What: The demands of the pandemic have challenged customer loyalty and increased the value of paid loyalty programs for companies that do them right.

Why is it important: McKinsey’s latest research on consumer outlook showed that 35% of United States consumers have tried a new brand since the pandemic began and 77% have also tried new shopping behaviors, including new channels, stores, and brands. The reasons for the extraordinary shift include product availability and price, and the trend stresses the broader challenge to traditional loyalty models and programs. The shift away from points-only loyalty programs was already well underway when the crisis hit. In this new concept, paid loyalty programs offer an attractive option for companies both to attract new customers and to shore up long-term customer value during a tectonic shift in consumer loyalty and preferences.

Members of paid loyalty programs are 60% more likely to spend more on the brand after subscribing, while free loyalty programs only increase that likelihood by 30%. Paid loyalty programs also drive higher purchase frequency, basket size, and brand affinity compared with free loyalty programs. Paying members are thus worth several times more than nonpaying members, even setting aside revenue from membership fees themselves.

Paid loyalty:

Paid loyalty programs can resemble traditional loyalty programs with just one small catch: a participation fee. Paid programs have a higher burden of proof to acquire customers, but they typically obtain higher customer value from those who sign up. When done right, paid loyalty elevates the overall consumer experience, delivering customized, high-value rewards and drawing the consumer into an exclusive community oriented around a shared brand promise or offer.

When paid loyalty makes sense:

Paid loyalty programs will suit some industries and business models more than others. Here are two business objectives that paid loyalty programs may help accomplish:

1. Funding premium rewards that are too expensive to offer more broadly: Some companies have responded by quietly paring back or devaluing their loyalty offerings, a solution that only serves to exacerbate the problem by leading consumers to engage less with the brand. On the other hand, some winning companies are shifting the loyalty paradigm itself by bolstering their offerings and charging customers an access fee to help fund more-expensive premium benefits. As an example, Lululemon’s paid program offers members free goods, exercise classes, and exclusive digital content as part of its $128 subscription fee. While Lululemon’s program is still being piloted in select cities as of 2020, the company has touted its early success. Lululemon CEO Calvin McDonald indicated that the program’s results have exceeded expectations in every pilot market to date.
2. Locking in customers in a highly fragmented or undifferentiated line of business: Some companies have responded by quietly paring back or devaluing their loyalty offerings, a solution that only serves to exacerbate the problem by leading consumers to engage less with the brand. On the other hand, some winning companies are shifting the loyalty paradigm itself by bolstering their offerings and charging customers an access fee to help fund more-expensive premium benefits. As an example, Lululemon’s paid program offers members free goods, exercise classes, and exclusive digital content as part of its $128 subscription fee. While Lululemon’s program is still being piloted in select cities as of 2020, the company has touted its early success. Lululemon CEO Calvin McDonald indicated that the program’s results have exceeded expectations in every pilot market to date.

In industries where multiple companies offer comparable products, and where environmental considerations, such as location or hours, may otherwise override brand preference, paid loyalty’s up-front pricing can help a company lock high-value customers into its ecosystem and reduce brand switching. For instance, the CVS CarePass program, which charges a $5 monthly fee, offers its members 20% off all CVS Health brand products in addition to premium services like free shipping and a 24/7 pharmacy helpline. Brands struggling to compete in a highly fragmented or undifferentiated market should consider paid loyalty as a means of acquiring consumers and creating an economic loyalty loop, where the paid features make it unfavorable to switch brands.

Getting paid loyalty right

Paid loyalty can suit several business needs, but the program must be designed with care to ensure value for both the brand and the paying customer. Based on consumer surveys and research into existing programs, we suggest there are three primary factors on which paid loyalty programs must deliver:

1. To drive sign-ups, benefits must clearly outweigh fees: Paid programs typically offer enticing benefits, but the sign-up fee can be a psychological barrier for some customers. If you’re going to charge, you must proactively demonstrate your value.
2. Retaining customers rely on offering more experiential advantages: Hard-value benefits like discounts and free products may hook consumers into the program, but they are not enough to retain them. Brands must use the membership fees to invest in exclusive offerings with more emotional resonance, such as access to personalized experiences or members-only content.
3. Keep engagement levels high: It is critical to win the subscriber early and continuously, offering benefits that can be used immediately upon sign-up and frequently thereafter. Retaining customers past the critical first renewal requires brands to adopt more nimble and everyday means of rewarding their members, as well as a robust marketing program to keep them engaged.

Brands that successfully execute the pivot to paid loyalty programs will open a new element of surprise and delight to their strongest customers. In a world where personalization is the frontier of consumer engagement, paid loyalty is a winning strategy.

Paid loyalty programs bring consumers back to brands