Trends Analysis: Building a Loyal Customer Base With Paid Memberships

Want to expand revenue and increase customer loyalty? Paid memberships could be just the thing your DTC eCommerce brand needs.

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Trends Analysis: Building a Loyal Customer Base With Paid Memberships

Increasing customer loyalty is a fairly standard marketing tactic. Having customers pay you to join your loyalty program isn’t. That’s exactly what dozens of brands and retailers are starting to do, however.

Paid memberships are on the rise, spurred on by wildly successful and hugely popular Amazon Prime. Perhaps you’re thinking of creating your own program, too. If so, you’ll want to understand what makes paid memberships so effective and whether one will be a good fit for your brand.

With that in mind, let’s lift the lid on Amazon and other retailers winning big with paid membership.

Costco and Amazon Set the Stage for Paid Memberships

In their own ways, both Amazon and Costco have paved the way when it comes to paid retail membership schemes.

Costco’s entire revenue model is built around retail membership, The Hustle’s Zachary Crockett writes. Customers pay between $60 to $120 per year for access to stores, regardless of what they buy. While the retailer barely breaks even on merchandise sales as a result of razor-thin markups (typically around 11%), Costco brings in more than $3 billion in membership revenue. What’s more, the renewal rate for Costco memberships is a staggering 90%, Crockett says.

Membership is also one of the ways Costco can compete with Amazon in the digital retail age, notes Inc. Contributing Editor Jeff Haden. Despite offering a fraction of the SKUs of Amazon, Costco’s Gold and Executive memberships have the same effect that Amazon’s Prime does; customers already paid for the privilege of walking in the front door, so they are going to make sure they get their money’s worth.

Prime, however, took some time to evolve into a bonafide membership program. At first, it was effectively an upfront payment on shipping costs. Now, as consultant Chris Lema points out, Prime’s music, video and other offerings make customers feel as though they belong to a club.

It’s a big club, too. More than half of U.S. households have Prime memberships, writes HubSpot’s Amanda Zantal-Wiener. Prime membership figures were revealed by Jeff Bezos for the first time ever in 2018. In his annual letter to shareholders, Bezos revealed that the company had more than 100 million Prime memberships worldwide. There were more than 50 million U.S.-based membership accounts in 2018, and this was expected to increase by more than 5 million by the end of 2019.

Prime Inspired a Surge in Retail Membership Programs

The success of Amazon Prime is helping boost other brands’ membership offers, reports Retail Drive’s Daphne Howland.

Citing data from Alix Partners, Howland notes that Prime customers are three times as likely to sign up for an additional paid retail memberships or subscriptions.

The cost of these services doesn’t appear to be an issue, says Howland. Familiarity is the hurdle facing most brands. An overwhelming majority of consumers say they would be inclined to join a program offered by an established brand they know.

More and more retailers are beginning to offer paid membership schemes. There are more than a dozen U.S. chain retailers that currently offer these kinds of plans, Beth Braverman at Consumer Report writes.

One such company is Restoration Hardware, as Retail Drive’s Jason Ankeny writes. In 2016, the company eliminated all traditional promotions — which CEO Gary Friedman believes didn’t reflect brand values, anyway — and replaced them with the $100-per-year RH Grey Gard. The Grey Card offers customers 25% off all regular-priced merchandise and 10% off clearance stock.

“Since the program was introduced in spring 2016, RH members have become responsible for a whopping 95% of sales, while the retailer boasts reduced return rates and increased inventory accuracy as a result,” Retail TouchPoint’s Marie Griffin writes.

Outdoor brand REI is taking paid membership in a different direction. Rather than a triple-figure yearly fee, its customers can join the membership program for life for just $20. Members have access to a range of special offers, in-store sales, courses, trips and an annual dividend, as the team at Insider Trends writes.

Retail analyst Jane Hali says several retailers are building on the success of Amazon and moving into the paid membership arena. Lululemon, Sephora and GameStop have all launched paid membership programs offering a range of perks, including discounts, free products and free shipping.

Some DTC brands have built their businesses on the membership model from day one. Thrive Market, for example, sells an annual membership that guarantees customers will save money.

“In terms of customer acquisition specifically, we are in the business of selling memberships,” says CEO Nick Green. “We only make money if people buy a membership and then renew. And the best way that we can market the membership is by delivering overwhelming value to our members.”

Memberships Increase Revenue and Loyalty, But Only If They Are Truly Valuable

Brands aren’t just following in the footsteps of Amazon and Costco because paid memberships are suddenly in vogue. Brands derive several key benefits from this kind of offering.

Firstly and most obviously, it’s an additional source of revenue, writes Scott Robinson, Vice President of Design and Strategy at Bond Brand Loyalty. “Even if only a small percentage of members elect to pay a fee, it could add a significant amount of funding to the program’s operating budget. This allows retailers to afford more benefits for their best customers, ensuring these members will stay engaged with the program and brand year after year.”

It also helps businesses stay front-and-center in the minds of customers, Robinson continues. Once customers pay, they are committed to a certain brand and will engage with that brand more regularly as a result.

That’s the difference between paid memberships and free loyalty schemes, says Retail Prophet’s Doug Stephens. “Paid membership means you’ve secured a place in the customer’s heart. Membership — even for a small fee — forms a sense of exclusivity and transforms the customer experience in a way that traditional loyalty programmes simply cannot.”

Charging a fee also sets a level of expectation that retailers are forced to live up to. This forces retailers to deliver exceptional customer experiences in order to retain future membership revenues.

Still, the success of each program depends on its perceived value, retail analyst Bryan Pearson writes. “The shine of exclusivity, even in the forms of grocery-funded travel and 1 a.m. prescription advice, can diminish once shoppers grow accustomed.”

Who’s Saying No to Paid Memberships?

Not every brand’s strategy aligns with paid membership programs. Some brands and retailers have even doubled down on free membership schemes recently.

Take Target, for instance. In 2019, Target went head-to-head with Amazon when it premiered Target Deal Days, a promotional day of no-membership-required sale prices, tech reporter Bruce Brown writes. That’s not all Target offers customers, however. Customers who sign up to Target Circle can get same-day delivery via Shipt, click and collect, and free two-day shipping.

J.Crew is also hoping a new free loyalty scheme will help revive the brand’s fortunes, reports Fashionista’s Hilary George-Parkin. “The program launched in August, and uses a point system to offer rewards ($5 for every $200 spent), plus free standard shipping and access to exclusive sales; the J.Crew credit card, meanwhile, offers double points and additional perks.”

Loyalty rewards and credit cards bring in the kind of increased income that paid memberships promise. By offering them for free, however, J.Crew will also get access to much more customer data than if it charged customers to join its program. This data can be almost as valuable as the additional revenue, George-Parkin says.

Making your customers pay to become more loyal may seem counter-intuitive, but can be very effective. At the same time, it won’t work for every brand. There is one question eCommerce managers should be asking themselves: Do customers love your brand enough to pay for a membership, or is free still the best strategy for now?

Images by Jonathan Weiss/©, Henry & Co,

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