THE CLARUS Blog

How Amazon Paved the Way for Premium Loyalty Programs

Amazon realized long ago that building the best premium loyalty program in the world would require listening to their customers. The story you’re about to read outlines the current state of retail, what Amazon did to get ahead, and how other retailers can compete today.

Retail is rapidly changing, and loyalty is no exception.

Consumers are demanding more, competition is fiercer than ever, and customer loyalty is decreasing – a lot.

Most of that withdrawal can be attributed to customers flocking to the most evolved programs that are more aligned to their expectations and needs.

While that benefits a select few, for most retailers, that means a shrinking customer base, less lifetime value and possibly the demise of a program.

Customers are Changing How They Shop

With the exponential evolution of the internet and e-commerce over the past couple decades, consumers have been gifted with the power of choice.

With so many websites to crawl through, consumers are no longer restricted by where they purchase an item, who they get their content from or by what time they want to do some window shopping.

It’s not just digital anymore. An omnichannel experience is what consumers want and expect.

They also expect lower prices online and they’re using Amazon as a search engine to find products.

These consumers are now constantly evaluating your brand to determine whether it’s worth their money, support, and most importantly— their time.

In addition, more than half of U.S. online consumers begin their product searches on Amazon.

Historically, retailers have tried to win over and keep these consumers with traditional loyalty models of transaction first, benefits later, but that is proving to be unsuccessful today.

The status-quo loyalty programs of the past just aren’t enough to keep the modern-day consumer from browsing at your competitors.

Loyalty Fatigue is Kicking In

The average US household is a member of 29 loyalty programs.

Are those programs benefitting retailers?

In a recent survey, 77% of all consumers interviewed admitted they now retract their loyalty more quickly than they did three years ago. With that quicker retraction, retailers are now prone to missing out on that valuable customer that provides brand advocacy and increased purchasing.

So, why are they retracting so quickly?

The reasons vary, but typically members lose interest because they either don’t understand the benefits or the incentives aren’t worth the purchases they must make to get them. Many don’t even sign up or use the programs in the first place because they don’t understand the value proposition and the benefits don’t appeal to them personally.

Loyalty is a Two-Way Street

The traditional method of forcing customers to spend large sums of money in exchange for small, delayed monetary rewards seems very one-sided.

The actualities of the traditional loyalty space clearly don’t match the expectations of the today’s consumer.

The loyalty program members that do stick around have simply been trained to wait for coupons and receive discounts on the commodities they would need to buy anyway. Billions of dollars are wasted on these traditional programs that don’t do much to foster loyalty.

Consumers need to get immediate value and in exchange the retailer needs to get not only increased engagement but useable data that can be used to tweak and optimize business strategies.

It’s Time to Rethink Loyalty

Loyalty is being reinvented every day as your customer is evolving. The biggest potential cost companies have today is not evolving your loyalty program with your customers.

The typical grocery store loyalty program does not reward loyal behavior; it rewards card ownership. Consumers are given discounts on the commodities they would buy anyway.

In other cases, traditional loyalty programs have simply trained consumers to wait for discounts thus earning loyalty programs the reputation of margin killers. Most companies view these traditional programs as costs.

The above paints a bleak picture of the loyalty space, but in every stumble, there is an opportunity for education and adjustment. Thus, it is important for businesses to set their sights on a new form of loyalty program.

Amazon Prime is the Best Loyalty Program of all Time

Most loyalty in its current form is not generating the value it could. That’s why many brands across many industries are making the switch to Premium Loyalty Programs.

The core of Amazon’s growth comes from its Premium Loyalty program, Amazon Prime.

Amazon Prime has been the most successful. Amazon Prime members spend 4.6x more money on Amazon than non-Prime members do.

What Made Amazon Prime So Successful?

Amazon addressed the users’ biggest pain point.

For Amazon it was shipping costs. For many stores this is pricing or lack of repeat purchases.

Amazon focused on the needs of their best customers first and then added to the program over time.

Focusing on the short-term benefits of a long-term strategy can feel counterproductive but it helps justify the ongoing investment in your customers and allows you to add more benefits to get more casual users interested in the program.

They are investing in the customer, not the product.

Instant gratification is more important now than ever before and premium loyalty programs like Amazon Prime give users the benefits immediately.

Charging their customers allows Amazon to offer their best benefits to customers who will get the most value out of their loyalty program. The free trial is a vital component here as well, so more users can see if it fits how they use the product.

“Start your free trial and get the premium benefits right now.”

Charging is a two-way commitment.

Psychologically, Amazon Prime members want to make additional purchases to justify the membership cost.

Equally as important, Amazon has made sure they are committed to running a program that’s increasingly valuable to their members along with the option on their first purchase to try the best benefits right away. This is the definition of a Premium Loyalty program.

Read more about Premium Loyalty and what it means for retail here.

Premium Loyalty is Expanding

Premium Loyalty isn’t a new concept, but it is seeing a renaissance.

Millennials are quicker to switch brands than any other demographic, but that’s quickly becoming the norm across the board. That’s why many retailers across many industries are investing in Premium Loyalty Programs, not just Amazon.

Brands like Bed Bath & Beyond, Costco, GameStop, and Restoration Hardware are onboard seeing the benefits.

Will Customers Pay for a Premium Loyalty Program?

Do you have an Amazon Prime or Costco membership?

According to a recent survey, 76 percent of millennials would consider joining a fee-based rewards program from a favorite brand, compared to 61 percent of Gen Xers and 48 percent of Boomers. Acceptance of subscription products (Netflix, Naturebox, Spotify, etc.) is high among young shoppers.

62% of respondents said they’d consider joining a fee-based rewards program if their favorite retailer offered one. This number was even higher among Millennials with 75% of 18-24-year-olds and 77% of 25-34-year-olds saying they’d consider joining a fee-based rewards program.

65% said customer rewards are worth paying for if relevant to their needs. Millennials, again, rated this even higher with 79% of 18-24-year-olds and 76% of 25-34-year-olds saying relevant rewards are worth paying for.

Nearly half (47%) said rewards in fee-based programs are better than rewards in free programs. A significantly larger number of millennials – 61% of 18-24-year-olds and 54% of 25-34-year-olds – said fee-based rewards are better, compared to all other generations.

If the program offers enough value, customers will sign up.

Challenges in Launching a Premium Loyalty Program

Most retailers already have a loyalty program that is free to sign up for.

Premium Loyalty doesn’t need to replace this program.

Free loyalty is great for turning rare customers into occasional customers, but premium loyalty is better at turning occasional customers into loyal customers.

Both programs can help the other, but if you’re going to invest in one, you’re always better off investing in your best customers rather than occasional customers.

Many retailers think of loyalty as free and are uncomfortable charging customers for it.

That’s understandable, but with free loyalty Programs there is unlimited share of wallet. That’s not true for premium loyalty programs. Sooner is almost always better than later. That’s another reason Amazon Prime has done so well.

Premium loyalty takes a distinct set of tools.

Building and running paid loyalty program is different than a free problem. Most companies don’t have the experience and infrastructure for creating these programs. Luckily, there are partners out there that specialize in building premium loyalty programs at little to no cost for the retailer. This way, the retailer can focus on their business and not have to worry about the loyalty program.

What do your customers want?

Every company is different. Every customer is different. That’s why loyalty can’t be won with an-off-the-shelf program.

It’s clear that we are seeing a significant shift in what consumers want, and how important premium loyalty programs are for the future of customer-facing industries.

The businesses that appeal to this new loyalty revolution will be the ones that will reap the rewards that come with happier and more engaged customers.

Are You Ready to Go Premium?

If you want to become a 24/7 presence in your best customers' lives, it's time to get started.