An insightful article in Retail Dive uses the recent launch of Restoration Hardware's fee-based luxury loyalty programme as a leading-edge example of retailers following Amazon Prime's lead into the potentially lucrative world of fee-paying loyalty programmes. Fee based programmes are a double-edged sword: The fees offset programme costs and provide a "walled garden" for members to consolidate purchases, but they can also leave customers with high potential out in the cold. Will Restoration Hardware hit the sweet spot?
Luxury home furnishing retailer Restoration Hardware's decision to launch a fee-based programme is driven by that most noble of motivations: the desire to stop marketing solely through margin-killing discounts. Money quote from CEO Gary Friedman from a recent letter to shareholders:
"Much of how we behave promotionally is left over from the Great Recession. The multiple sale events and email communications do not reflect the brand we are building, nor are these promotions aligned with how our customers shop with us."
The retailer's new RH Grey Card programme charges a flat $100 annual fee in exchange for a generous 25% discount on all new merchandise and soft benefits such as complimentary interior design services. The retailer's move is also driven in part by desperation: continued disappointing earnings reports that drive home the new reality for specialty retailers - consumers trained to showroom, shop online, or otherwise seek deep discounts on even the highest-end luxury items. The purpose of a programme like Restoration Hardware's is to get discount dollars out of the hands of cherry-picking casual shoppers and put them to use where they can do the most good - in the hands of the retailer's best customers.
Reporter Jason Ankeny uses other well-known examples of fee-based programmes such as Amazon Prime, Costco, and Barnes & Noble to argue that fee-based loyalty programmes are the coming thing. There's no doubt that retailers are casting envious gazes on Amazon's exceptionally lucrative and seeemingly world-dominating Prime programme - the article quotes sources estimating that half of all U.S. households now pay Amazon $99 per year for the privilege of having forklift skids of toilet paper shipped free to their homes. "We want a piece of that action," we may imagine retail execs saying.
Before we rush into the boardroom to proclaim a fee-based programme as the savior of our brands, however, it behooves us to remind ourselves that fee-based programmes serve a specific purpose beyond merely generating fee revenue. programme fees act as a self-select mechanism, keeping out casual shoppers while attracting loyalists who are already heavily engaged with your brand. The risk in a fee-based programme is that the fee keeps out high-potential customers - those who might shift spend from your competitor to you - and attracts high current value customers, or those who already hand you most of their category spend.
Therefore, a fee-based programme might deliver less incremental spend from those high-potential customers who don't yet see the value in paying the programme fee. On the other hand, it certainly can deliver ROI in the form of decreased churn from high-spending customers. The key to the fee-versus-free decision, therefore, is to understand up front your business goals. Want to encourage spending shift? A free programme that casts a wide net might be a better fit. Want to consolidate lifetime spend with your most valuable customers? Then a fee-based programme might work for you.
To his credit, Restoration Hardware's CEO seems to get this, and is launching the programme with the goal of retention in mind. The programme won't reach the lofty numbers of Amazon Prime - but it may help the retailer build a community of brand loyalists who wouldn't think of refurnishing their living rooms anywhere else.
Read the Retail Dive article here.
- Rick Ferguson