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Paid Loyalty Programs: A Strategic Guide For Ecommerce Brands

paid-loyalty-programs:-a-strategic-guide-for-ecommerce-brands
Paid Loyalty Programs: A Strategic Guide For Ecommerce Brands

A 2020 McKinsey survey found that members of paid loyalty programs were 60 percent more likely to spend more money with a brand than non-members.

For free loyalty programs, that figure was only 30 percent.

Paid loyalty programs have always been relatively uncommon compared to the free kind, and with good reason: it’s hard to get a customer to sign up for a paid loyalty program, and it’s even harder to deliver the kind of value that will keep them signed up.

But statistics such as those unearthed by McKinsey point to a growing trend. Get it right, and there are significant benefits, as the success of examples such as Amazon Prime or Barnes and Noble demonstrate.

Ultimately, the suitability of a paid loyalty program will depend on your business model, target audience and financial goals.

In this article

Advantages of paid loyalty programs

1. It’s guaranteed revenue: Perhaps the most immediate benefit is the creation of a new, steady revenue stream. Membership fees can provide a reliable source of income, separate from direct product sales. This stabilizes cash flow, which can be handy during slow periods.

2. Your subscribers tend to be pretty engaged: Customers who pay for a loyalty program are more likely to engage with the brand to make the most of their investment. Get it right, and you can expect higher purchase frequencies and average order values.

Amazon Prime is a case in point: the average customer lifetime value (CLV) of a Prime subscriber is $2,283 — more than double the $916 of the average non-subscriber.

3. The quality of customer insights is often better: Because paid loyalty program subscribers tend to spend more, you get a richer source of customer data. You can use this to better personalize marketing efforts, and, in turn, further increase revenue.

4. You can stand out in commoditized markets: Members of paid loyalty programs often develop a stronger emotional connection to the brand. This creates advocates and referrals. And this, in turn, makes you less reliant on price as a point of differentiation.

5. Target audiences might perceive yours as a “premium” brand. This might sound a little “fluffy”, but a strong subscription-based loyalty program can shift a customers’ perception of your brand.

If you can build such a reputation, it’s easier to bump up your prices and strengthen your profit margins.

Drawbacks of paid loyalty programs

1. It’s harder to get customers signed up: It is, of course, harder to get customers to join a paid loyalty program than a free one, so you’ll typically get a smaller proportion of your customer base signing up. 

If your goal in setting up a loyalty program is to rapidly grow your customer base — say, through incentivizing referrals — a paid loyalty program probably isn’t the way to go.

5. Pricing can be complicated: Determining the right price for membership and the mix of benefits can be tricky. The program needs to be profitable without being prohibitively expensive.

2. You need to keep delivering: Not only is it harder to get your customers signed up to a paid program — it’s also harder to keep them. If you don’t keep adding value, you can expect a high churn rate.

3. This can make it more resource-intensive to set up and manage: Developing and maintaining a paid loyalty program requires significant resources. From managing memberships to continually innovating benefits to keep the program appealing, the operational and financial burden can be substantial.

4. And if you get it wrong, customers will feel ripped off: A good paid loyalty program can build up your brand’s prestige and exclusivity. A bad one can damage it.

Pros and cons of paid loyalty programs for customers

Advantages for customers

1. Exclusive benefits and rewards: One of the big draws of paid loyalty programs is access to exclusive benefits. These can include special discounts, early access to new products, members-only sales, or unique experiences that aren’t available to non-members.

2. Convenience: Many paid loyalty programs offer perks that enhance the overall shopping experience. This could mean expedited shipping, priority customer service, or personalized product recommendations, all of which make the shopping process a lot smoother.

3. Potential for savings: A lot of paid loyalty programs come with discounts on all purchases. Barnes & Noble, for example, gives 10% off everything for a $40 annual fee.

For customers who spend a lot with the brand, these savings can more than make up for the cost of membership.

5. Personalized interactions and offers: Paid loyalty programs often come with tailored discounts, birthday offers, or early access to limited-edition products.

Drawbacks for customers

1. Having to pay for membership: The obvious one — customers are far more likely to sign up for free loyalty programs, and they rightly expect a lot of value when they’re paying for it.

2. They might not use it enough: Even if the benefits are compelling, a lot of customers will be concerned about using the loyalty program enough. This is especially true of those who make fewer purchases.

5. Diminishing value: With a paid loyalty program, every billing cycle is a chance for customers to re-evaluate the loyalty program. Maybe they’re not using the benefits as much as they used to. Maybe they have less disposable income, and they’re looking to cut back on unnecessary expenses. Either way, if a loyalty program isn’t offering more and more value, customers might lose interest over time.

How to figure out if a paid loyalty program makes sense for your brand

First, get to know your customers. Paid loyalty programs are best suited to brands that already have a cohort of loyal customers who buy relatively frequently. Whereas free loyalty programs are often used to get infrequent shoppers to buy more often, those less engaged customers are unlikely to fork out for a paid membership.

(In this sense, paid loyalty programs can seem a little counterintuitive: they’re designed to increase customer loyalty and lifetime value, but you need a little loyalty already to get your customers to consider signing up.)

Here, segmentation can be a big help. Group your customers by purchase frequency, average order value, and, if you’re already tracking it, lifetime value.

Which of those segments are likely to go for a paid loyalty program? How big are those segments? Would a free loyalty program be a better way to bump up customer loyalty across the board? Could you offer a hybrid program, with both free and paid options?

Then analyze your product offering. Paid loyalty programs are often most effective when you sell commodities — those markets where it’s difficult to stand out on anything but price. 

In such markets, paid loyalty programs can have a “locking in” effect on your customer base through non-price-related benefits and bonuses, such as free delivery. And this saves you from having to take part in a race to the bottom on pricing,

A good example of a commoditized market is book retail. Every retailer of a particular book is selling the same exact item — the product is identical whether you buy it from Barnes & Noble or Amazon. So how do you differentiate without being cheapest?

Because of this, it’s no coincidence that Amazon and Barnes & Noble have two of the most notable paid loyalty programs.

Paid loyalty programs are also best suited to products with a relatively high purchase frequency. If you sell, say, high-end jewelry, customers are unlikely to make more than a couple of purchases a year. It’s very difficult to convince someone to pay an ongoing fee for a loyalty membership for a brand they buy from so infrequently.

Understand your position in the market. If you’re a small player in a crowded market, a paid loyalty program probably won’t work for you. Your bigger rivals are better positioned to offer more elaborate benefits, and you can’t realistically put the same resources into offering great value for money.

Instead, a free loyalty program can help you gradually build up your market share.

Paid loyalty programs can also be a savvy choice if you have a loyal customer base and you’re looking to expand into other markets or products. You can tactically add perks to your program to cross-sell these new products. For a bookshop, this might involve giving discounts on the coffee you sell in-store.

Think about whether you have the resources to implement it. Typically, paid loyalty programs are more resource-intensive than free loyalty programs, because you need bigger, better benefits, and you need to keep adding more value all the time.

Free loyalty programs, like stamp cards or a simple points system, are comparatively simple to run.

Consider your financial goals and revenue patterns. One of the biggest benefits of running a paid loyalty program is the predictable revenue stream it creates. If you have a highly seasonal product or significant fluctuations in customer demand, this revenue can help even out the quiet periods.

And gather as much customer feedback as you can. Run surveys, talk to your customers on social media — ask them directly what they would find valuable, and whether they’d consider paying for a loyalty program.

How to set the price of your paid loyalty program

First, decide between annual and monthly. Billing customers for the whole year is naturally a much better, more reliable source of revenue. With monthly payments, there’s always the risk of churn.

Annual payments are also easier to manage — you don’t have to process a billing cycle for every customer each month.

On the other hand, there is of course a much higher barrier to convincing a customer to sign up for an annual payment.

Monthly payments also provide more interactions with your customers. When sending a monthly communication to confirm that the payment has been processed, you can also throw in a few cross-sells and marketing messages.

Ultimately, the monthly vs. annual debate might be settled by the norms in your industry. If customers are used to monthly payments, they’re unlikely to opt for an annual plan.

You can, of course, offer both. You can even give a discount for annual payments. But this is the most operationally complex option.

Next, dive into some market research. When assessing competitor loyalty programs, you’ll want to look at:

– Cost
– Pricing structure (annual vs. monthly)
– Loyalty program marketing tactics
– Benefits offered

Consider all this in the context of the competitor’s market share and customer base.

If you’re not in a position to offer the same kind of benefits, you’d have to price your paid loyalty program accordingly.

Then run your own cost and profit margin analysis. Think about costs like:

– Software development/platform integration — how much will you need to spend to get this thing up and running?
– Customer service
– Staffing, if hiring would be necessary
– Marketing and promotion
– Profit loss from any blanket discounts offered
– Logistical expenses of offering improved delivery times
– Outlay on any exclusive products or experiences

Next, think about your profit margin. Your appetite here will probably depend on your goals with the program. If the goal is to have a strong revenue stream to offset seasonal fluctuations, a healthy profit margin is important. 

If you’re looking to boost your customer lifetime value, it might be worth having thinner margins to offer a lower price and increase uptake.

Case studies

Amazon Prime

Amazon Prime is perhaps the most famous example of a paid loyalty program. You know how it works: members get very fast delivery for free, along with access to Prime Video, and a bunch of other benefits.

Prime works so well for Amazon because it turns one of the retail giant’s biggest strengths — delivery speed and convenience — into a direct source of revenue. And it makes customers value Amazon for something other than price, which is good for the brand’s margins.

Prime memberships also create a ready-made audience for Amazon’s moves into other markets, which helps them grow market share rapidly — Prime Video being a rapid example — and their partnerships with other brands, such as Deliveroo, lock customers in further by saving them money in other areas of life.

The results are pretty exceptional.

1. High subscription retention: Despite a price increase in 2022, only 14% of American users reported intending to cancel their membership. This resilience highlights the program’s strong value proposition to its users.

2. Large user base: As of 2023, Amazon Prime boasts over 200 million users globally, constituting nearly two-thirds of all Amazon users. In the US alone, this figure reached approximately 160 million in 2021, predicted to grow by almost 10% to 176.2 million by 2023.
3. Enhanced customer loyalty: During the COVID-19 pandemic, Amazon’s revenue and profits surged, partially attributed to the loyalty of its consumers. 86-88% of Amazon customers didn’t even consider other retailers before making purchases in 2020-2021. 

For Prime subscribers, loyalty levels were even higher, with 93% renewing their subscriptions for one year, and 98% of those for another two years.

4. Significant lifetime value: The average lifetime value of a Prime subscriber is $2,283, in stark contrast to $916 for non-subscribers. This is notably higher than other subscription services, like Netflix, for which the average lifetime value is $291.25.

REI Co-op membership program

REI’s Co-op membership program costs $30. It’s a one-off fee.

As well as all the usual paid loyalty program goodies — free trade-ins, free delivery, 33% off rentals — REI uses the loyalty program to nail its colors to the mast and connect with its audience through shared values.

A portion of each membership fee supports environmental and outdoor education initiatives — donations totalled more than $5.4 million last year.

Members can also vote for candidates to the board.

If there’s one lesson you can learn from REI’s paid loyalty program, it’s that such programs don’t have to be purely transactional. Customers want practical benefits for their investment, yes, but don’t forget the emotional stuff.

In REI’s case, it’s certainly translated into better commercial performance.

Record sales: In 2022, REI achieved $3.85 billion in sales, a 3.2% increase from the previous year, partly attributable to the loyalty program’s success in driving repeat business and enhancing customer lifetime value.

Member growth: The addition of 1.3 million new members in 2022, reaching 23 million members, underscores the program’s appeal and the brand’s expanding reach.

Rewards and community investment: Distributing nearly $224 million in rewards to members and $6.9 million to 503 nonprofit partners reflects both the financial success of the program and its community impact.

Barnes & Noble

Barnes & Noble uses a hybrid loyalty program.

The free version is a simple stamp card. For every $10 a customer spends, they get a stamp. And for every 10 stamps, they get $5 off their next purchase.

But the paid loyalty program, which costs $40 per year, gives customers:

Across-the-board discounts, with 10% off every purchase.
Special customer service, with free delivery on even smaller online purchases.
Exclusive products, with free merchandise and access to events.
Early access to new titles.
Personalized rewards, with birthday offers each year.
Multi-product rewards, with free upgrades in Barnes & Noble cafes.

Like Amazon Prime, Barnes & Noble stands out in a commoditized market (bookselling) with better customer service for members — which allows them to carve out a loyal customer base against the likes of Amazon, even if they can’t consistently offer better prices.

They also, like Amazon, cleverly use the paid loyalty program to cross-sell other products. Someone who doesn’t usually buy a coffee from a Barnes & Noble cafe might pick one up when they get a free drink upgrade with their membership.

Ready to use loyalty marketing to your advantage?

Paid, free, hybrid — there are many options for brands looking to build a loyalty program.

But for many smaller ecommerce businesses, the biggest challenge is implementation. How do you set up, optimize and analyze your loyalty program without significant investment of both time and money?

With this, LoyaltyLion can help. When you’re ready to get started, book a demo.

Special thanks to our friends at LoyaltyLion for their insights on this topic.
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