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To Fee or Not to Fee? What Charging for Loyalty Can Get You

Let’s make one point clear: Fee-based rewards are not pet rocks.

Sure, some major merchants have recently launched fee-based loyalty initiatives, but that does not make the concept a fad. Rather, a retailer’s decision on whether to apply a fee to its rewards membership – or not – is very strategic in design.

Indigo_ExteriorConsider the recently launched shopping club Jet.com. Or Walmart’s new delivery program, called Shipping Pass. Each charges about $50 a year and is considered a shot across the bow at Amazon Prime, a successful program that charges $99 a year for free two-day shipping as well as video streaming.

With an estimated 44 million members, Prime is not a fad. Nor is iRewards, the fee-based rewards program operated for years by Canadian chain Indigo Books & Music. Rather, they are functions of each brand’s proposition.

In fact, both also offer free programs alongside their fee programs. Amazon recently launched the Amazon Prime Store Card, which instead of points gives its members 5 percent back on purchases. Indigo, meanwhile, in September will change its long-serving rewards program, called plum, a points-based loyalty initiative – more on that soon.

The takeaway is that fee and non-fee programs not only co-exist successfully, but that they also can co-exist under the same brand. The task is ensuring each model services the retailer’s mission, as well as the predetermined needs of loyal customers.

Indigo’s approach, by the book

To appreciate the strategy that goes into the fee/no-fee decision, it helps to review the evolution of Indigo and its programs.

With iRewards, Indigo gave its customers the option to self-select memberships, the net benefit being discounts on books. It also helped segment is customer base: By setting a fee (now $35 a year), Indigo effectively made the program interesting only to its best customers – people who spent upward of $750 per year on books.

The retailer’s strategic planners were clearly applying the Pareto principle, or 80-20 rule. They were addressing the interests of those 20 percent of customers who represented a disproportionate amount of sales and profits.

Then in 2011, Indigo introduced plum rewards – a program that charged no fee and rewarded its members points on purchases that they could use toward future discounts. Why? Because Indigo understood the broader value of data and knew the fee required for iRewards limited its ability to understand all of its customers, and therefore marginalized its sales potential.

Ultimately, as Indigo pivoted from book seller to a lifestyle store with a selection of not only books but also toys, jewelry, electronics, fashion accessories and household items, both its free and fee-based programs assumed greater roles. Each now helps the retailer make better-informed decisions that apply not only to novels, but also to assortment, pricing and store optimization.

The changes to plum rewards, to take effect Sept. 3, will usher in features based on such customer feedback. Among them: quarterly bonus events that reward members 10 times the points on their purchases, as well as other bonus point offers. Members also will be able to redeem their points online, in store and via the mobile app.

The rate at which members earn points, however, was reduced, to five points per dollar from 10 points. Indigo said it made the change because members wanted more flexibility in earning and redeeming plum points.

“Members want to be rewarded for their online purchases and they want to see more ways to accelerate their points earnings,” Indigo stated on its FAQ page.

The shift may also be a method of encouraging its dedicated plum members to join its fee-based iRewards program.

Fee or not, emotional loyalty requires relevance

Regardless of Indigo’s strategy, history proves that retail loyalty takes more than providing the customer with an incremental sweetener.

Rather, it requires a commitment to sifting through that customer information – whether it be transactional, from a survey or through social feedback – for the kinds of insights that shape messaging and experiences in ways that are golden, and relevant. Only when the brand experience resonates with the customer on a personal level can the retailer expect to foster an emotional bond.

To achieve that emotional loyalty, a company must engage its customers throughout the experience. This means basing every decision it makes – including those affecting its loyalty program – on what is meaningful to that consumer. Responsible data use is an important part of this task. It will help the retailer understand its best customers’ core interests, assign value to them and then connect with its customers in ways that say, “I know who you are, and I understand your needs.”

Retail loyalty is a combination pack of unit value for the customer and data value for the retailer. Using loyalty as a method for competing on price alone is a limiter. A retailer could fully realize a customer loyalty initiative only when its value extends beyond the program itself and to the ways its data can shape the customer experience – and that includes the decisions implicit in creating that experience.

Fee or no fee – who cares? Unlike Sea-Monkeys and mood rings, retail loyalty programs can evolve with their market. What matters is that the model supports the brand’s purpose, values and ultimately the way it enhances the customer experience.

This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.

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