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 towards similar business models, 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:
This 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).
This 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. This subscription model is usually found in sectors where the delivery of the product does generate some extra variable cost, such as restaurants and coffee chains and individual transportation providers, like Uber. This model is also adopted by buyers’ clubs like Costco, which provide members access to attractively priced products against a one-time subscription payment that customers typically amortize in four or five trips to Costco stores.
This is typically found in sectors where the product or 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 maximise 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 the business from members 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. It also serves as a differentiating factor from competitors.
Developing successful membership models
However, running a successful membership or paid subscription program is not easy. Here are four common success factors of best-in-class membership programs:
- ‘Unlimited’ is rarely actually 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 per cent 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. Considering the amount of benefits and perks at each level of the program and understanding their economics, is critical to sustain their attractiveness, while keeping 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. They also 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 start-up Movie Pass, which 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 and membership scheme?