The silly season of retail is upon us. Last week was the biggest Black Friday ever, and continues to be the busiest shopping day of the year. The only problem is that Black Friday is a glaring example of everything that is wrong with the retail industry today.
I don’t think it’s hyperbolic to say the entire mindset of most retailers is to trick you into buying more stuff. The goal is to sell lots and lots of units. Hence all the Black Friday discounts and deals.
And after the sugar rush of the holiday season fades, how do they encourage us to keep buying more stuff? They reward us for our “loyalty.” They offer us membership cards, coupons, points. United gives us miles. Starbucks gives us coffee. Safeway gives us discounted gas. And we are trained to expect it.
It’s a completely messed up system; a total race to the bottom. In fact, I think it’s one of the main reasons that US retailers closed more than 5,800 stores last year. This year they’re on track to close over 9,000. It doesn’t have to be this way.
Retailers are basically paying us to be loyal customers. But what if they flipped the script? What if they asked us to pay them to be loyal customers? Sound crazy? Well, that’s actually what some of the most successful retailers in the world are doing today.
Think Costco. Costco makes hardly any money on the products it sells, but it’s a massively successful business that has been called “Amazon proof.” Why? Because it asks its members to pay for memberships. Membership sales represent about 2% of Costco’s overall sales, but practically 100% of its profits.
When someone pays $60 for an annual Costco membership, they are literally and figuratively investing in Costco. They understand that it’s in Costco’s interest that members receive way more than $60 for their membership, so the deal makes sense. But more importantly, Costco members demonstrate active loyalty, as opposed to just passively receiving freebies.
Not surprisingly, the Costco model is catching on. As Retail Prophet notes in an article titled Why Paid Memberships are the New Loyalty, “Getting a customer to lay down a membership fee forms an entirely new degree of mutual commitment. Even a small sunk cost will make a customer implicitly more engaged with a brand.”
Think Loblaw, Canada’s largest grocery chain. They’re rolling out a $99 dollar a year membership program that includes perks like free “click and collect” grocery shopping to over 600 locations. Their pilot program was so successful they had to turn customers away!
Think Lululemon. For $128 dollars a year, their members get free clothing, expedited shipping, and special access to workout classes. Think CVS. For $48 a year, their CarePass members get discounts, free deliveries, and direct pharmacist access. Think GameStop. Their program costs $19.99 a year (or $14.99 with a digital subscription), and includes extra trade credit as well as access to game launch events. All of these programs are successful and expanding.
And finally, of course, think of the big daddy of all paid membership programs, Amazon Prime. Costco Co-Founder Jim Sinegal famously explained his business model to Jeff Bezos in a Starbucks in 2001, and now Amazon Prime is in half the households in the United States.
Retailers should be asking their customers to pay for loyalty programs, not the other way around. They are discounting themselves to death! Besides, most loyalty programs don’t even work. A 2017 Accenture study sums it all up: “Organizations are wasting billions of dollars each year on customer loyalty programs that don’t work.”
But when companies put paid programs in place, suddenly everything changes. For starters, they have a brand new revenue stream that they can use to invest in new customer centric ideas. And instead of talking about margins and mark-ups, they’re talking about membership churn and retention. Instead of discounting products, they’re developing relationships.
Could a paid membership program have saved Sears? Could it have saved Borders? Could it have saved Gymboree? Who knows? But I suspect that they would have had a much better shot at surviving the retail apocalypse with legitimate paid loyalty programs.
If you’re a retailer, you should be asking: what is the relationship that your customers would choose to invest in, to sign up for, to subscribe to? Otherwise you’re not building real loyalty, you’re just trying to buy it.
For more insights from Zuora CEO Tien Tzuo, sign up to receive the Subscribed Weekly here. The opinions expressed in the Subscribed Weekly are his own, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.
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