Yep. That’s why structure matters so much more than just calling yourself a cost centre or profit centre. The stool has to hold. It’s also one of the reasons why at yuu Rewards we built it as a separate company, with its own P&L — a profit centre. It gave us neutrality with partners, discipline with shareholders, and focus on customers.

Ms Chan

But you’ve also run cost-centre models, right?

Mark Sage

Yes. At LVMH owned DFS, the luxury travel retailer, loyalty was a cost centre. No revenue line, just a budget. We ran a global loyalty programme, with a single currency, across multiple markets - but we were disciplined in attribution — proving value through impact KPIs. So that worked too.

Ms Chan

So profit centre vs cost centre isn’t the real question.

Mark Sage

No — the real question is: can you prove the value you create, over and over again?

Ms Chan

Let’s talk about proof—because you couldn’t test yuu Rewards ahead of launch.

Mark Sage

That’s true. The gold standard for measuring the impact of a loyalty programme design is to use geo-testing - essentially launching a version of the programme in a discreet region and comparing its impact to the rest of the market. With yuu Rewards, though, secrecy was too important. We wanted to ensure we surprised the market.

Mark Sage

But others have used geo-testing well. Boots Advantage Card, for example, ran pilots in the Southwest of England and Scotland before going national—Lee Martin who worked on it, described the “phenomenal lift” they saw from these which gave them confidence to roll out.

Ms Chan

And you mentioned earlier that Nectar also learned through testing?

Mark Sage

They did. While I was at Eagle Eye, they leveraged our platform to test their new scheme design on the Isle of Wight – but this showed pretty quickly that customers hated losing base earn, so they brought it back. That’s the power of this type of testing.

Ms Chan

Is this hard to setup though? I assume you need all the same systems and solutions as the full scheme.

Mark Sage

You do, and so there are still some significant costs even to get to a pilot. But the aim here shouldn’t be whether to launch or not launch, but instead “how” to launch. With the programme I manage in Vietnam for Masan, we’ve just done exactly that – setting up the relevant systems and consumer app to run geo-testing – using mirrored test and control stores to understand different programme designs.

Ms Chan

So the gold standard is always test, test, test.

Mark Sage

It is. But your mind-set going into the testing should be about getting the design right through test and learn, not justifying whether you do it at all. And you should let the data talk. Customers don’t like change, so you have to separate out the short-term noise from the long-term impact.

Ms Chan

Ok – so testing is super useful if you can do it – but what happens if you can’t. Like, on yuu Rewards, how did you have confidence in it when you couldn’t really test it? Did you launch totally blind?

Mark Sage

Not at all. We couldn’t put the programme into live stores without tipping off competitors, but that didn’t stop us testing. We just had to get creative

Ms Chan

Creative how?

Mark Sage

First, we did extensive user testing on the app. We put prototypes in people’s hands and asked them not only how it felt to use, but also how it stacked up against competitor apps. That gave us a real sense of where we were strong — and where we needed to tighten the experience before launch.

Ms Chan

Okay, so you tested the digital journey. What about the in-store side of things?

Mark Sage

That’s where we went further. We actually built a full replica store — shelving, product, checkouts, everything. The goal wasn’t to sell anything, it was to simulate the customer journey end to end.

Ms Chan

Like a secret test lab?

Mark Sage

Yes - full James Bond styel! We used it to try out in-store marketing, display layouts, and point-of-sale journey — all the things a customer would encounter. Walking through the journey ourselves showed us what caught the eye, what got missed, and whether the mechanics were easy to understand.

Ms Chan

But without customers, how could you be sure?

Mark Sage

Two reasons. First, the replica store gave us confidence that the experience would feel seamless. Second — and more importantly — we weren’t starting from scratch. We had an experienced team that had done this before, with benchmarks from previous loyalty launches. That meant we could validate against tried-and-tested models while adapting them for Hong Kong.

Ms Chan

So even without a geo-pilot, you still launched with a model you knew would work?

Mark Sage

Yes. It was about de-risking. We couldn’t test the sales impact in-market before launch, but we could test the journey and lean on proven benchmarks. That gave us the confidence that on day one, customers would find it both intuitive and rewarding.

Ms Chan

Ok – so we’ve danced around this a little already – but, the big question: profit centre or cost centre?

Mark Sage

Honestly? Both can work. At DFS, we ran it as a cost centre—budget plus KPIs. At yuu, we built a standalone company with its own P&L, because neutrality mattered in a coalition.

Ms Chan

So it’s not about labels.

Mark Sage

Right. Structure matters, but attribution matters more. If you can’t prove value, no structure will save you.

Ms Chan

Which brings us back to where we started: it’s not about marketing optics, it’s about impact, leverage, and being customer-led.

Ms Chan

So there you have it. Structuring loyalty isn’t about whether you call it a profit centre or a cost centre. It’s about proving impact, designing for leverage, and—most of all—being customer-led.

Ms Chan

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