Fee-based loyalty programs: Should yours be one of them?

Loyalty should be a two-way street. It’s the same with loyalty programs -- the best ones make both marketers and customers feel like winners.

It makes sense, right? A sporting goods retailer collects valuable customer data (win), then sends a coupon and reminder to last season's snowboard buyer that it's time for a tune-up just before the snow hits (win-win). As marketers, we want those wins. But we also know that it’s the level of customer engagement that ultimately determines how profitable our loyalty programs are.

We’ve had a question about engagement in loyalty programs come up quite a bit lately: Should loyalty membership be fee-based or free? And which results in higher customer engagement and return purchase behavior?

Set your course: The pros and cons

If you’re considering the same questions, you’ve likely thought through the positives and negatives of each type of loyalty program. Compared to a paid program, one that’s free will deliver a high volume of registrations. In this case, “FREE” sounds good to your customers, but it may not be ideal for you because the low cost-of-entry can keep them from feeling closely tied to your company for return purchases.

A paid loyalty membership can help drive return sales as customers aim to recoup their spend. Still, fee-based loyalty memberships can be tricky. That’s because it’s not always true that a bigger investment equals members who are more invested customers. It’s a balancing act—set your fee too high, and no one will be interested at all.

Get out the map

When I get questions about free-versus-paid loyalty programs, I always pose two back:

  • 1) In a perfect world, what do you want your company and your customers to get out of your loyalty program?
  • 2) If you offer the program free, and every one of your customers enroll, does the cost of their reward outweigh your benefit?

Before you make a decision on your whether your program should be free or paid, you’ll want to map out your strategic objectives and financial goals. Once those are defined, you’ll have your destination set.

Take the wheel

I encourage clients to do the financial modeling work to determine the cost to the company if the customer never returns after a first visit. In simplest terms, you need to understand your customer lifetime value.

If your program offers rewards that cost more than the value you get by retaining that customer--even for one additional trip--you likely need to re-evaluate your program’s incentive structure. It’s important to do this work upfront, or risk having to change the program down the road—which almost always leads to a poor customer experience (and disillusioned members).

If you’re thinking about a “Pay-to-play” model, do your best to figure out the cost that represents your customers’ tipping point: high enough to keep them motivated to return, but low enough to keep them from balking. Because as you know from experience—once customers leave, they tend to turn to your competitors programs to compare both their rewards and the strings attached to get them.

Are we there yet?

Let’s say you’ve worked through these questions and you’re still unsure. Then, it’s probably time to do a competitive analysis. Research other brand loyalty programs out there—both inside and outside of your category—for help with your unanswered questions. And be sure to keep your eyes open. Competitive reviews can almost always generate some good ideas for your company’s program. Here are a few companies to dig into that have been successful with each type of loyalty program.


  • Starbucks
  • CVS
  • Bloomingdale's
  • Walgreen's
  • Neiman Marcus
  • Target


  • AMC Theatres
  • BJ's Wholesale Club
  • Amazon Prime
  • Landry's

You have arrived at your destination.

Keep in mind, the decision to charge for loyalty membership doesn’t have to be overly risky. That’s because this is the perfect opportunity for testing to determine if a company-wide roll-out makes sense. For some companies, it’s not a single loyalty strategy that works best, but a hybrid approach instead. For example, a program that requires customers to pay to participate until they’ve spent to a certain level, after which they earn benefits at no cost.

In the end, the right loyalty program for your company is the one that starts with your business destination in mind. Take an honest look at what you want your program to achieve, and you’ll be on the road to success.

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