Can a Fee-Based Loyalty Program Work for Your Brand?

American consumers increasingly desire enhanced experiences across the retail spectrum. From shopping at department stores to weekly grocery trips, many are willing to pay for benefits that resonate and simplify their lives. Smart companies are acknowledging that fee-based membership or loyalty programs that offer enhanced benefits are a way to better serve their customers while differentiating themselves from competitors.

Evidence of the pay-to-play trend is plentiful. Wal-Mart is rolling out a $50 per year fee-based delivery program called "Shipping Pass," an offering that's widely viewed as a challenge to Amazon Prime and its $99 annual fee. Jet.com is another emerging membership-based shopping club promising low prices for a $49.99 fee.

In addition to the marketplace developments, recent research shows that shoppers will pay and stay loyal for the right benefits — particularly young adults.

A LoyaltyOne nationwide survey of 1,005 consumers in May addressed the "fee vs. free" loyalty program dilemma. Here are some the key findings:

• Sixty-two percent of respondents said they would consider joining a fee-based rewards program if their favorite retailer offered one. Among millennials, the numbers jumped to 75 percent of 18-24 year-olds and 77 percent of 25-34 year-olds.
• Sixty-five percent of respondents said customer rewards are worth paying for if relevant to their needs. Millennials, again, rated this even higher, with 79 percent of 18-24 year-olds and 76 percent of 25-34 year-olds in agreement.
• Nearly half (47 percent) said rewards in fee-based programs are better than rewards in free programs. A significantly larger number of millennials — 61 percent of 18-24 year-olds and 54 percent of 25-34 year-olds — said fee-based rewards are better.

Clearly, the survey indicates significant consumer willingness to pay for additional benefits through membership programs when they perceive value. Retailers can capitalize on this opportunity as they look for ways to create competitive differences and increase customer spending.

Fee-based loyalty strategies offer benefits such as the following:

• increased commitment from customers, who typically feel compelled to take advantage of the benefits they've paid for;
• instant gratification for customers, as benefits begin immediately without having to achieve pre-set purchase or activity levels; and
• favorable economics that provide greater resources for exceptional benefits, with funding not dependent on incremental spending, as with most free programs.

While the survey results make a strong case for fee-based strategies, in reality they may not work for every brand. Retailers considering implementing this type of loyalty program should begin with these guidelines:

1. Determine the customers to target and the desired results. As with any marketing initiative, establishing clear goals and objectives sets the table for success. Identify the customer segments most likely to participate and the corresponding desired outcomes. For example, engaging customers who spend in the top 10 percent requires a different approach than the middle 50 percent.

2. Recognize the primary potential roadblocks and opportunities to drive the desired customer behavior. Look deeply into customer data to discern gaps in the customer experience that create barriers, such as price, effort required, risk, convenience, choice or an emotional consideration (e.g., fear of commitment).

3. Prepare solutions to overcome roadblocks. Adopt the customer perspective and mind-set to develop answers that address both rational and emotional objections. Issues such as a customer’s need for time savings or reduced risk can be powerful influencers for the right segment.

4. Consider how to bundle program benefits. Figure out when, where, how and why the customer interacts with your brand, then organize and package the program components based on those answers.

5. Ensure the initiative aligns with your broader product or service offering and brand identity. Economic projections may be favorable, but fee-based programs can fail if not in step with a company’s goals and norms. The offering needs to fit into the broader value proposition, brand narrative and front-line employee culture.

As the research shows, consumer expectations have evolved to the point where fee-based memberships are not only acceptable, but anticipated. This understanding, combined with a focus on delivering meaningful value and utility, makes exploring a fee-based membership program far less of a gamble — and potentially a differentiator in today’s competitive marketplace.

Lance Du Chateau is associate partner, LoyaltyOne Consulting, a firm specializing in loyalty and customer experience strategy.