This week, I explore paid memberships as a newer business model supplanting traditional free loyalty programs.
In the arms race to retain customers, a newer loyalty program model is gaining traction: paid memberships.
Getting customers to pay more to retain them may seem counterintuitive. However, companies are finding that by offering early or exclusive access to discounts, products, and experiences for a fee, paying customers are willing to engage more frequently and buy more with a brand. Paid membership is also sometimes referred to as premium loyalty, subscription loyalty or paid loyalty. The number of paid membership programs on the market is small today but expanding rapidly. This year, hydration beverage brand Liquid I.V. soft-launched a paid membership in February. Hair-color brand and salon chain Madison Reed followed, introducing a tiered paid membership program in April. Sweetgreen also launched a paid membership in April. Before this, in April 2022, lifestyle brand Jenni Kayne created a paid program offering 20% off every furniture and décor purchase, among other benefits, for $150 a year. This was modeled after Restoration Hardware’s members-only pricing program, which began in 2016. In Nov. 2022, luxury faux lash brand Lashify introduced Membership X, which has become a key revenue driver, according to founder and CEO Sahara Lotti.
“Loyalty programs over the last 100 years have been about members spending $1 to earn a [single] point. But there is so much more opportunity than that,” said Zsuzsa Kecsmar, co-founder and chief strategy officer at Antavo, a loyalty management software company. “Loyalty programs have the earn side and the burn side. On the earn side, there are so many more opportunities than rewarding purchases, like [rewarding] friend referrals. … And on the earn side, [perks] can include not only discounts and coupons but also experiential rewards.”
Since its launch, the nearly 6-year-old Lashify has offered Luxe Box, akin to a monthly subscription renewal, where customers can add multiple products to a bundle and receive steep discounts as a result. Lashify starter kits cost $145, while refills cost $20-25. But in Nov. 2022, Lashify built on this idea with the Membership X program, which costs $100 annually. It offers perks like $1 cashback for every $10 spent, free standard shipping with a $45 minimum purchase, a $5 “Lash Cash” bonus every month to use on purchases, 15% off retail prices, and access to more discounted outlet shopping for less-than-perfect Lashify products.
Lotti said that because lashes are a high replenishment product, she expected that customers would find Lashify’s paid membership appealing. Membership X currently has approximately 16,000 members. Between Membership X and Lashify’s existing Luxe Box subscriber base of 150,000 people, the programs account for 20% of the brand’s revenue. High replenishment products are key to a successful paid membership, according to Kecsmar, as customers can experience a direct and frequent benefit from the paid features.
“Membership creates loyalty and community, which every brand should want. Because those people carry you; you can’t only focus on getting new customers,” said Lotti. “It’s a reoccurring revenue you get per month, whether you market or not. You have those customers, and so long as the experience is good, they’ll stay.”
Lotti saw the cashback offer as a particularly tantalizing prospect, as it gamifies the customer experience and encourages people to keep buying so they don’t “lose out” on cashback rewards or the additional $5 a month offer. Compare this to points-based systems, where people tend to hoard points in hopes of reaping a bigger reward. On average, Membership X customers purchase up to twice a month, while customers who subscribe to neither Membership X nor Luxe Box purchase six times yearly. A 2020 McKinsey survey on loyalty programs found that members of paid loyalty programs are 60% more likely to spend more on a brand after subscribing, while the likelihood among free loyalty programs only increases by 30%.
Notably, both Lashify and Liquid I.V. took inspiration for their programs from high-end L.A.-based grocer Erewhon. Erewhon has recently gained greater attention due, in part, to the cultish interest in its smoothies and its engagement with the beauty industry. The Erewhon membership costs $200 per year and offers perks like $1 cashback for every $10 spent, a complimentary monthly tonic drink, free delivery on orders of $150 or more, and the ability to share the membership with another person. While not cited as inspiration, brands have no doubt seen the strength of Ulta Beauty’s Ultamate Rewards and Sephora’s Insider loyalty programs. As such, attracting high-spend customers to shop on the brand’s DTC e-commerce channel rather than at beauty retailers may become more attractive for brands. While both retailers offer the ease of points accrual by purchasing across multiple brands, brands could convince customers of the long-term benefits of shopping directly with a brand if they are already frequent buyers.
“There is now a bigger focus on profitability,” said Kecsmar. “Marketing and customer retention is less about brand building and more about strategies for driving more business. Marketers are [viewed] less as brand builders and more like business drivers.”
Liquid I.V. soft-launched its LIV Membership in February before formally rolling out the program in May with dedicated creative assets. The program costs $5 every three months and currently has 26,000 members. Perks include a 20% offer for every single order, early access to promotions and new products, and access to exclusive products and experiences. Liquid I.V. did not have a pre-existing loyalty program, but it also offers a recurring subscription where people can receive a nearly 23% discount on products sent monthly or every other month.
Regarding whether the $5 LIV Membership is seen as a revenue driver, versus a sale equivalent to the company’s cost for the program’s benefits, Brooke Cullison, e-commerce and media director at Liquid I.V., said that’s yet to be determined as the program is still in a test-then-scale trial.
“Liquid I.V. has a strong omni-channel presence, so we wanted to give our customers a digital VIP experience that allowed them to connect with us off the shelf,” Cullison said. “Having something where people can instantly access our community resonated with our customers.”
Cullison said the benefit of the program’s $5 price, to both customers and Liquid I.V., is that people can immediately access all the benefits of the program rather than accrue benefits through expenditure, as seen with tiered loyalty programs. By opting into the paid membership, customers could also flexibly invest in the brand’s products rather than be locked into a reoccurring order via subscription. The early results are promising. LIV Members exhibit a 78% higher purchase frequency than non-members, account for 3x more long-term value and spend 20% more on every purchase, even with the 20% discount baked into the order value. Furthermore, 50% of LIV Memberships were formerly what Liquid I.V. categorizes as dormant customers, meaning the program has re-engaged them. Liquid I.V.’s dormant customers are people who have not purchased in the previous three months. However, Cullison said she does not understand why dormant customers were leapfrogging into the paid membership.
“The early success makes us excited about what else we can build this program into,” Cullison said. She added that, during the soft-launch phase, LIV Membership had 10,000 signups in 40 days, exceeding the team’s goal by 50 days. Aside from the planned, yet-to-launch program perks for members, future benefits may include new-flavor sampling and live membership activations at key hydration moments like music festivals.
It is highly likely that, in the coming months and years, more brands will announce paid memberships. According to Antavo’s 2023 report on global customer loyalty, 83.7% of companies surveyed said they offer a free loyalty program, compared to 8.1% of companies who said they have a paid program. Another 2.6% of companies planned to launch a paid program, while 23.7% planned to offer a tiered hybrid program with free and paid tiers.
Kecsmar said she would not be surprised to see companies developing customer loyalty departments that fall under marketers’ purview rather than that of customer service. She also anticipates that more people leading loyalty programs will be elevated to the C-suite tier, something she had not seen before 2020. Existing industry examples include Michelle Crossan-Matos, CMO of Ulta Beauty, who oversees the retailer’s free Ultamate Rewards loyalty program. And in April, Bath & Body Works appointed marketing veteran Maurice Cooper to the newly created position of chief customer officer, overseeing loyalty.
“The big companies are making these [changes], and everyone else is hiring to get there,” said Kecsmar. “Customer service is about servicing what already exists. But marketing teams and business development will oversee [loyalty programs] as business-building opportunities.”
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