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 its 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.

This paradigm shift 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

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

And COVID-19 has accelerated that power of choice among consumers.

According to data from IBM’s U.S. Retail Index, the pandemic has accelerated the shift away from physical stores to digital shopping by roughly five years.

With more consumers shopping online than ever before, it makes choices virtually unlimited.

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, even throughout the pandemic.

They also expect lower prices online and two-thirds of them are using Amazon as a search engine to find products.

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

Historically, retailers have tried to win over and keep these consumers using 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 enrolled in more than 18 customer loyalty programs but is only active in 8.4.

Are those programs benefitting retailers?

In a recent survey, 78% of all consumers interviewed admitted they now retract their loyalty more quickly than they did five years ago. Given that quicker retraction, retailers are now prone to missing out on those valuable customers that provide 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 realities of the traditional loyalty space clearly don’t match the expectations of today’s consumers.

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 receive immediate value and, in exchange, retailers need to get see only increased engagement, but leverageable data that can be used to tweak and optimize business strategies.

It’s Time to Rethink Loyalty

Loyalty is reinvented every day as your customers evolve.

The biggest potential cost companies have today is not evolving your loyalty program with your customers, especially as we venture into a strange new world post-pandemic.

Program alignment with customer expectations is critical for success.

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.

It is important for businesses to set their sights on a new form of loyalty program – a type of program that Amazon popularized back in 2005, but one that has picked up steam.

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.

The program has been hugely successful, with Prime members spend twice as much as non-Prime members do.

What Made Amazon Prime So Successful?

Amazon addressed its customers’ biggest pain point – shipping costs.

Prime initially focused on the needs of Amazon’s 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 members the benefits immediately.

Charging members an annual fee allows Amazon to offer its 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 consumers 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 important, Amazon has made sure it’s committed to running a program that’s increasingly valuable to its 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

It isn’t a new concept, but premium loyalty is on the rise.

Millennials are quicker to switch brands than any other demographic, with 74% saying they will join another premium loyalty program, 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.

While Amazon’s customer problem was free shipping, every retailer is different and its customers value different things.

Focus on your customers and their specific pain points.

Take Restoration Hardware for example.

When buying high-end furniture, you want to make sure it looks and functions well in your space. So, in addition to instant discounts, RH offers interior design services as a benefit of its loyalty program.

A healthy and active lifestyle is important for Lululemon customers, so its loyalty program focuses not only on free shipping and merchandise but also includes access to in-person and virtual sweat classes.

Even Walmart was able to launch their own successful premium loyalty program alongside Prime. Walmart+ focuses on grocery delivery, gas discounts, and other in-store experiential benefits like scan & go. These are all valuable to its members.

Other brands like Overstock, Wayfair, and CVS have found success with premium loyalty as well. They’re all onboard and reaping the benefits.

While Amazon brought premium loyalty into the spotlight and other retailers have joined in, Walmart really cemented the trend when it launched Walmart+ in September.

Learn more about the megatrends leading to the rise in premium loyalty.

Will Customers Pay for a Premium Loyalty Program?

Do you have an Amazon Prime or Walmart+ membership?

Seventy percent of consumers would join a premium loyalty program if their favorite retailer offered one and the benefits were valuable.

Not only are your customers eager to join, but a recent 2020 McKinsey survey on loyalty programs found that members of premium loyalty programs are 60% more likely to spend more on the brand after subscribing, while free loyalty programs only increase that likelihood by 30%.

Premium loyalty programs drive higher purchase frequency, basket size, and brand affinity compared to free loyalty programs, according to the McKinsey survey.

As a result, premium loyalty members can be worth significantly more to a brand than non-paying members.

McKinsey also cites in its report that 83% of consumers expect personalized content and experiences from their favorite brands, which premium loyalty programs are uniquely positioned to provide.

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 an unlimited share of wallet.

This isn’t true for premium loyalty programs. Sooner is almost always better than later. It’s another reason Amazon Prime has done so well.

Premium loyalty takes a distinct set of tools.

Building and running a premium 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.

A premium loyalty partner can help your brand in many ways.

To begin with, a premium loyalty partner is comfortable with a recurring billing subscription model. This is a key factor in any premium loyalty program and you want to partner with an expert in this area.

A premium loyalty partner helps you keep your brand experience front and center with all your program messaging.

Focusing on your best customers is an integral part of any premium loyalty program. A premium loyalty partner helps with creating loyalty moments that create emotional connections, which ultimately result in long-term retention.

This way, you can focus on your business and not have to worry about your 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.

88% of consumers are likely to choose a retailer whose premium loyalty program they belong to over a competitor that is offering a lower price.

Retailers that move with this new loyalty revolution will be the ones that will reap the rewards accompanied by happier and more engaged customers and be top of mind with consumers in a post-COVID world.

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.