How Costco, Amazon, RH and CVS are Replacing Loyalty Programs with (paid) Memberships

This year’s gigantic Restoration Hardware (rebranded as RH) catalog came with a membership invitation. 

According to their website, for a $100 Annual Fee, member benefits include: discounts, access to early sales, and their "concierge service" (which I think is a chance to sell you more things.) For a single big-ticket item (which is to say any major piece of furniture), the discount is larger than the $100 membership fee - which kinda makes anyone who isn't a member feel like a sucker. You wouldn't buy a couch and not become a member, for example.

Membership is being reinvented by retailers, and traditional loyalty programs are falling to the wayside. 

 In April of 2018, Amazon CEO Jeff Bezos announced that Amazon Prime membership had passed 100 million members. At $119/year (less for certain groups like students and people on government assistance) that’s well over $10B in revenue before a single item is purchased—a significant business on its own.

Amazon Prime is reinventing loyalty programs. There are no cards, no points, and no tiers, and it’s not free—there’s a hefty fee for membership. And yet, more than half of all American households are members.  

And they aren’t the only ones. Costco has built their entire business around their membership model. Membership costs about $60 and gives members access to a slew of deals. In fact Costco claims that they don’t profit from product sales because the deals are so good. Their profits come from the membership, while the retail business itself is break even.

For a while, Costco and Amazon Prime were among the few retailers who charged a fee for membership.  There were other innovators for sure, using free loyalty programs in new ways: 

• Starbucks used gift cards as a point of entry to membership, then tied membership to their app, making it easy to track points, offer special benefits and even order and pay with the app.
• Sephora Insider and Very Important Beauty (VIB) Programs provide biggest spenders free samples, early access to new products and unlimited makeup, plus status as “VIB Rouge” members
• Nordstrom’s gives dollars back based on spend, plus early access sales and free (included) alterations
• Marriott offers lowest rates, no blackout dates and free in-room Internet access right from signup, as well additional benefits based on higher usage, such as free breakfast and late checkout—all of this on top of the ability to “earn” free nights based on depth of spend.

Traditional programs that simply offer discounts and benefits based on frequency and depth of purchase are no longer seen by consumers as unique drivers of loyalty. I have so many retail & hospitality membership cards that I need a special card-holder in my wallet. It's not so much about loyalty as it is about making sure I get the discounts I earn.

What’s interesting to me is how many retailers are now following Costco and Amazon’s lead, forcing members to pay up front. This approach does a few things.

First of all, the member needs to demonstrate commitment up front by opening their wallet. It’s not just a “give us your email address if you want to use our wifi” kind of thing anymore. And these memberships provide real benefits—free shipping, access to truly special deals, concierge services and other perks that improve the experience for more engaged shoppers. 

RH (Formerly Restoration Hardware), Wayfair and AMC Theatres are all offering paid loyalty programs targeting their most frequent customers. CVS just announced a program too. And there are many more. 

So, how can you apply this new kind of membership program to your business?

Take a step back, and identify your best customers. Your best customers are usually the ones with high Lifetime Customer Value, but who also use your products in services in a way that many others are likely to replicate (so no outliers!). What do they value, and how do they behave? You want to design your membership so that lighter customers sign up and change their behavior to look more like best customers. 

 Make sure your program isn’t a straight financial arrangement, and don’t offer a program just to “check the box.” A membership mindset is about building a forever transaction with your customers. You want to make it so easy and appealing to buy from you that they take off their “consumer” hat, don their “member” hat and stop looking for alternatives. 

And what do you do if you’re the little guy? How do smaller retailers compete? 

Many small mom and pop businesses have some kind of a punch-card loyalty program. Buy 10 ice cream cones and get the 11th one free. That’s effectively a discount for depth of purchase, and can drive an increase in frequency, but there are many other ways to build deeper engagement and loyalty. I know a bar that reserves the coveted window seats for members. Nail salons that offer free touch ups to regulars. And restaurants that let members store their wines on site, to enjoy with meals.

Big or small, companies have all kinds of opportunities to build relationships with the people they serve, whether by providing subscription pricing, membership benefits or digital communities connecting like-minded people. The trick is to determine what it is that your customers really need, and build a model that meets those need, forever.

About Robbie Kellman Baxter

Robbie is the founder of Peninsula Strategies LLC, author of The Membership Economy, and the Instructor for 10 LinkedIn Learning courses including: Create a Membership-Based Business and B?ecome an Entrepreneur Inside the Company. Her clients have included large organizations like Netflix, SurveyMonkey, and the National Restaurant Association, as well as smaller venture-backed start-ups. Over the course of her career, Robbie has worked in or consulted with clients in more than 20 industries.

As a public speaker, Robbie has presented to thousands of people in corporations, associations, and universities. She has an AB from Harvard College and an MBA from the Stanford Graduate School of Business. Find Robbie on Twitter, @robbiebax