When are fees appropriate for a loyalty scheme?

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By: Wise Marketer Staff |

Posted on August 6, 2015

When are fees appropriate for a loyalty scheme?

Imagine it's a Wednesday evening. You had planned to go home and wax your car, but you need an electric polisher. Normally, you would stop at Target and get 5% off with your RedCard, but it's been a long week and you just want to go home. In addition, you recently paid US$99 for a yearly Amazon Prime membership, want to get your money's worth, and realise you could have the polisher by the weekend with 'free' two-day shipping. So what do you do?

This buying decision is one consumers face every day. Brands realise their customers have more information and options than ever before, according to Tyler Walton, marketing manager for Clutch, who warns that the implementation of a programme to create committed relationships and deter customers from considering competitors during the path of purchase is increasingly important.

Many brands immediately turn to the traditional points programme - and for good reason. Utilizing a free loyalty programme allows a brand to sign up, analyse behaviors, and attempt to increase lifetime value across a wide range of customers. This provides vast amounts of actionable customer data, which is always welcomed by marketers. Yet, because these programmes are free, customers have limited incentive to actively engage the programme. In fact, while the average U.S. household belongs to more than 21 loyalty programmes, only half of those programmes are actively used in each household.

While marketers could certainly drive better engagements within the usual "spend US$100 and receive US$5 credit" programme, fee-based loyalty programmes that focus on adding more value for the best customers may be better suited for some brands. After all, many brands make most of their profits from a small amount of their top customers. Gartner Group research found that 80% of your company's future revenue will come from just 20% of your existing customers. Therefore, emphasizing customer relationship quality over quantity makes sense for many business models.

As with Amazon Prime, a fee-based loyalty programme can take the focus off spending money and gaining points to a more VIP experience that gives customers access to exclusive benefits. Once the yearly transaction is settled, the emphasis is immediately placed on adding value with soft rewards, not monetary discounts like many loyalty programmes. In exchange for the fee, Amazon is able to provide higher perceived rewards such as free two-day shipping and movie streaming.

Not only does paying to join a loyalty programme increase a customer's financial investment in the brand, it brings along an emotional commitment as well. The customer has made a conscious decision to support a particular brand and no longer needs to think about where to make their next purchase. The fee may even drive the customer to do more business in order to maximize their investment. It's a win-win for both parties.

One brand that strategically bridges the gap between free and fee-based programmes to create the ultimate experience is Latitude360, a growing chain of luxury entertainment and eatery venues. In a venue where guests can eat and drink their way through a sports theatre, live comedy shows, dine-in movie theatre, dance club with live entertainment, luxury bowling lanes, game room, and outdoor patio, Latitude360 offers three levels of memberships for their loyal customers. All levels offer a free appetizer for enrolment to incentivise sign ups.

The free Green Card is a traditional points programme that seeks to capture data and motivate loyalty for as many guests as possible. For every US$10 spent, the customer receives one point. Various rewards are available such as two free movie tickets for 10 points or a free hour of bowling for 40 points.

Where Latitude360 gets creative is with their monthly membership programmes. Instead of paying up to US$60 for an hour of bowling, customers are offered free bowling every month if they sign a four-month contract at US$25 per month with the Blue Card. In addition every month the member earns double the base level points, gets two free comedy tickets, a US$25 game card, unlimited movies during the week, and four movies on the weekend.

If the customer signs up for the Black Card at US$50 per month, all the Blue Card perks are doubled while earning triple the points. The purpose of all three programmes is to provide value, drive frequency, and increase the chances of high margin food and drink purchases while guests enjoy the venue.

Both Blue and Black members also receive exclusive access to the 360x Club Concierge service that manages their entire experience at the venue.

The Latitiude360 fee-based programme is successful because it provides more than enough value for guests to make their money back every month. The fee creates a commitment and perception of an enhanced experience. Fee-based loyalty or even hybrid programmes such as Latitiude360's don't make sense for every brand, but if done correctly, they can be very effective in maintaining and growing highly-engaged customer relationships in a greatly competitive landscape.

Whether your brand is suited for a traditional free or fee-based loyalty programme largely depends on a few key factors:

  1. Value Successful fee-based programmes are typically rooted in rewards focused on experience. Having the ability to deliver consistent value is critical in getting customers to invest in a loyalty programme.  
  2. Affinity Successful fee-based programmes are often run by brands that have strong affinity among their customers, so they are willing to make an "investment" in their brand experience.  
  3. Frequency Successful fee-based programmes are generally ideal for those brands that have regular, frequent customer interactions so the individual can extract meaningful value from the programme on a regular basis.

"The key to designing the right loyalty programme foundation is to understand your brand, and more importantly, the interactions, preferences, and tendencies your customers have with your brand," concluded Walton.

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