How do membership and loyalty programs differ? Why do some succeed while others sink? Let's find out.
Memberships and loyalty programs address a universal business challenge: Customer retention
Harvard Business Review notes that acquiring a new customer can be 5 to 25 times costlier than retaining one. While marketing is essential, focusing on retention can increase profits in some sectors by over 25%, with just a 5% increase in customer loyalty.
In this post, we’ll give a brief overview of loyalty and membership programs, their effectiveness, and highlight some real-world examples.
A quick(ish) overview of membership programs
Membership programs require customers to pay a recurring fee for immediate benefits, offering superior perks because members pay extra for enhanced loyalty and engagement. The perceived value to members lies in these rewards.
One big advantage of membership programs is their predictable revenue from direct membership fees. They're straightforward for brands to manage and for customers to grasp since the program's value directly correlates with membership count and the resulting revenue.
That said, the success of a membership program hinges on consistently delivering value. Valuable membership programs retain customers and increase revenue, but lackluster ones can be detrimental.
Common membership rewards include:
- Community access - A new way for customers to have their loyalty rewarded, community access involves members getting exclusive access to a community space where they can socialize with other members of a loyalty program. These “brand communities” are a revolutionary, modern form of customer engagement. Brand communities can also be an excellent source of valuable feedback from a brand’s most loyal customers.
- Exclusive content - Members-only products, services, content, and more are examples of common rewards given exclusively to those invested in a membership program. This can be incredibly effective, but also costly as additional content now has to be created exclusively for members.
- Early access - As an alternative to exclusive content, membership programs will sometimes give their members early access to the content that everyone else will eventually get. This is a simple but effective way to demonstrate value to members.
- Special benefits - Member discounts, free shipping, and special offers all fall under member-exclusive benefits.
Examples of some popular membership programs include:
- Amazon Prime - Perhaps the most popular modern membership program, Amazon Prime’s $14.99 per month fee gives customers free shipping, special savings, and exclusive access to their Prime Video catalog. With over 200m members and a 99% renewal rate, it’s an incredibly effective customer retention tool.
- Costco Membership - Costco’s $120 per year membership is required for customers to gain access to their exclusive shopping centers. However, membership means that customers get access to exclusive offers, products, savings, and cheaper gasoline. Costco is able to gate its products and services behind a membership fee by providing an incredible amount of value to its customers.
A quick(er) overview of loyalty programs
Loyalty programs reward customers for repeat business.
They're typically free to join, offering various benefits depending on the brand's strategy. Not only do they incentivize purchases, but they also promote continued brand engagement.
Customer engagement goes hand in hand with loyalty programs as it’s tied to what makes your customers want to stick with your brand. Examples of engagement include making purchases, leaving reviews, and interacting with customer service. Brands should cultivate this engagement, and loyalty programs are one effective tool.
Key loyalty program features include:
- Points systems - Brands grant points for specific actions, like purchases or referrals, which can later be redeemed for a reward.
- Rewards - Free or discounted products, exclusive products, or special events are all forms of rewards that your customers may receive from engaging with your loyalty program. Rewards are most effective when personalized to your customers' individual interests.
- Tier levels - Earn enough points or make enough purchases and a customer may achieve a higher tier of loyalty. Loyalty programs will often tie better benefits to higher tiers of loyalty.
Examples of popular loyalty programs may include:
- Starbucks Rewards - Starbucks coffee has one of the most popular loyalty programs out there. The simple program lets customers accumulate points with each purchase, which can be exchanged for free drinks, snacks, and other items. All rewards are seamlessly managed via the Starbucks app, simplifying the order and pickup process. Starbucks Rewards added an impressive $2 billion to Starbucks’ revenue in 2022.
- American Airlines AAdvantage - This classic loyalty program involves members earning “miles” instead of points. These miles are directly tied to the distance that they travel during their flight. Miles can be spent on free items, upgraded seats, and even free flights. AAdvantage also has membership tiers that customers can ascend as they fly more. High tiers enjoy better benefits, such as complimentary upgrades and an exclusive airport lounge.
Key differences between loyalty and membership programs
With these two different approaches to rewards programs, you’re probably wondering: Which one is better?
Well, neither exactly comes out on top as always better for every situation. When building a program to increase customer retention, brands take a lot of different factors into account. This could be customer desires, the specific industry they’re in, the resources they have available, and more. Only you know your brand's exact situation, so we can’t speak to which program is better for you.
What we can do is highlight the key differences between these two program types to help your brand understand which could be better for achieving your customer retention goals.
Membership programs charge an upfront fee, offering customers exclusive benefits. In contrast, loyalty programs reward customers based on purchase frequency or brand engagement.
For a membership program to succeed, its tangible value must be clear and appealing to potential members. It's akin to visiting a gym before committing to a membership; you need to see its value firsthand.
Loyalty programs, however, react to customers' interactions with a brand, offering rewards for purchases and engagement. They must be enticing and user-friendly to genuinely foster loyalty. If loyalty isn’t properly rewarded, customers won’t feel incentivized to be loyal!
Which structure fits your brand best?
With these key differences established, you may see why the goals of your brand, your target audience, and industry positioning matter so much. A subscription-based brand that offers regular shipments of goods over an extended period of time may smoothly integrate a membership program into its structure. While another brand dealing with a high volume of quick, small purchases may garner more benefits from a loyalty program that involves points.
Additionally, you have to consider the budget and resources that your brand has available. A program that’s meant to improve customer engagement will never get off the ground if it’s not properly planned and executed. Be realistic about the amount of value that you expect a loyalty or membership program to generate and how much you can afford to invest in the program. But, also consider the dividends that increased customer engagement can eventually generate.
If this is all too daunting, we’re here to help! Partnering with a customer engagement expert is the best first step for testing the water for a loyalty or membership program.