Are subscription-based loyalty programs recession-proof?

Paid loyalty programs have come of age throughout the last few years.

The standard-bearer, Amazon's $139-per-year Prime membership program, boasts more than 200 million members, a milestone it surpassed in 2021—just three years after crossing the 100-million user plateau. The trend isn't limited to the Seattle-based behemoth, as 39% of consumers reported subscribing to at least one paid loyalty program other than Prime in a 2020 McKinsey survey in sectors ranging from entertainment to personal care and retail. For example, Walmart's $98-per-year loyalty program, Walmart+, has grown to about 16 million members and recently sweetened the pot by adding access to the streaming service Paramount+.     

But the equation may now be changing. Inflation continues to rise, and businesses and consumers alike are grappling with the threat of recession. The pressure is on brands to ensure paid loyalty programs provide enough value to shoppers to be viewed a worthwhile investment even during tough economic times.         

We believe compelling, well-structured paid loyalty programs will remain viable and popular amidst a downturn.     

Why paid loyalty programs appeal to brands

They provide an opportunity to create an elite customer tier 

Providing exclusive access to content and a personalized experience are two of the top reasons subscribers like paid loyalty programs, according to a survey by BarclayCard. Subscribers who join are choosing to invest in your brand, creating an emotional connection and signaling a willingness to join a community of like-minded people. For lifestyle brands, especially, this creates a real opportunity to nurture a sense of belonging that will, in turn, foster even greater loyalty.     

Paid loyalty programs add a new revenue stream 

Annual fee payments are a source of recurring revenue—the sort of subscription-based model that has risen in popularity over the last decade and provides a cushion against seasonal variance and other causes of economic fluctuation. In 2021, financial services firm UBS estimated the digital subscription economy at $650 billion per year and projected it would reach $1.5 trillion by 2025, partly because its analysts expect companies to gravitate toward business models that provide stable cash flows.     

However, the subscription economy is already showing signs of strain as the economic climate shifts. Subscription spending fell 5.7 percent in May 2022 compared to the previous year, according to British financial services Barclaycard Payments.    

Paid loyalty programs enhance customer engagement

After customers decide to pay an annual fee in exchange for special benefits, they become incentivized to spend even more with your brand. They want to ensure their decision pays off through savings due to features and perks like discounts or free shipping. A 2020 McKinsey survey found that members of paid loyalty programs are 43% more likely to buy weekly after joining, 59% more likely to choose the brand instead of a competitor, and 62% more likely to increase their spending with the brand.    

Dialing in the value proposition 

For all that to work, a paid loyalty program's value matrix has to make sense both for brands and consumers, who expect a return of at least 150 percent on their annual membership charge, according to McKinsey.      

Getting that value proposition dialed in has proven challenging for businesses. This year, several high-profile brands shook up their approach to paid loyalty by adding value to their offering, along with the potential for greater engagement.   

In March, for example, outdoor retailer REI relaunched its lifetime membership program, raising the price from $20 to $30 and broadening its focus. Rewards and coupons are still included, but now REI's program is based on components such as member-only exclusive products and used-gear shop, plus free shipping. 

There's also a new incentive for social good: REI is donating $5 from each membership fee to a nonprofit dedicated to supporting green spaces and outdoor culture. Those changes track with the results of a 2021 Lightspeed/Mintel survey that shows exclusive offerings and shipping benefits are among consumers' most desired features in a paid loyalty program.     

Bed Bath & Beyond is another retailer that burnished its paid loyalty program this year, replacing its Beyond+ program with a new offering called Welcome Rewards+. The annual fee is the same—$29—but on top of existing perks such as a 20% discount, the new program also includes free same-day delivery on four orders per year, along with an option to use mobile checkout when shopping at a brick-and-mortar location.     

Even Amazon is adding benefits to its Prime program, offering free delivery on some GrubHub orders and expanding the music library available to Prime users. The cost of Prime increased to $139 from $119 per year.     

Finding the optimal rewards formula

All of these changes suggest companies are searching for a rewards formula that will enable them to continue attracting customers to paid loyalty programs even during an economic downturn. There's reason to believe they can be successful if they find the right mix. A Barclaycard Payments survey found 38 percent of consumers believe subscriptions offer good value, and more than a third said subscriptions help them manage finances amidst rising costs. Forty-two percent cited reassurance key products would be delivered as another benefit. That last point bodes especially well for paid loyalty programs because one possible perk of an elite-status loyalty program is to offer first dibs on restocked items.    

Finding the right loyalty formula for your brand can be a challenge in this uncertain economic climate. Knowing the real value of your program's value exchange is paramount, especially as brands and consumers alike look to maximize their marketing dollars. Harnessing the power from Epsilon PeopleCloud and our emotional loyalty technology allows brands to drive deeper connections. Even free loyalty programs, such as Dunkin', use flexible program offers and incentives to adjust to changing customer needs. With Epsilon as a partner since 2013, they've been able to increase loyalty member spending year-over-year by 50%.

Whether free or paid, loyalty programs need to offer a mutually beneficial value exchange. This is an interesting moment for brands investing in loyalty programs. The paid loyalty concept has grown in popularity over the last few years, showing such programs can provide value for brands and consumers alike.

That value proposition will be tested in the event of a recession. Still, we believe with the right mix of benefits, paid loyalty programs can withstand a recession and grow as consumers look for value-added ways to manage spending and engage with their favorite brands.