Is Amazon a ‘Prime’ Example for Others?
Through a special arrangement, presented here for discussion is a summary of a current article from the Mark Heckman Consulting blog.
One infrequent and yet interesting approach to adding some punch to lackluster loyalty programs involves the creation of a "pay for benefit" club that is a "premium tier" of loyalty. Membership clubs at Costco or Sam’s Club offer some examples. But in the context of most retailer’s loyalty programs, paying for benefits remains a rare occurrence.
It should be obvious that the key to being able to charge the shopper for any service or commodity is to create a viable value proposition.
Consequently, if retailers are considering a "premium tier" to their loyalty program, a commitment needs to be made in terms of investment into incremental benefits that are worthwhile to the shopper to warrant a fee.
Not a complicated concept. So why aren’t many retailers pursuing this strategy? Let’s start first with examining a few retailers that have ventured into premium, fee-based loyalty programs.
New England supermarket chain Big Y and Amazon are two retailers that have explored this concept with some success.
For a $20 annual fee, Big Y’s Silver Savings Club, introduced in 2011, offers members benefits such as:
- Deep Discount Silver Coin pricing on hundreds of items throughout the store;
- Express savings deals on thousands of items throughout the store;
- Discounts on gas;
- Discounts on movie tickets;
- Special offers and discounts at local attractions, area restaurants and other businesses;
- Opportunity to win Gold or Silver Coins (redeemable for discounts or freebies).
While "Silver Savings Club" as well as the growing membership ranks at Sam’s and Costco show the model can work, my guess is that few retailers are ready to make the commitment or investment required to support an elite loyalty program that would warrant a $25-$100 annual subscription fee.
Amazon Prime, introduced in 2005, offers free two-day shipping, free movies, and eBooks as its major features for a $79 annual fee. By providing an upgrade for moderate to heavy Amazon users, Prime shoppers feel vested in the process with their annual fee. The return on investment is easy for the shopper to calculate.
I believe Big Y and Amazon have paved the way for "fast followers" to launch their own elite programs. Done correctly, the subscription fee coupled with the incremental revenue generated from this "elite engagement" should self-fund the effort. But more importantly, they should prove to be a solid step forward for retailers looking for "new news" for programs in need of a shot in the arm … or other extremities.
Discussion Questions
Why haven’t more retailers rolled out premium, fee-based tiers to their loyalty programs? Do Big Y’s Silver Savings Club and Amazon Prime show the path to creating such programs?
Today’s loyalty programs have become an expected generic. This has the possibility of providing some new differentiation, until everyone else does it, which, over time, is predictable.
Customers have been conditioned to the concept of tiered loyalty programs via the amount of the spend in non-retail environments. Examples would be the hotel and airline industries. The more you spend, the higher the tier and the greater the benefits.
On the other hand, retailers have conditioned their customers to single-tier programs. As pointed out in the article, to break that paradigm requires having an offer that provides a level of benefits where consumers see the value in “buying up” in tiers. Like many things, that’s easier to do in concept than in reality.
Retailers haven’t rolled out premium, fee-based tiers to their loyalty programs because it takes time and effort. Most are content to offer me-too loyalty programs that provide minimal benefits to support high-low pricing schemes.
It’s not easy to create successful tier-based programs. It take creativity and infrastructure. Amazon can offer free shipping (addressing consumer desires for free and fast) and free movies and books (even if those movies and books are not current hit titles). Costco primarily offers increased cash back.
What basic need would most retailers address by offering a paid program?
What services will the retailers provide that consumers are willing to pay for? Amazon offers a clear benefit: two day shipping with paying extra and access to streaming video. Kohl’s offers different levels of loyalty benefits based upon how much you spend: extra discounts. Consumers do not pay directly for the benefit, but they have to buy a higher dollar amount during the year. Consumers will pay if the benefit is desirable.
If one is talking about an e-tailer, Amazon has an advantage because they offer such a wide assortment of products. Combine this with this fact that they also offer free movies and e-books, customers know they will recoup the investment made for Prime membership. How many other e-tailers can offer something similar? Potentially eBay, but most of their stuff is sold and shipped by the sellers directly to the buyers and a transaction in eBay is seldom “owned” by them the same way as Amazon does.
Fee-based loyalty programs often exclude lower income shoppers who cannot afford the fee. Costco is focused on higher-income shoppers and it’s working out quite nicely for them.
Big Y, well, I’m not so sure it’s successful. Big Y’s sales per square foot are consistently lower than its major competitors. Is Big Y excluding low income shoppers? Or can anyone afford $20? Perhaps they have found a sweet spot that includes all shoppers.
Recently I studied lower income regions where Giant Eagle, Kroger, and Winn-Dixie seemed to be doing well with their free loyalty card. Grocery prices and discounts were not too important since there was high EBT use. What was important was the large fuel perks and discounts at the gas stations. This gave them one up on Walmart and Aldi.
Depending on the demographics, high, middle, or low income, each store needs to be able to zoom in on what appeals to shoppers.
Loyalty needs to be a win for both the consumer and the retailer. If it is one sided, it is bound to fail. So how do you create a win-win? Amazon and Big Y have both figured out that by getting a consumer to commit, they earn more of their wallet and in return can offer true value and savings to those consumers.
I am an Amazon Prime member, so the first place I go to shop online is Amazon. I paid for Prime and I want to get my money’s worth. Prior to Prime, my wife and I made 20-25 purchases a year on Amazon. Now that we are members we make well over 100.
Paid loyalty is not as easy as it sounds. If you go down this road, you need to put a program together that provides consumers real and meaningful value (Amazon – free shipping, free content). Also, paid membership will not work for every retailer. If consumers shop you 2-3 times a year, a paid membership is less likely to be successful.
The frequency of purchase is a key factor in people buying their Amazon Prime membership. It’s brilliant, as it is a product (free shipping), and as a result of the customer’s financial investment, creates loyalty. I don’t believe it was intended to be a fee-based loyalty program.
I went to my AMC theater and did pay for their loyalty program. The reason was the immediate benefit I received, and that I know that my participation will yield a return on my investment. As a result of that investment, I’ll be more loyal to them. Hey, I paid for it, now I want to use it!
This may be an over-simplification, but in the case of AMC, they didn’t buy my loyalty. They didn’t earn my loyalty. I actually paid them to be loyal. Interesting concept!
Premium memberships fall into two groups. The first group is of customers that deserve a higher level of membership due to past purchases. For example, the Executive Platinum status American Airlines gives its most frequent flyers. This is an earned premium membership. The second group is customers who think they should have the top status. For example the Platinum credit card from American Express or Black Master Charge card. These customers will pay for status even if they don’t deserve it. The problem with most retailers is there is little status and even less they can provide that would be considered of value.
If it were easy, more retailers would have done it. While I am not familiar with Big Y, Amazon Prime is a significant benefit for those who have signed up as it should save them money over the course of a year. While I don’t know when Barnes & Noble started its membership program, I wouldn’t be surprised if this was in the last 10 years in response to Prime.
While there are 2.6B+ loyalty program memberships in the US as of 2012, only 9.5% are actively using those memberships. As a result, its probably worthwhile for every retailer to at least do some research to see if they could initiate a fee based tier to their loyalty program.
Amazon has been able to see success with Prime because it has vast amounts of resources that enable it to pay the high associated shipping costs. At $79 a year for Prime, the costs to Amazon often outweigh the benefits. Fortunately, Amazon.com is a company which is truly only concerned with long term strategy and despite slim to no profits, they are not punished in the marketplace.
Nevertheless, programs like these are incredibly successful because it serves to differentiate the retailers from already crowded marketplaces and removes a key pain point of online shopping (in Amazon’s case). As other retailers continue to realize that a true loyalty program rewards that prove effective are ones that involve some sort of mental lock in, combined with meaningful benefits (as opposed to a Safeway club card), then we will see many more fee-based, tiered loyalty programs.
There is no greater loyalty program than the one the customer pays for. Of course the trick is showing the customer that the value received will exceed the cost. Amazon Prime is obvious and just keeps getting better. How about the outrageous cost of airline clubs? Imagine paying $400+ and the results is that you fly that airline more frequently.
The problem with retailers is they really can’t think creatively. How about faster checkout for $20 per year? No brainer for me. A personal shopper anytime I visit the store for $50 dollars? I like that. Or, unlimited time to return merchandise for full credit? I’d pay for it and I would only shop at that store.
Retailers have much to offer. They just can’t think progressively.
CRM Premium Clubs have some administration tasks that perhaps retailers don’t want to take on. Versions of a premium offering, however, have been seen in play at retailers. Big Y’s Silver Savings Club always played a role in visits to that chain when our family lived in Connecticut.
Walmart has modified their Christmas layaway this year to provide a rebate to sign-up when the item is fully purchased. Naturally, credit card tie-in programs with retailers also provide premium offerings when a particular card is used. The promotional tool isn’t broadly common, but it is out there. And, when focus is given to it, it works well, both for the retailer and the consumer.
Many of these paid loyalty programs are skewed toward the more affluent consumer — David’s Costco example, for instance. Amazon’s program requires internet access, a credit card, and disposable income. The low income market could be a more of untapped market. Can conventional supermarkets provide offers beyond petro discounts with a no-cost loyalty program?
As Warren Buffet often says (and me too, now on RW), “price is what you pay, value is what you get,” so if retailers are going to emulate Amazon Prime, they’d better offer a value when they do so.
Perceived or not, Amazon Prime is a great value. Question: is it profitable? Do we know that yet?
Those attracted to the “Prime” package will be interested in the free shipping for holiday gifting. The savings for consumers in time and energy (as in gasoline, tolls, parking, gift wrapping, delivering and so on) will more than compensate those that enroll. Amazon with its thousands of suppliers from all over the world will take another bite out of the market share of those that attempt to compete in the race for low price and convenience.
PayPal will also get a free lift into other’s profits from this plan. And as for Amazon’s direct competition… well I guess there isn’t any, as of yet, which makes Amazon the showroom king in a one horse race.
I see an end to this when bank cards provide the same or very similar services as what you have with Amazon with prime and PayPal. Visa and/or Master Card should look into the benefits of creating a similar package of services or face the inevitable end game simply by becoming noncompetitive. I wonder what would happen if PayPal — or better yet, Visa — bought eBay? There’s a fun idea for discussion.
When I was checking out from Costco, a manager walked up and scanned my card. He pulled up my purchase history and explained to me that if I had been an Executive member over the last 12 months, I would have saved another $50 over and above the $55 incremental cost of the higher-level membership. Oh, and if the upgrade *didn’t* pay for itself, they’d refund the difference. Did I want to upgrade right then and there?
This pitch worked on me because: 1) it was fact-based and personalized, 2) the value proposition was clearly explained, and 3) the merchant took away my downside risk.
Ask yourself: what could you pitch to your customers that would accomplish the same three goals?
The problem with a fee-based program or fee-based tiers is that they can depress participation rates. Most consumers are pretty quick to determine whether they would get enough value for their fees and if not, they’d opt not to participate.
What does this mean? While the more limited participation may be from more engaged customers, you also miss out on the opportunity to understand those customers in the long tail of your business. This would likely result in lower understanding of the true dynamics in your business and the opportunities to recognize and reward your customers.
Adding paid tiers to your standard program works if the value proposition is truly incremental. But if you want to engage in true enterprise loyalty, you will want as much customer information as possible.
It takes an affluent neighborhood, and a retailer with high-end services to make this work. I live in a depressed area, with many low-income shoppers, so what is the upside for my business? Very little, but in our own way, we personalize the shoppers’ experience on high-end catering services all the time, and it costs nothing. Most of Costco’s profits are derived from the huge money taken in membership fees, and Amazon, well they’re Amazon and do it better than anyone else.
To do something just because you can doesn’t always make sense, which is why I think there are fewer premium tiered programs out there for consumers.
Offering a compelling difference is what is needed for any loyalty program with an extra fee attached. Amazon is successful because the Prime program offers a distinct value at a price point that makes a consumer feel that since they have invested something, they may as well shop enough to get the value out of it. Works well for both the shopper and for Amazon.
The real key is for retailers to think creatively to come up with something that would really “wow” their shoppers or their desired shoppers if they don’t already have them.
Creating consumer loyalty requires a value proposition that appeals to a significant number of frequent shoppers. Key is understanding the target shoppers needs and wants – which is something many retailers are struggling with. It will take a much clearer focus on defining and executing key deliverables for retailers to leverage a fee-based program. Retailing is working through the special discount and coupon approach based on transaction data – it will take sharper consumer insights and analytics for a retailer to develop from their current platforms
Amazon Prime and Costco’s Executive Membership work because they deliver clear, simple monetary value to the shopper, reinforced over a sufficient purchase frequency.
Not many retailers can hope to deliver this combination, which may explain why there have been relatively few attempts to create paid-tier memberships.
The benefits of premium have to exceed the cost. If a retailer can solve that equation, then it makes sense. For Amazon or a grocer it’s easier in that those retailers have a frequency of purchase with the shopper either because with Amazon they sell virtually everything, or in the case of a grocer, most of what they sell is consumable and you need to buy more a week later. For a retailer who sells product that shoppers buy infrequently, it’s a little bit harder to get that pay for premium loyalty equation right.
There are subtle differences between membership programs like the ones cited in the article and points based loyalty programs.
Amazon Prime is a fantastic example of a service that inherently drives customer loyalty, bringing us back to what often matters most: Products and services that meet customer needs will lead to repeat customers. Prime does just that, providing a value proposition that customers are willing to pay for but they do so for those explicit Prime services, not for the opportunity to accrue obscure value in the form of rewards points or tertiary benefits. This, by at least some definitions, should lead us to consider Prime as a paid service, not as a loyalty program. Customer loyalty is the inherent value reaped by Amazon in exchange for a service that is designed to address known customer pain points (shipping wait times and costs) and desires (streaming multimedia, etc).
This is, in fact, a better and more authentic lesson for marketers to learn from Amazon: Work hard to be an advocate for customer needs and desires, and influence the product roadmap as the primary driver of customer loyalty. That is something for which customers will gladly pay.
In a word – fear!
I think many retailers could create similar offerings if they weren’t so busy finding more and more ways to sell at a discount.
Many retailers struggle to identify a clear set of benefits that would warrant a premium fee. On a standalone basis, consumers are generally unwilling to pay a fee to receive discounts on a company’s core products – they feel they should be receiving those discounts anyway.
Big Y has gone outside of their core products to offer benefits on such commonly used products as movie tickets to help justify their fee. If all they had was discounts on their products, I do not think the program would succeed.
Amazon offers a clear benefit – free shipping, that makes the math easy for consumers. The easier the math on the benefit, the more consumers will flock to the program.
Most retailers haven’t rolled out premium, fee-based tiers because they have (a) no sure-fire way to identify/target high-value people who already haven’t been captured in their loyalty program; (b)within their loyalty program, no way to distinguish between truly high value and average/low value people (since many split their loyalty among several retailers, a high-value person could “look like” a low value one); and (c) no way to identify – and pay out – aspirations and values that differentiate the high-value shoppers from everybody else – therefore, scant input around which to construct a top tier.
Without the ability to appeal to peoples’ aspirations and emotional drivers – the things that get us up in the morning – they’re left with “the more you spend, the more you save” – nice, but not a game-changing value proposition.
To truly engage the top tier, you have to appeal to aspirations beyond deals on Coke and Pepsi.
Over the last decade, I’ve seen how tapping emotional drivers unique to high value shoppers accelerates program profits and payback. Hitting the sweet spot consistently boosts lift by at least 40 basis points per mailing. This is hugely profitable when run to scale.