Cover Charge? I Have to Pay to Get into this Club?

The other day I heard someone refer to Amazon’s Prime Membership as a loyalty club. It took me by surprise. I always thought of Prime as more of a membership club – they charge a fee, so how can it be a loyalty program? At first I dismissed the term as a generic label to describe Amazon’s service. The more I thought about it, the more I thought the term loyalty club might be more accurate and if they were, then maybe Amazon has a secret recipe that other merchants should consider.
Prime is Amazon’s $99 membership club. For this annual fee you get access to movies, music, books, special deals, and most importantly, free 2-Day Shipping on a great many products found on Amazon’s site. To say it has been hugely successful for Amazon is an understatement. According to NBC News, there are approximately 54 million Prime members in the U.S. today. Doing simple math, Amazon rakes in over $5 BILLION dollars from this program alone.
The New Loyalty Model
The general understanding of a loyalty club is that it is free to join. You rack up points, or stars, or punches as you spend or engage with a merchant. These points accumulate in a virtual “bank” and then this proprietary currency can be used to redeem for a curated set of good or services determined by the merchant. It’s simple and has been around for as long as anyone can remember (yes Subway, I miss my free foot-longs).
At some point long the way, clever folks figured out or backed into the idea that traditional loyalty programs can be coupled with the exclusivity of membership clubs to greatly increase the value, both perceived and actual, for the consumer. First, the customer is part of a club that offers benefits not available to non-members. Second, they get more value from the club with more use.  If you distribute the up-front cost of a Prime membership across more purchases, then the value of the free shipping continues to increase. At some point in this curve, Amazon begins to lose money on the shipping costs. However, this is offset by the increase in total revenue per customer from additional purchases –now the loyalty piece comes into play. Amazon has created a motivated consumer by merging a great initial offer and long term loyalty by enticing them to buy more.
Applying the Model
To illustrate another example, let’s use an ice cream shop. Suppose they have 31 standard flavors anyone can buy. For $10 a year you can join the Moo Moo Club and get a complimentary extra scoop and access to 3 reserve flavors no one else can. The incremental costs to the shop is minimal. We all know ice cream itself doesn’t cost THAT much to make. Leasing a store, buying ice cream machines, utilities and labor are the major expenses that don’t really cost more when the shop adds on another scoop for loyal customers. As in the Amazon example, the shop drives incremental new revenue (the membership fee) that will eventually boost revenue from regular sources as customers buy more (the loyalty revenue).  Win for the consumer. Win for the merchant.
This model works better in some situations than in others. If the business model is not conducive to repeat customers, no loyalty program is going to help. Tom’s Tree Removal Service isn’t going to play well as a membership club or a loyalty program. Referrals are the name of their game and they should be looking to motivate good customers to refer them new ones.
It’s time for merchants to consider this new loyalty model. Today’s consumers have more loyalty cards than they know what to do with. The cards that remain top of mind, the cards consumers use, are the ones that offer them exclusive benefits and tangible rewards. Asking for a fee will deter some from joining your loyalty club, but these consumers weren’t likely long term loyal customers anyway. Fee based loyalty clubs puts skin in the game for you and your customer and ultimately creates a stronger bond. Isn’t that the point of a loyalty club in the first place?
For further information, contact Nick at: nfredrick@wcapra.com.

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