Building loyalty through membershipsFriday 14 May 2021
The Covid-19 pandemic has hit the leisure industry hard – but the recovery presents a once-in-a-lifetime chance for leisure service operators to reconsider their business model and seize opportunities to grab wallet share from customers who start to consume leisure services again.
Shift towards subscription economy
2020 has seen consumers sign up for paid memberships in droves – continuing a long-term trend towards a subscription economy.
In a recent OC&C survey, we found that the average US household spends USD 240 per month on membership and subscription products, across an average of 12 different products and services.
We also found that younger generations tend to adopt this mode of consumption more than older generations: On average, Millennials were subscribed to 17 contracts, whereas Generation X to 13 and Boomers only 8.
Some leisure sectors such as gyms, golf and country clubs have always used paid memberships, but others are rapidly pivoting their business models toward more memberships, including amusement parks, cinemas and ski resorts. Amidst the massive changes coming out of COVID, we see several of the more traditionally non-subscription sectors like hotels and resorts, airlines and restaurants, experimenting with subscription models. For example, KFC and McCafe in China both introduced coffee passes for a fixed subscription amount per month.
Paid memberships have also increasingly been introduced in retail, initially by buyers’ clubs like Sam’s Club and Costco, and now widely adopted by grocery and convenience store chains and by major E-Commerce platforms.
Differentiating membership models
Paid memberships are not all the same. We look at them as three models:
- Unlimited access – Which caters to regular customers who want to increase access to a core product and can save money by consolidating their spend with one operator. This subscription model is often found in cinema chains and amusement parks, where the delivery of one unit of additional service does not create any additional cost (as long as the provider has sufficient available capacity).
- Pre-payment – Which consists of paying in advance for a specific product or service (e.g. one meal per day) or adding to a cash balance that can be spent later. We find this subscription model in sectors where the delivery of the product does generate some extra variable cost, such as restaurants and coffee chains and individual transportation providers (e.g. Uber). This model is also adopted by buyers’ clubs like Costco who provide members access to attractively priced products against a one-time subscription payment that customers typically amortize in 4-5 trips to Costco stores.
- Enhanced benefits – This is typically found in sectors where the product/service offering itself can be differentiated and houses inherent value, such as in offering corner rooms in hotels, lounge access in airlines, as well as expedited shipping in e-commerce platforms
The value of memberships
Paid memberships add value to operators in a variety of ways by enhancing customer loyalty and increasing customer lifetime value, as discounts and perks encourage more transactions that help maximize revenue generated over time from each individual customer.
Additionally, paid membership programs create a complementary revenue stream that can improve the economics of the business, as food and drinks in a cinema or an amusement park.
It also increases accuracy of revenue forecasts because members’ business tends to be more stable and predictable, and improves cashflow thanks to payments made by customers in advance of their consuming the products and services that they are subscribing for, and serves as a differentiating factor from competitors.
Developing successful membership models
However, running a successful membership or paid subscription program is not easy. We identified four common success factors of best-in-class membership programs:
- Unlimited is rarely unlimited – It is critical to implement the right guardrails to ensure profitable usage. This can involve limiting access to certain locations or products and limiting how often or easily customers can access them. For example, in “old school” time share programs, usage was often limited to one single property, one week per year. In more recent timeshare programs, points are accumulated and can be spent for different levels of service quality and duration across a variety of properties, but there is careful attention given to yield and capacity management to avoid potentially costly disconnects between demand and supply. China KFC’s Coffee membership offers 50% discount to coffee products twice a day.
- Don’t forget the popcorn – Attractive incremental value is typically created through on-site spend. Cinema chains understood this a long time ago, and have been capturing a lot of value by selling food and drinks to captive customers once they have checked in for a movie. A detailed understanding of customer economics is required to price at the right level to drive uptake, and to make profit on the total basket.
- Start small, think big – Layer benefits over time to broaden the appeal as customers increase their spend. Programs sometimes fail because they have offered too much, too soon, without first understanding customer response and economics. Dosage of benefits and perks at each level of the program, and understanding their economics, is critical to sustain their attractiveness yet keep costs in check.
- Sell-into the existing booking journey – Pricing and introductory offers should make upgrading a one-time purchase the obvious choice. For example, best practice online travel agents clearly communicate the value benefits from becoming a premium member, then frequently nudge customers during their travel product selection process to upgrade their account to a premium membership, and allow customers to upgrade and save immediately when they check-out, so that they can see the immediate tangible benefit of having joined the program.
If you don’t lead, you will likely have to follow. Memberships succeed by capturing share and inducing stickiness. Once a program is offered by a competitor, most businesses have no other choice than to respond quickly to secure their own best customers – and win from smaller operators. Typically, being the first to market with a smart membership product has been a key driver of competitive advantage.
Disruption often also comes not from within, but beyond, such as with Movie Pass (a non-cinema owning start-up) that pioneered the subscription model for cinemas and rapidly led to major chains introducing similar in-house programs.
For leisure operators and retailers planning to start or enhance an existing membership program, here are four key questions to keep in mind:
- How can you meet the needs of an increasingly ‘unlimited’, subscription-led society?
- Are there assets in your business which have unmonetized customer value? How could these be combined as part of a membership program?
- How could a membership program transform your business’ economics?
- What does this mean for your existing loyalty / membership scheme?
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