Today’s customer wants preferential treatment and is willing to pay a premium for it. In a recent study, 37% of customers are willing to pay more for a tier that unlocks preferential benefits. This percentage increases when looking at younger generations segments: 47% for Gen Z and 46% for millennials. And we can see the benefits resulting from paid loyalty, with winning examples such as Amazon Prime.
There are many benefits to paid loyalty. Restoration Hardware (now RH) has seen 95% of its core business is driven by members who pay $100 annually for 25% savings on RH products and 10% savings on sales items, among other perks. Additionally, they’ve been able to level off on the usual peaks and valleys of seasonality and sales. RH has also reported an easing in operational challenges such as inventory, and while their competitors may be closing stores, RH is investing in high-end experiences sure to appeal to their customer base and retain the brick and mortar locations as a destination site. Competitors like Wayfair are starting to follow suit, although it’s yet to be determined if their value proposition matches their premium loyalty fee in the same way.
Likewise, popular subscription models continue to grow, increasing more than 890% since 2014. Brands such as Ipsy, Blue Apron and Dollar Shave Club are capitalizing on consumer willingness to share data for a better or friction-free experience, and are able to use this data to personalize at scale. And not only do these types of memberships continue to attract and grow customers, but Dollar Shave Club’s ingenuity in the subscription space retains more than 50% of customers after 12 months, and more than 25% after four years. Again, this is monthly incoming revenue that customers continue to pay after four years – a retention stat we imagine all brands would love to see.
While this model won’t work for everyone, it could be a tactical strategy for many. The largest categories currently in the space are food and beauty, but creative marketers can see how a supplemental subscription model can benefit their brand.
To make these strategies work, customers need:
- an understanding of the value from your brand
- an ongoing realized value from your brand
- a desire or need for more convenience or willingness to pay a premium for friction-free experiences.
To make these strategies work, brands need:
- frequently (repeatedly purchased) products and/or services
- complicated purchases where an added subscription service removes friction
- premium priced items where a discount or added service provide true value for customers
Undoubtedly, there is plenty of room for leadership in this area. Some examples or considerations for launching a paid tier or subscription plan:
- Grocery: When the same items are purchased weekly or monthly, a brand could offer free pick up or delivery, or even have items pre-packaged for a premium fee
- Beauty: One of the biggest players in the subscription model, beauty still has room to grow. As lotions, makeup and facewashes all have predictable, limited life, subscription boxes of preferred items makes sense
- Hotels: IHG’s loyalty program is $200 annually for perks such as an automatic room upgrade, free weekend night stay, welcome gift and more. Many luxury hotels are following this example in order to invest more in its highest value customers who desire preferential treatment
- Retail: Some retail brands already offer subscription services, such as Nordstrom’s Trunk Club But they could also explore a paid loyalty tier for the right customer set. Lululemon, which has always had a strong cult following, is doing precisely this with their paid program in which members receive a free pair of pants, as well as popular workout experiences
In terms of paid programs, Aimia has seen much value from members who “pay to play.” Members in a paid program spend on average 5 times more than members in a non-paid program and also make 3 times the number of trips over a non-paid member.
We’re very interested in how paid loyalty and subscriptions will continue to develop. It’s certainly not a silver bullet, but if the value proposition is right, the experience is frictionless, and the program is relevant, it could certainly be a significant source of incremental revenue for brands to continue to invest in their highest value customers.