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Loyalty Programs: Points Are Out, Paid Is In

Brands are looking for any edge to stay competitive. We saw brand loyalty dramatically fall off early in the pandemic, when many consumers switched from their tried-and-true to other products based on availability, convenience and pricing. 

Research shows that rewards can build brand loyalty. But not all loyalty programs are successful. In fact, McKinsey research shows that about 66% of loyalty programs fail to deliver value, and many have the opposite effect and hurt brands. 

Paid loyalty programs are a strategy that more brands are rolling out or are testing as a way to keep more customers in the fold and increase customer lifetime value (LTV). A paid program – which puts some customer skin in the game – can be a smart way to acquire customers who are most interested in your brand and more likely to remain high-value customers over the long term. 

Paid loyalty programs can look a lot like the points-based loyalty programs most of us are very familiar with – plus a fee. While effective (for reasons we’ll get to in the next section), the fee does put more pressure on brands to “show me the value,” such as with experiential benefits that go beyond the transactional. These types of benefits could include things like early access to sales and new product releases; members-only content and events; brand communities; and personalized offers and recommendations.

Effectiveness of paid loyalty programs

When customers put money down, they are making a deliberate choice about a brand. A paid loyalty program can be a way to influence customers’ buying habits. According to a McKinsey report, consumers who joined paid loyalty programs were 62% more likely to spend more with a brand, versus 30% of consumers who were part of a free loyalty program. Fifty-nine percent of members also said they were more likely to choose the paid loyalty program brand over competitors. 

In addition to helping increase customer LTV, paid loyalty programs can be a way to differentiate a brand from competitors, particularly if there are a lot of choices in the marketplace for similar products and/or services. 

Also, when customers get benefits in return, they are more likely to share information about themselves with a brand. This is high-quality data brands can use to further personalize members’ experiences and increase customer engagement.

Some challenges

It’s important to understand that implementing a successful paid loyalty program requires sustained investment and commitment. One not-inconsequential benefit of asking members to pay a fee is that it helps brands cover some of the program costs. This gives brands more leeway to offer a targeted group of members better experiences and higher-value benefits while staying profitable. 

To keep members engaged over the long term, programs need to keep things new and exciting, with useful and entertaining content, personalized experiences, events, brand communities and more.  While transactional benefits like discounts and free shipping may entice consumers to sign up, experiential benefits are more likely to keep members in the program longer.

Best practices for designing a paid loyalty program

When considering a paid loyalty program, how do you go about designing it? We talked to our friends at Inveterate, a platform in the Shopify App ecosystem that allows Shopify merchants to more easily launch paid loyalty programs, to get some insights. They recommended getting started on designing a paid loyalty program by focusing on two key areas: 1) benefits and 2) pricing. 

Be purposeful in designing your benefits offering

Many brands go wrong by picking benefits that fit their business goals (we can afford to offer free shipping on orders over $75), and then tailoring those benefits to try to make them appealing to customers. Instead, it’s much more effective to first identify what your customers want (free shipping on all orders!), and then figure out what your business model can support. 

Additionally, consider how the benefits you select could address or solve for any existing friction in the customer journey. Removing barriers to purchase, particularly for your most loyal customers, can have a noticeable impact on your business.

The benefits you choose to offer should easily and clearly demonstrate value to customers. A compelling combination of benefits makes it a no-brainer for members to buy more frequently and spend more money.

To help you determine your paid loyalty program benefits, ask three key questions: 

1. What are our customers telling us?

To get the pulse of customer sentiment, a great place to start is with your customer support team. Because they interact with your customers regularly, they should have a good sense of what customers want more of, what they don’t like, or any friction in the customer journey. 

In addition, consider interviewing or sending an email survey to your existing high-value customers to ask them for feedback or their opinions on what they like and don’t like about their experiences with your brand, and how your brand could better engage with them. 

Additionally, you can review and aggregate social media comments about your brand to better understand where you’re winning (or not) with customers. 

2. What’s unique about our brand?

What does your brand have or do that your competitors don’t (what is your value proposition)? What do your customers value most about your brand? Your products? Customer service? Your mission? 

Also, analyze your business model and identify what contributes to higher conversion rates and average order value (AOV). Factors that motivate customers to purchase more frequently are areas to capitalize on for membership benefits. For example, your brand sells apparel and you notice that when you run a “buy more save more” campaign, your customers purchase at higher volumes. With this insight, you may decide a similar “everyday” benefit would appeal to loyalty program members. 

Further, identify operational advantages and package those as customer benefits. Do you have multiple warehouse locations from which you could provide two-day shipping? Do you have the ability to include free samples or gifts with every member purchase that you ship?

3. How should we curate our benefit offering?

More is not always better – it can get confusing. Instead, pick one or two benefits to lead with. These should be the most compelling reasons for customers to sign up, like 20% off member-only pricing or automatic store credit added to a member’s account. Then, you can consider adding a few secondary benefits that complement your business model and add perceived value for customers. For example, these could include early access to new product drops, access to brand communities (e.g., close friends on Instagram), and priority customer service.

Because you’ll be testing what works, it’s best to keep the offer simple and start small. You can always add benefits as your program grows. This is a better approach than having to take benefits away – that’s never popular with customers! 

Pick a membership price that makes sense to your customers

According to a McKinsey survey, half of loyalty program memberships are canceled within the first year and the primary reason is that members don’t feel like the benefits justify the program cost. 

Therefore, pricing your loyalty program membership just right is critical for sustained success. In addition, to drive initial sign-ups, customers must be able to immediately perceive the value of the program. 

Take a step back and review your offering. From a transactional perspective, does your offer make it easy for customers to understand how quickly the membership will pay for itself? For example, is it easy to calculate how many purchases with free shipping or a percentage off it will take them to break even on the program fee? 

However, going beyond the transactional nature of a paid loyalty program is important. Adding experiential benefits, such as special access to events or content they can’t get elsewhere, is a critical way to increase perceived value and keep more customers satisfied over the long term.  

How do you figure out how to price your program? It can be useful to use the following key performance indicators (KPIs) to help you determine how much and how frequently to charge for your membership program.

  • Average Order Value (AOV): How much do your customers typically spend? This dollar amount is a good indicator of a potential membership cost because you know your customers are already comfortable spending that much on your site for a single purchase.
  • Average Yearly Spend: How much is your average customer spending during a 12-month period? Your high-value customers will quickly calculate if the benefits they receive will outweigh the annual cost of the program compared to how much they spend with you.
  • Repeat Purchase Rate: A strong membership program should increase the average repeat purchase rate of customers who participate in the membership program. When crafting your program, take note of how often your average customer places orders during a 12-month period. For example, if they purchase three times, consider offering automatic store credit or member-only discounts four times a year to increase the repeat purchase rate.

Could a paid loyalty program be right for your business?

Paid loyalty programs can be a smart way to identify and nurture your best customers. And research shows that consumers want them. More than 60% of consumers belong to at least one paid loyalty program. If you think a paid loyalty program may make sense for your business, let’s talk!