The idea of paid loyalty programs raises a few eyebrows amongst businesses. After all, why would customers want to pay for services they expect to get for free?
Yet there’s ample evidence to show that consumers want to – and do.
There’s one premium loyalty program in particular that’s taken the U.S by storm. Since it first launched in 2005 this program has accrued more than 112 million members, with the average member spending $1400 per year on the platform.
You’re probably heard of it. It’s called Amazon Prime.
So, it’s high time to put to bed the urban myth that consumers aren’t willing to pay for extra services. Because if there’s one thing that consumers value after the pandemic, it’s certainty about the experience they’re going to receive.
We’re going to explore the world of paid loyalty programs, and how they’re helping retailers to boost customer retention and improve their value proposition.
Loyalty rewards programs are so ubiquitous in retail that we often sign up without thinking about it. Most of us are members of several loyalty programs with varying degrees of commitment – or none at all.
65% of consumers engage with less than half their loyalty programs, and 41% with less than a quarter of them.
If we take a look at Millennial and Gen Z consumers, the picture is even worse. A study by YouGov found that these age groups were significantly less likely to participate in loyalty programs compared with those in older age categories:
There are many possible reasons for this. Younger consumers tend to be more price-conscious than brand loyal and are less likely to make everyday purchases from places where they would benefit from a loyalty program, such as pharmacies.
But there’s also another reason why loyalty rewards programs are going unused. They simply aren’t engaging enough.
If we take a look at customer surveys, it’s clear that many conventional loyalty programs leave something to be desired:
As a result of these findings, more brands are changing their approach to customer loyalty programs. They’re offering their customers a new value proposition; access to bigger and better benefits – for a price.
A paid or premium loyalty program is where a brand offers access to exclusive benefits or discounts in exchange for a recurring monthly or annual fee. This could include:
Having witnessed the success of the likes of Amazon Prime, we’re seeing a growing number of retailers experimenting with their own paid loyalty programs – especially those in highly competitive product categories.
Sephora has introduced its rapid shipping subscription Sephora Flash, despite already running a successful free program. Urban Outfitters has also recently launched a test program that gives customers access to a variety of benefits including free shipping and returns, 15% discounts, and exclusive promotions at companion brands Anthropologie and Free People.
According to CEO Richard Payne, the program is designed to “drive increased frequency, capture a greater share of wallet, improve retention, provide opportunities for greater cross-brand exposure and selling and attract new customers.”
Paid membership programs are the opposite of a standard free loyalty program. In the latter, customers usually need to spend X amount over a certain period to access exclusive perks. In a paid program, customers pay upfront and get access immediately.
It’s easy to see why a paid model is attractive to consumers. Traditional loyalty programs can be cumbersome and confusing to navigate, with all kinds of T&Cs concerning how points can be redeemed and when. In fact, 54% of respondents to a 2019 survey noted that it takes ‘too long’ to earn loyalty rewards.
For this reason, paid membership programs offer customers the best of both worlds. They get the exclusivity of being part of a select group of engaged customers, but without having to put in so much legwork to qualify. Meanwhile, brands get access to a source of recurring revenue that they can use to reinvest in the customer experience.
As we talked about at the beginning of this post, the image of consumers being unwilling to pay for a better ecommerce experience doesn’t tee up with the reality on the ground.
Traditional tiered or points programs have a major weakness; no matter how loyal customers are to your brand; they simply might not be able to spend $1000 to ascend to the next tier. And if no further benefits are in easy reach, consumers have little incentive to make repeat purchases. Therefore traditional ‘loyalty card’ programs are no longer fit for purpose.
This is why 64% of program members would be willing to pay a fee if they received benefits such as better earn rates or expedited free shipping – a figure that rises to 70% for millennials.
In fact, Millennials show by far the biggest preference for paid programs. 80% of millennials would be willing to join a paid loyalty program if their favorite retailers offered them. Despite this, 31% of consumers haven’t joined a paid loyalty program because the retailers they shop with don’t offer them – a huge gap in the market for your business to fill.
Customer expectations in ecommerce are only getting higher – and that adds a bigger cost burden on merchants.
According to a 2021 YouGov survey, 66% of consumers expect free shipping all the time, while 80% expect free shipping when they reach a certain threshold. A further 79% of customers want free return shipping on unsuitable items.
In their efforts to compete with the likes of Amazon, most digitally native brands can’t consider doing away with these benefits altogether.
Paid programs are a great alternative to increasing friction during the shopping journey with additional fees – the number one reason for cart abandonment. This extra stream of revenue also means you can invest in giving your loyalty members more valuable and interesting benefits that you wouldn’t be in a position to offer in a free program.
For example, value-added experiences such as free product samples and premium packaging are great ways to help your brand stand out from the competition and would provide novel additions to a rewards program.
If we’re paying for something upfront, we’re far more likely to make use of it than something we’re getting for free.
Membership fees make retaining customers in your program a whole lot easier. When customers have already paid for a set of services, this gives them a powerful incentive to turn to your brand first before a competitor. According to McKinsey, 62% of consumers are more likely to spend more on the brand after subscribing to a paid loyalty program – double the rate of free loyalty programs.
Not every customer will be interested in signing up for a paid program. But those that do are most likely to be your customers with the highest levels of brand loyalty and lifetime value. By getting even more mileage from your best customers, you can boost order values and create a closed loyalty loop that gives them few reasons to switch.
The product shortages and supply chain disruption bought about by the COVID-19 pandemic forced consumers to experiment with new brands and shopping methods on a massive scale. 40% of U.S. consumers report changing brands during 2020, which is double the rate during 2019.
This so-called ‘loyalty shock’ opened an unprecedented opportunity for brands to grow their customer base. But consolidating a rush of first-time customers into loyal customers is a major challenge, especially in product categories with high competition.
Paid loyalty programs offer a real lifeline to brands that are trying to shore up their value proposition in a post-COVID world. With consumers now enjoying the opportunity to get back into stores and encounter immersive brand experiences, discount-driven retention models aren’t going to cut it; consumers want genuine value, and a paid loyalty program is a much stronger offering.
Loyalty programs are a massive touchpoint in the customer experience. Every time a customer makes a purchase or browses your website, those loyalty credentials kick in. This makes them a goldmine of demographic information and insight into shopping behaviors, such as:
Consumers are often wary about handing over personal data to brands. But they’re more inclined to do so in a paid loyalty program because they’re actively invested in the experience; 54% of customers say they are willing to share personal information if it’s used to create personalized experiences and rewards.
Being able to identify key trends in customer preferences and buying habits also helps to inform your wider marketing and product development decisions. For example, you can use member feedback about a beta product to inform the next round of tweaks before releasing it to the rest of your customers.
It’s impossible to talk about premium loyalty without mentioning Amazon Prime. Amazon was the first to hit on the winning formula; keeping it simple. By allowing customers to pay for a year’s worth of shipping upfront, they single-handedly removed one of the biggest causes of cart abandonment.
But more importantly, Prime helped to change Amazon’s value proposition from the place people bought books and movies to where everyday purchases could be made – quite possibly the biggest shift in the history of retail.
Sephora Flash is one of the most interesting paid loyalty examples out there because it’s a totally separate offering from their free Beauty Insider program. Like Prime, Flash gives customers a free two-day shipping subscription for the year – a perk that was previously only available to the Rouge tier of their program.
Sephora has gained huge mileage from its free rewards program and was among the first to offer experiential rewards, such as exclusive events and early product access. It remains to be seen whether Flash will be expanded to include other perks, but it’s a great example of how brands don’t necessarily have to choose between free and paid models.
When CarePass first launched in 2019, it was the first pharmacy to offer free national delivery to customers. Considering how pharmacies stock essential items as well as sought-after categories like cosmetics and personal care, it’s surprising that it took this long for someone to take advantage of this repeat purchasing power. CarePass also offers 20% off CVS branded products, in addition to monthly promo rewards.
What makes CarePass unusual is that it offers customers two payment options: a flat rate of $48 for the year or $5 per month. This allows them to appeal to both high and lower-income consumers.
“We also recognize that some people want both simplified value and access to our unique services and offerings.” Says George Coleman, Senior Vice President of Merchandising. “We created CarePass with those customers in mind, making it easier for them to save money while taking care of themselves and their families.”
Customer retention is the key to success for any ecommerce brand. If you’re facing high levels of customer churn, it’s tough to build steady revenue and grow your business.
With paid loyalty programs, you can leverage your most valuable customers and learn more about what gives them satisfaction. This in turn helps you to accrue greater profits over time.
However, running a successful paid membership program entails a lot of work on your business’s end.
Brands with a large market share like Sephora can launch a free shipping subscription and call it a day. But transaction-based offerings alone won’t help to help independent brands to forge a stronger emotional connection with their customers.
You’ll need to dedicate considerable resources both to marketing your program and coordinating fresh offerings that keep your members interested and engaged. This means conducting consistent outreach to understand whether members are finding your program valuable or are willing to make a referral to one of their friends.
While paid memberships help to secure customer engagement, the flipside is that members feel more entitled to great service (as they should). Your customer care team needs to be highly responsive to members’ pain points, or you’ll struggle to retain them for another cycle.
Ultimately, the suitability of paid programs depends on the following:
It’s important to note that you can still build a highly successful free loyalty program – if you know how to do it right.
Nike’s NikePlus program is a great example of how to keep members engaged not through upfront fees, but via data-driven personalization and localized experiences.
Program members have access to the members-only Nike Live, an experiential store model that uses loyalty program data to select store merchandise on a bi-monthly basis. Nike Live also puts the Nike app at the center of the experience, with users able to reserve products and find additional information with a single swipe.
Nike Live isn’t just a great strategy to keep current members hooked; it also provides a great incentive for uncommitted customers to join for exclusive access.
In sum, experiential rewards, personalized offerings, and omnichannel shopping capabilities are the table stakes for any loyalty program in 2021. If you’re able to bring these into your current program, you have a strong formula for boosting customer loyalty and retention.
Read our dedicated guide on how is revamp your loyalty program here.
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