Pay-to-play loyalty programs

19Jan10

Lately, I’ve seen some rather odd loyalty programs. Normally, you’d just sign up for free and start earning points. This is the model that airline frequent flyer programs made popular and it seems quite logical: you reward your best customers, and those who don’t spend enough with you don’t get anything in return. However, two programs I’ve seen lately are a bit different:

– A retailer charges you to buy some sort of “green bag” token, and then you get a discount whenever you bring your own bags. Use your own bag without buying the token, and you don’t get any discount.

– A restaurant charges you to join their loyalty club, and you don’t earn the fees back until several meals later. Dine there a lot without paying the fee and, you guessed it, you’ll earn nothing in return.

I’m sure these companies have their reasons for requiring a fee to join the loyalty club. It probably keeps out the lower value customers and limits the club to the biggest spenders. But I bet a lot of potentially valuable customers fail to join, to the detriment of the customers and the businesses alike.

From what I recall, Best Buy had a similar situation a while back. They used to charge for their frequent shopper club, and after they dropped the membership fees entirely, the number of people who joined the program skyrocketed. That’s no surprise: people like free. But more interestingly, the incremental revenues from the new loyalty members vastly exceeded the loss in membership fees from making the program free.

This approach can be extended to virtually any company that’s charging for their loyalty program. Rather than charge an upfront fee, either require that people achieve a certain level of spending before they can join, or let anyone join but delay their rewards until they pass the threshold from average customer to great customer. Give this a try, and I bet customers will feel more valued and shop with you more often — leading to a whole lot more revenue from your loyalty initiative.



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