Ecommerce businesses face a lot of challenges ranging from cybersecurity to customer experience to shipping and pricing to customer retention and loyalty. Retaining customers and converting them into loyal customers who will buy again and again from your store is one of the biggest challenges that ecommerce brands face.
With growing competition, maintaining a positive cash flow with sustainable growth is getting tougher. Customer behavior and shopping patterns are changing too. For example, a whopping 63% of millennials and Gen Z consumers won’t buy from a company that doesn’t have a loyalty program.
Paid loyalty programs are more attractive and appealing to customers as they offer more benefits and rewards. Paid members are more loyal, stick with your brand for longer, have higher lifetime value, buy more often through upselling and cross-selling offers, and bring more customers through word of mouth.
If you do it right, a paid ecommerce loyalty program delivers far better results than a free loyalty program.
This article explores the ins and outs of paid loyalty programs for ecommerce businesses, their value, case studies and examples, how to create and implement a paid loyalty program, how to overcome key challenges, and more.
The Importance of Customer Loyalty in Ecommerce
Customer loyalty in ecommerce is priceless. Customer loyalty endorses customer retention which means loyal customers stick with your store and have a higher average order value as they buy multiple times from your store.
Retaining an existing customer is less expensive and it is more profitable. It costs 6-7x more to acquire a new customer than to retain an existing customer:
Loyal customers are more likely to buy from you as it is easy to sell to an existing customer.
This is because existing customers have had a transaction with your business and they have crossed the barrier. They are more likely to buy again from your store than a newly acquired customer.
Customer loyalty lowers customer acquisition cost, increases average order value, and boosts customer lifetime value (CLV) as they buy more.
Customer lifetime value is a crucial metric that plays a major role in ecommerce profitability. It is defined as the total net profit your ecommerce store can expect to generate from a customer for the entire relationship with your brand. It considers the first purchase and then all the repeat purchases of the customer and the average duration a customer stays with your business.
CLV helps you better understand customer profitability and customer loyalty, and it is also linked to customer acquisition cost.
For example, the CLV of a customer is $100 which means you will earn a revenue of $100 per customer (on average). If you are spending $50 to acquire a new customer, you are expected to make $50 per customer.
Increasing CLV lowers customer acquisition cost and increases profitability per customer. This is why loyal customers are the backbone of your ecommerce company. The longer they stay with your business, the more they will buy. This positively impacts profitability.
Once you recover CAC for a customer, you earn positive cashflow and the longer such customer stays with you, the better:
Customer loyalty plays a major role in increasing CLV because you need two things from a customer:
- Staying with your company for a longer period
- Purchasing from your store multiple times during the stay.
A customer that stays with your brand but doesn’t buy any upsell or cross-sell, it won’t be useful. Loyal customers don’t just stay but they buy from your store.
This is a reason your ecommerce store needs to have more loyal customers who re-purchase multiple times during their stay.
Understanding Paid Loyalty Programs
A paid loyalty program charges a participation fee to the members and in exchange members receive exclusive benefits. You offer a fee-based loyalty program to the most valuable customers so they spend more with your company.
There are two types of paid loyalty program structures:
- One-time membership fee
- Recurring subscription.
Paid loyalty programs are focused on delivering exceptional customer experience and high value rewards. The objective isn’t to earn from the participation fee but to boost customer activity and increase CLV and customer loyalty.
Free loyalty programs target a much wider customer base to increase customer loyalty.
If the rewards of a paid loyalty program aren’t attractive and worth spending money on, your customers won’t participate. It needs to be designed and structured carefully. And when done right, it helps you increase purchase frequency by 43%, brand affinity by 59%, and basket size by a whopping 62%:
Amazon Prime is a leading paid loyalty program example. The members get exclusive rewards such as free shipping, special sales, streaming services, same-day delivery, etc.:
Amazon charges a monthly subscription fee to its Prime members which is $14.99. There are more than 200 million Prime members. These paid members have subscribed to Prime to get benefits that they don’t have access to otherwise.
Amazon Prime is a successful paid loyalty program because the rewards aren’t available to non-members. Same day shipping and free delivery are exclusive benefits that only Prime members receive and if you are not a Prime subscriber, you can’t get these benefits.
Ecommerce Paid Loyalty Program Examples
Amazon Prime isn’t the only ecommerce paid loyalty program example. There are several other examples too including:
- Walmart+: Walmart+ is a paid loyalty program just like Amazon Prime. It costs $12.95 per month or $98/year and you get free delivery, video streaming, fuel savings, and more. You can save as much as $1,300 per year with Walmart+. It has 11.5 million members.
- Costco membership: It is a paid loyalty program that costs $65 or $130 per year depending on what benefits you like. You get a 2% annual reward on qualified products. Costco has 117 million global members who are its loyal customers.
- Fabletics: It is a clothing brand that has a membership business model. It charges $59.95 per month and customers can buy any item up to $100 per month both online and in-store. Fabletics has more than 2 million members with an annual revenue of more than $300 million with an annual growth rate of 20%.
- Petco: The Vital Care membership program by Petco costs $19.99 per month and it offers monthly discounts, points, free products, and several other perks. Petco has over 400K members and it has a 200% YoY growth. The annual revenue last year was well over $1.5 billion primarily due to its members who have a 3.5x higher lifetime value than non-members.
The Value Proposition of Paid Loyalty Programs
Paid loyalty program benefits make them a must-have part of your ecommerce strategy. Here are the reasons why you should have a paid loyalty program:
1. Improved Customer Retention
Paid loyalty programs increase customer retention as paid members are least likely to shop elsewhere.
A study reported that 59% of American consumers say that once they are loyal to a brand, they are loyal to it for life and won’t switch it. McKinsey reported that 59% of paid loyalty members are more likely to buy from the same company and are least likely to go to a competitor.
When compared to a free loyalty program, paid loyalty programs have a higher retention rate because they are paying for the program and are an active member. Free members don’t have anything at stake and they can switch brands without hesitation.
2. Enhanced Customer Spend and Frequency of Purchase
People who pay a recurring fee for a paid loyalty program spend more with the brand. This is because they don’t want to miss the recurring rewards and benefits they receive from the company.
McKinsey reported that paid loyalty programs have 43% higher purchase frequency and paid members spend 62% more on the brand. Another survey found that 68% of paid members increase spending to maximize the benefits they receive and to receive more reward points.
The reward system is linked to the spending of the customer and this is how ecommerce businesses persuade paid loyalty members to increase spending and purchase frequency.
3. Greater Customer Engagement and Brand Affinity
Paid loyalty members don’t just spend more with the brand but they are highly engaged and consider the brand as their favorite in the category.
These members are 78% more likely to pay a higher price to stay with the brand.
Why?
Because they are loyal and engaged customers.
A study found that 72% of people consider loyalty programs a part of their relationship with the brand. This describes the high engagement and brand affinity for paid loyalty programs. It is much more than a transaction between a company and a person – it is viewed as a relationship.
4. Upselling and Cross-Selling Opportunities
Paid loyalty programs significantly increase upsells and cross-sells leading to a higher revenue.
This means you can sell more to your paid members which increases customer lifetime value and profitability. You increase revenue without spending money on marketing and customer acquisition.
Paid loyalty members are also more likely to buy upsells and cross-sells because they are willing to adjust their spending to get more rewards.
5. Quality Customer Data and Insights
The best thing about running a paid loyalty program is that it lets you generate customer data and insights that are priceless. You get to know your customers better.
You understand your ideal customers better in terms of what type of rewards they like, what products they buy, what makes a customer loyal to your ecommerce store, how many transactions a customer needs to sign up for a paid loyalty program, etc.
The data helps you in updating buyer personas, targeting, and marketing campaigns.
You can also collect primary data from your loyal customers through surveys and interviews. As loyal customers, they are more likely to respond to a survey. Better yet, you can link the survey to your reward system.
Case Studies of Successful Paid Loyalty Programs
Do you want to know how successful paid loyalty programs are created and executed and what makes them successful? The following loyalty program case studies will help you better understand the anatomy of a successful loyalty program:
1. Italic
Italic is an online marketplace that connects manufacturers with end-consumers bypassing the retailers. It has a lot of manufacturers that sell clothing, home accessories, and beauty products for both men and women. It was launched in 2018 with a pay-to-shop pricing model.
Challenge
The major challenge Italic faced in educating its target audience was the benefit they get when they buy directly from a manufacturer instead of a retailer. It relied on organic growth driven by referrals as it was found to be the best approach to reaching its target audience.
Loyalty Program Strategy
Italic started as a pay-to-shop platform where customers were charged $10 per month to access products. This pricing model was driven by the notion that it was giving access to the customers to buy directly from the manufacturer at a low price (wholesale price).
It then dropped the membership program and opened the platform for everyone. This didn’t work as expected.
In 2021, Italic switched to a hybrid pricing model where it became free for everyone and customers could opt for a $60 per year membership to get exclusive discounts and free shipping including $60 in credit.
This helped the company go from 40 products in 2018 to over 800 products with more than 100K members in 2022. Referral is the biggest source of new members and non-members and that’s just because of the loyalty program it offers to its loyal customers.
Key Takeaways
The hybrid pricing model works best. Keep your business free for non-members and offer paid loyalty programs with exclusive benefits to your customers as an option. You should always have a mix of non-member customers and paid member customers.
2. Fabletics
Fabletics is an activewear and workout clothing brand for both women and men. It was founded in 2013 as an ecommerce brand but later opened physical stores. Today, it operates virtually in 8 countries and has 27 physical stores across the US.
Challenge
Standing out from the crowd was the biggest challenge Fabletics faced. Customers have a lot of options to choose from and retaining customers wasn’t easy. It tried influencer marketing to reduce acquisition cost but it didn’t work too well in terms of customer retention.
Loyalty Program Strategy
Fabletics created a paid loyalty program for customer retention and increasing customer lifetime value. The membership business model was appealing to the customers as it was unique and offered amazing benefits.
The membership costs $59.95 per month that comes with credits worth $100. Paid members get free shipping, 20-50% off on everything and special pricing that is not available to non-members.
Membership credits accumulate and have an expiry of 12 months making it easier for members to accumulate them and shop once they have enough credits.
The paid loyalty program has over 2 million members and counting. The annual revenue is increasing by 20% per year. The annual revenue increased from $300 million in 2020 to $500 million in 2022.
Key Takeaways
If you are in a competitive market where retaining customers isn’t easy, offering a highly lucrative paid loyalty program might help. You can stand out easily if your loyalty program keeps your customers hooked.
3. Petco’s Vital Care
Petco is a leading pet supplies ecommerce store that offers a wide range of products and supplies for all types of pets.
Challenge
Petco is operating in a competitive market where customer shopping behavior changes too frequently. Customers, for example, reduce shopping significantly during hyperinflationary periods such as during Covid. Lack of stability with consistent growth was a problem for Petco as it was lacking recurring revenue.
Loyalty Program Strategy
Petco launched its paid loyalty program in 2020 to boost recurring revenue and improve growth consistency. Vital Care is priced at $19.99 per month offering a 20% discount on grooming and 10% off every nutrition purchase with rewards and other exclusive offers.
The paid loyalty program increased recurring revenue by 56% YoY. Paid members climbed to 400K+ with a 50% increase in weekly signups. The paid members have a 3.5x higher lifetime value than non-members.
Key Takeaways
When it gets hard to generate recurring revenue due to economic and other macro (or micro) changes, a paid loyalty program can maintain stable growth with predictable revenue.
4. Mirenesse Gold Membership
Mirenesse is an Australian award-winning cosmetic and skincare brand that is focused on selling skin care products that have 100% clinically proven ingredients. It was founded in 1999 by Irene Patsalides and has been doing well for years.
Challenges
With an increase in competition, changing buyer behaviors, and increasing repeat purchases, Mirenesse was looking for a breakthrough. Retaining customers wasn’t easy as they had a lot of other skincare brands and products to choose from and they cared less about the ingredients.
Loyalty Program Strategy
Mirenesse created a customized loyalty program that includes both free and paid programs. The free members earn 1 point per $1 purchase and get basic level rewards and incentives.
The paid program is priced at $18 per month and offers better rewards including free shipping, 2 points per $1 purchase, access to panel testing for new products, secret sales, and more.
Member spending increased by 50% in the first year with a whopping 51% higher repeat purchase rate. Overall, the members spent 73% more than guest visitors, and 54% of brand revenue was attributed to the loyalty program.
Key Takeaways
In competitive industries like skincare and beauty, you should consider offering both free and paid loyalty programs. You need to gain customers’ trust with a free loyalty program and then convert them to paid members when you win their trust.
5. Panera Bread
Panera Bread is a well-known name in the food and beverage industry. It is a bakery-café with more than 2,200 restaurants across the United States and Canada.
Challenges
Businesses in the food and beverage sector offer free meals and drinks to their customers. Subscription plans like Burger King’s $5 coffee subscription service pushed Panera Bread to offer something to its customers too.
Panera Bread also suffered from declining repeat customers during the Covid-19 shutdown. Dine-in customers dipped to almost zero for Panera Bread in 2020 due to the pandemic.
Loyalty Program Strategy
Panera Bread launched its paid subscription plan in February 2020 to fight competition and meet customer expectations. For a monthly subscription of $8.99, customers can get unlimited coffee and tea of any size.
The price was later increased to $11.99 per month with an annual subscription of $119.99.
More than 100K people subscribed in the very first month and there are more than 40 million members in the paid loyalty program. Over 50% of total transactions are attributed to its paid members.
The major reason for such a huge success is that Panera Bread offered free coffee and tea without any limits and it ensured that it had the necessary resources and connections to reach its customers during the pandemic. The omnichannel approach to connecting with customers across multiple touchpoints including on-premise, drive-thru, pick-up, etc. contributed to the success of the loyalty program.
Key Takeaways
You need to make sure that your loyalty program is better than the competition and you are offering more benefits and rewards. At the same time, you need to acquire the necessary resources to make sure members get the benefits they are paying for.
Implementing a Paid Loyalty Program: Key Considerations
Here are the steps to creating and implementing loyalty programs for your ecommerce business:
1. Understanding Your Customers and Their Needs
Understanding customer needs is the core step in creating a successful paid loyalty program for your ecommerce business. As much as 75% of American consumers are of the view that they are more likely to be loyal to businesses that understand them and their needs on a personal level.
You need to know what type of benefits your customers need, how much monthly or yearly fee they can afford to pay to be a member, what products they buy the most, and much more.
Most of this information is not hard to find. The analytics tool and CRM will have this information. You just need to use this data to know more about your customers.
You might not get everything right in the first go.
Leading brands, for example, switch between paid and free loyalty programs and change loyalty program fees several times to finally come up with something that their customers like.
It needs experimentation and constant tweaking based on data.
2. Determining the Right Incentives and Rewards
This is crucial. For a paid loyalty program, the rewards must always be greater than the program fee. You need to offer more value to the paid members.
According to McKinsey, you need hard-value benefits to boost membership signups and then you need to offer experiential perks to retain members:
This means the incentives should encourage new customers to sign up and then they must be valuable enough to keep them hooked forever.
For example, Fabletics offers credits to its paid members every month. And these credits have an expiry of 12 months. This is a great benefit to retain members. They accumulate credits to buy items they like. And it gets hard to leave your membership when you have credits available for use.
Retaining customers in ecommerce is challenging but when done right, you can increase the retention rate by offering the right rewards and incentives to loyal customers.
3. Communicating Value to Customers
Do your customers know the true value and benefits of your paid loyalty program?
In most cases, they don’t. And when the members don’t fully understand the program’s value and benefits, they won’t sign up. You need to communicate the program’s value to the members.
The best way is to create a dedicated loyalty program page on your website where you explain the program, its fee, benefits, rewards, and value to the customers.
Here is an example from Petco’s Vital Care program:
It is a detailed page that explains the difference between free and paid membership benefits with a detailed FAQs section. It also gives a complete overview of the major rewards and discounts.
This type of detailed program page that compares members vs. non-member benefits is a decent way to communicate your program’s value.
4. Integrating the Program with Your Overall Ecommerce Strategy
The paid loyalty program is not a standalone program. It needs to be integrated and embedded into your ecommerce strategy.
It needs to be available across all touchpoints including online and physical stores.
The members should get the rewards irrespective of where they are shopping. This means you must have an omnichannel strategy that’s fully integrated with your CRM tool and loyalty program.
This is essential, not optional.
Integrate your loyalty program with your ecommerce strategy and offer your members an omnichannel shopping experience.
5. Ongoing Tracking, Analysis, and Improvement
Creating a loyalty program isn’t a one-time job. It requires tweaking – a lot of it.
Successful loyalty programs undergo several changes before they reach their final stage. For example, Italic created its loyalty program in 2018 and finalized it in 2021 when it switched to a hybrid program. It took the brand almost 3 years to finalize its loyalty program.
Once you have your ecommerce loyalty program implemented, you need to track its performance across multiple dimensions such as:
- Customer response
- Sign up rate
- Retention rate
- Change in customer lifetime value
- Changes in average order value
- Revenue and growth.
When you implement your loyalty program, you will have lots of data to make well-informed decisions and tweaks to the program.
Potential Challenges and Risks of Paid Loyalty Programs
The list of ecommerce challenges is gigantic. There are times when paid loyalty programs become a risk and might backfire.
Here are the potential challenges and risks of a paid loyalty program and how you can avoid them:
Boomerang Effect
The most common issue with loyalty programs is when loyal customers face an issue such as shipping delays or customer services. These issues hurt loyal customers and paid members more than non-members because they are more frequent shoppers.
And in case of consistent problems, your loyal customers hurt your brand the most. This is what researchers at Wharton School call the boomerang effect.
Solution: The solution is more strategic where you need to integrate your loyalty program with your business strategy and processes. It calls for a holistic approach where all the teams work together at the program implementation stage.
For example, a product selling for $50 costs you $40 means you can’t offer a 25% discount on it. These types of strategic-level issues create long-term, irreparable damage to your loyalty program as well as your customer base.
Customer Alienation
If you are promoting your paid loyalty program religiously and all the offers and benefits are provided to the members, non-members will feel alienated.
And this is dangerous.
Because it reduces the entrance to your brand and therefore, new loyal customers will be hard to find. And you won’t be able to rely on existing loyal customers for too long.
You need new customers and non-members because that’s how you find future loyal customers and members. Don’t close that door.
Solution: Do not offer all the major discounts and offers to members. Keep it interesting for non-members to shop from your online store.
Amazon, for example, offers flat discounts to all customers including non-Prime customers. And there are free shipping offers for non-members too. This balance is mandatory to maintain.
Don’t over promote your loyalty program.
Perceived Value Issues
The McKinsey study reported that customers expect at least a 150% return on their subscription fee in the form of offers, discounts, and rewards for paid loyalty programs.
The biggest challenge is communicating the actual value to your customers. You might offer a lot of benefits and perks, but if they are not perceived as high value, you might not get enough signups.
Perceived value might be lower or higher than the actual value and this comes down to how you create, implement, promote, and pitch your paid loyalty program to your audience.
Solution: It requires a strategy and use of techniques like scarcity, social proof, FOMO, charm pricing, testimonials, reputation and authenticity, and the like. You need to have a robust marketing strategy for the loyalty program that boosts and highlights its value to the customers.
Conclusion
Enhancing customer spend, boosting customer retention, and growing your store even when economic conditions aren’t favorable get easier when you have a solid paid loyalty program implemented for your ecommerce business.
When considering ecommerce customer retention strategies for your brand, don’t forget to implement paid programs. When done right, nothing works better than loyal customers who stick with your company for years (not just months).
As competition is rising and it is getting easier for customers to switch brands, we will see a lot of ecommerce companies offering loyalty programs in the coming years. According to a survey, 74% of ecommerce businesses are now focused more on customer retention than conversion or acquisition.
So, expect a lot of new paid and free loyalty programs from ecommerce companies.
You should better be an early adapter, if not the first.
Where to begin?
Create your first paid loyalty program and begin the process by taking a deep dive into customer analytics. Get to know your customers better. Conduct a survey and ask your customers if they will be willing to pay a monthly subscription fee for rewards and discounts.
Use a simple platform like Subkit to create and implement a paid loyalty program. It supports instant integration and lets you charge a subscription fee for your ecommerce store. You can design your paid program the way you like.
Subkit is free to use and gives you all the tools, resources, and help you need to set up and implement your paid membership program from scratch.