- June 28th, 2016
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The Psychology Behind Fee-Based Membership Programs: 3 Tips For Retailers
Restoration Hardware’s recently launched RH Grey program has renewed the question of the viability of fee-based loyalty memberships. More retailers are testing the concept, which could succeed if it delivers a compelling enough value proposition. The trick is in understanding the psychology behind accepting such fees.
Ironically, the one area Restoration Hardware should not want its new membership program to fall into would be the grey, yet that is exactly what it is calling it.
The upscale housewares chain’s recently launched fee-based membership program, called RH Grey, is definitely clear in its proposition: pay an annual $100 membership fee, get 25 percent off purchases. It is not the first merchant to charge its members a fee and then entice them to earn it back through purchasing and other interactions. Amazon Prime, Walmart and even American Express have succeeded with (or are testing) such models.
They clearly have caught the scent of potential demand – or acceptance. Sixty-two percent of the 1,005 surveyed consumers said they would consider joining a fee-based rewards program if their favorite retailer offered one, according to a 2015 study by LoyaltyOne.
I believe such models could succeed, and even add an element of difference to the loyalty landscape, as long as they deliver a compelling enough value proposition. There are pitfalls, for sure, but also terrific upsides. For example, while a fee may reduce membership numbers and therefore limit the visibility a retailer has into shopping behaviors, it also would enable a retailer to focus its attention on a self-selected group of loyalists.
The trick is in understanding the grey matter – the human psychology that influences such loyalists into paying these fees – and the potential hazards, including the “sunk-cost” effect.
When People Prefer To Pay
As I said, there are potential pitfalls, including the risk of missteps. Take, for example, the feeling of prestige in receiving a special perk after spending a certain amount with a brand over a period of months. Then imagine the reaction one would have after seeing someone else get the same service, simply by paying for it on demand.
This happens with tiered loyalty or even credit card programs increasingly. Some merchants operate earned-tier systems wherein the more a customer spends, the better her perks. Some of these companies, however, began allowing lower-tier customers to pay for these same higher-level benefits. Not only does this peeve those customers who earned their way to such perks, it risks undervaluing the benefits themselves, because it has fixed a price for them. Does it make sense to require a customer to spend $15,000 to qualify for a certain tier when another customer can receive the same tier benefits for a $300 fee?
Such scenarios touch upon the psychology behind a person’s willingness to pay for special attention and services. In return for their loyalty (or spending over time), they want special treatment. Simple.
Restoration Hardware’s program is elegant in the simplicity of its value proposition. In addition to the 25 percent discount, members receive complimentary interior design services and early access to clearance events.
Grey Matters, And Avoiding The Sunk-Cost Effect
Another key risk for those considering fee-based memberships is that members may succumb to the “sunk-cost effect.” This is a consumer’s reluctance to pull out of an investment because of the feared loss it would incur. This effect takes place even when an investment does not appear to benefit the consumer, so great is the aversion to taking a loss.
“It’s well documented that consumers routinely consider sunk costs when deciding future courses of action,” states The Harvard Business Review, in a report on pricing and the psychology of consumption.
The report shares an example wherein a psychologist at Ohio University asked 61 college students to assume they’d purchased tickets for a ski trip on the same weekend, one at $50 and one at $100. The students were told they’d have much more fun on the $50 trip, yet more than half chose to take the $100 trip because the sunk cost mattered more to them than the greater enjoyment.
In short, fees do influence consumer behavior and retailers should consider the role this fact plays in their loyalty-related endeavors. Based on the HBR report, here are a few tips to understanding the psychology behind why customers pay fees, and how to make the value proposition relevant.
Pay attention to timing: The more time that passes after a customer has paid for a product, the less likely she will be to cash in on it. For example, members who pay a large up-front fee for a gym membership are likely to use it frequently at the beginning, but visit less often as time lapses, HBR reports. For this reason, retailers should at regular intervals alert customers to the benefits of their fee-based memberships. One month after a customer signs up, a retailer can send her a message to alert her of perks nearby on the horizon; after three months, it can send another detailing the perks she has earned, and so on.
Stagger payments: By staggering the fee structure, say to quarterly payments rather than one large annual payment, retailers can promote consistent spending among their members, since shoppers are more likely to use their memberships after paying their fees. That said, this strategy’s success depends largely on the average size and frequency of purchases. Using staggered payments may make more sense among retailers that generate smaller transactions or are shopped with some frequency (say four times a year). Careful design and testing will determine the right combination.
Highlight the value of individual perks: Amazon Prime offers free, two-day delivery to its members. I am not sure what that shakes out to in terms of dollars earned toward my membership fee, but if I did know, I’d likely spend more. The same goes for Amazon’s exclusive programming. Knowing the value of the perks helps the consumer justify the fee – even if he or she doesn’t take advantage of all that are available. What matters is the value is reinforced and available, so paying the fee makes sense psychologically.
Restoration Hardware, with RH Grey, is making its benefit plain. If I spend $400 with the chain, I will automatically earn my annual fee back – that’s the silver lining. If I purchase a $500 faucet and get a $125 discount, I will perceive that I am entering profitable territory.
Or, to apply the financial term, I’d be into the black. There is nothing grey about that.
This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.