The Membership model
These programs give members access to a set of exclusive benefits, usually for a fixed annual fee upfront. These “exclusive” benefits are sometimes combined with private label brands or versions of products only available to members.
Well-known examples of membership models are Amazon Prime, Costco and The Deutscher Alpenverein in Germany. Membership benefits include “free” shipping, “free” additional services (video and audio streaming) from Amazon Prime, low prices, enhanced home services, auto buying and insurance services from Costco and from The Deutscher Alpenverein discounted entry fees to climbing gyms, lower fees for overnight stays and access to courses.
Membership programs require proactive use of the service to get the benefits, which then reinforces the customer’s decision and the value of signing up. Customers are encouraged to use the benefits since they have already paid for them.
Membership programs tend to benefit from scale, as the most successful programs are typically very large.
The Loyalty model
Loyalty programs, sometimes called Rewards programs, are customer retention programs that reward repeat purchases. Most do not have an upfront fee.
Prominent examples are travel-related firms, including Delta/KLM and Marriott, regularly consumed products like Starbucks, grocery store programs and credit card rewards programs.
In a loyalty model, the primary way brands interact with customers is by sending regular updates about rewards earned, recognising their loyalty at check-in, and informing customers about how they can use their rewards.
The Subscription model
Subscription programs provide products or services to customers with an ongoing or predetermined schedule and format. They rely on direct recurring payment streams, either for continuous access to services, for episodic delivery of curated products, or for replenishment of consumed products.
Subscription models have many forms, including both monthly and annual contracts and auto-ship services. They run the gamut from digital entertainment services that are continuously available for consumption (such as Netflix and Spotify) to more episodic physical product replenishment services (such as Chewy.com and Nespresso) and to curated services (such as Stitch Fix).
Consumers are rapidly embracing what is called the subscription lifestyle: subscription offerings and consumer adoption of subscriptions have both skyrocketed in the past few years. For consumers, subscriptions may reduce the upfront cost of commitment and use of a product or service compared to other models and ad hoc purchases.
Digital entertainment subscriptions frequently have tiered pricing, sometimes including a “freemium” model, further reducing the upfront cost commitment for consumers. Episodic subscriptions are most commonly replenishment or curation models delivered on a fixed schedule, sometimes called auto-ship. They feature convenience, discovery and easy order modification for quantity and timing.
Subscription programs rely on pre-authorised credit and debit payments to reduce costs and increase stickiness.
The subscription model offers opportunities and challenges
Through SKIM’s ongoing research and work with clients in subscription businesses, we have seen that this model seems to be the most rapidly changing of the three. While it makes for a dynamic and somewhat chaotic marketplace, it also offers exciting new opportunities for brands.
Why so much change? The rise of digitally-enabled subscriptions has encouraged an influx of new competitors in many industries and markets. The shift in consumer decision behaviour has brought more change as well. Almost every consumer inflexion point in the subscription decision journey is either new or must be reimagined and reengineered. That includes everything from the consumer decision journey (where does the digital subscription journey start?) to product development (optimising channel-specific selection and pricing) to regaining lost customers.
Why do subscriptions offer new opportunities? Digitally-enabled subscriptions are a more recent development. The ability to target a specific product category or consumer segment makes the subscription model attractive for new entrants and agile brands. The direct customer relationship model and value proposition possibilities make subscription models attractive to D2C companies as a next step in their evolution. Many D2C brands already have some of the infrastructure and systems in place. In addition, the cost of entry for a brand is much lower than for Membership or Loyalty programs. We recommend that D2C brands and new market entrants consider this model first.
In Part Three, we will use a habitual-deliberate loop framework to discuss changing consumer decision behaviour that is developing related to these direct relationship models. We will also offer recommendations and next steps to implement and optimise direct relationship models.