Marketers are willing to invest in customer loyalty… if they offer a strong value proposition and solve customers’ problems, many customers are willing to pay, too.
Over the past several years we have identified a trend in the loyalty space: many marketers are moving toward, or considering, forms of fee-paid loyalty programs. The articles in this Review take a deep dive into a range of such programs. But not all “paid loyalty programs” are alike. In fact, the field is so diverse that we should take a step back and consider the broad category we might define as “continuity loyalty program models.”
Of course, for any program incorporating fees, those fees provide a revenue stream that offsets the cost of the program. But, there’s much more to the picture than revenue.
So, where do you start? There are three principal models to explore:
- Fee-only programs: in which all members pay to participate
- Freemium programs: offering both free and fee-paid levels or tiers
- Subscription programs: where members sign up for a defined set of services and/ or member pricing. It’s important to note that the word “subscription” has been used somewhat imprecisely; people often use it to refer to both subscription services (e.g. auto-replenishment, telecom/Internet Service Provider/ content streaming) and subscription programs (e.g. loyalty programs with a fee, like Amazon Prime). We’ll try to deal with this confusion below.
While there are many variations, virtually all programs involving fees fall into one of these models.
FEE-ONLY LOYALTY PROGRAMS
This is perhaps the easiest place to start, because fee-only programs have been devolving to the point of near extinction. Loyalty programs that require a fee from all participants, such as those once offered by AMC Theatres and GNC, have morphed into one of the other two models. The reasons for this trend are fairly obvious. A fee-only program by definition limits the penetration of the program and reinforces self-selection by those customers who are already committed loyalists. That’s a key reason we have seen fee-only programs add free tiers and options – thus becoming freemium.
But perhaps the most powerful force behind the decline of fee-only programs is that such programs limit the real power of a loyalty program: to use customer tracking and preference data to influence their behavior, growing customer lifetime value by migrating less valuable customers upward. One of Kobie’s loyalty tenets is, “Enroll broadly, reward selectively.”
FREEMIUM LOYALTY PROGRAMS
The freemium model has been growing in popularity, no doubt because it is attractive to the consumer and powerful for the marketer.
Many marketers, led by AMC, GameStop and GNC, offer programs in which anyone can participate, but special pricing, services and benefits are limited to those who pay for membership in one or more premium levels. This model has several reasons for its proliferation:
- Gives the consumer the choice and power customers demand today (35 – 45 percent of Millennials and Gen Z say they won’t join programs that require a fee)1
- Allows the marketer to reach the broadest audience
- Allows for robust segmentation and customization, enabling marketers to target specific customers with offers and messaging that can drive incremental purchases and other desired behaviors – including “buying up” into the paid level
- Because of these benefits, this model delivers a robust financial performance
An additional virtue of this model is that marketers can use a “charge-and-waive” strategy, in which the fee sets a perceived market value for the program’s premium services and limits the marketer’s investment. But, the marketer can selectively waive the fee for customers whose behavior and value have “earned them the right” to enjoy premium status and value.
SUBSCRIPTION PROGRAMS, CURATED SERVICES AND MEMBER PRICING
Subscription and member-pricing programs have two distinct origins. One is the members-only store, where only members may shop. Perhaps the most successful and well-regarded example is Costco. Members love the free samples, unique products and liberal return policy. From the marketer’s perspective, the membership fee is the principal profit driver. Other prominent players using this model include Sam’s Club and BJ’s.
Then there are retailers who don’t require membership to enter, but offer favorable pricing for a membership fee. RH and Barnes & Noble are prominent players who offer members-only pricing. (We’re excluding supermarket programs, which offer member pricing among other benefits and rewards, but do not charge a fee).
The other incubator for subscription programs has been ecommerce. Of course the mother of all online subscription programs is Amazon Prime, which has achieved penetration into nearly half of U.S. households. While not initially recognized as a loyalty program per se, Prime is clearly one of the most successful loyalty models of all time. Members pay for free shipping and other premium services that extend well beyond shopping alone, such as free content streaming included with membership. Once members are used to these “free” services and benefits, it’s hard for Amazon’s competitors to lure them away.
Another variation of the subscription program developed in the digital world is the curated subscription model. There are offerings using this model in categories including fashion, health and beauty, pet products and ready-to-cook meals. BarkBox, Blue Apron, Birchbox and Stitch Fix are just a few of the programs pioneering fee-based models that offer unprecedented convenience and choice for consumers.
We see a good deal of volatility in these programs, and member retention may be a significant challenge as these programs mature.
THE BIG PICTURE
Freemium programs, subscriptions, member pricing and curation are all major trends in loyalty and customer engagement. But, there are many elements to consider when deciding if and how to leverage these models in your customer loyalty efforts.
The overriding consideration is the value proposition; customers must be convinced that your offering is worth the fee. As always, delivering value and relevance to the consumer is the key to success.