危 wēi danger
Retailer loyalty programmes fall in and out of fashion. Their supporters describe increased customer stickiness (particularly for retailers that become known for value in price-sensitive markets), increased average spend per customer and valuable data aggregation for market research on shopping habits. Tesco clearly believes in these benefits as it relaunched its Clubcard last summer, leading to an increase in scheme members to 15 million. However, the schemes are expensive to launch and run: Clubcard’s relaunch cost c£150m. In addition, as referenced in this Marketing Magazine blog, Tesco is quite unique: it sees data frequently and across many items, is able to change its offer using that data and can sell the data to its suppliers, turning a cost-centre to a revenue centre. Given the high costs and uncertainty of benefits Amazon would surely be crazy to launch a loyalty programme open to everyone in a similar way?
机 jī opportunity
Maybe not. Keith Melker, my friend from HBS, recently brought to my attention a slightly counter-intuitive trend in the introduction of ‘paid’ loyalty programmes in the US, and helped me understand why they’re often smarter than they appear.
Amazon Prime, launched in 2005 is one such example in which members enjoy unlimited free shipping with no minimum purchase amount. But, instead of giving membership away free Amazon charges $79 per year.
Superficially you might expect this to be taken up solely by Amazon’s most frequent customers and that the programme would be loss-making because those customers place frequent orders (which Amazon would have to foot the shipping bill for). But that assumes that customers don’t change their behaviour as a result of being a Prime member and a quick scan of various blog posts suggests that they do. In fact anecdotal evidence suggests that Amazon’s customers go from about $160/yr to $600/yr after they buy Prime. It appears that once customers pay for Prime they begin to order more (perhaps because they feel that they’re beating the system). So, assuming the combination of the Prime charge and the increase in margin per member is greater than the value lost through free shipping it’s a business masterstroke. Had Amazon given it away free the uptake might have been greater and the behaviour change might not have been as dramatic: that could have been hugely expensive.
- Re-examining loyalty programmes – perhaps deliberately offering it to a select group (rather than everyone)?
- Or even charging for it if it might drive positive behaviour change?