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'It's a battleground': Why retailers are turning to subscription programs to build loyalty

Channeling Amazon, Loblaw announced in December it would be rolling out $99 subscription program to loyalty members

After seeing the indisputable success of Amazon Prime, more and more retailers and brands in Canada are launching their own paid loyalty programs in a bid to retain customers.

Loblaw Companies Ltd. announced in December that the grocer would be launching an Amazon Prime-esque, $99-a-year subscription program for its loyalty members, offering perks such as free shipping and online grocery pickup as the company continues to aggressively invest in e-commerce.

But it’s not just Loblaws that’s getting in on the subscription game. Lululemon Athletica Inc. rolled out a program in Edmonton last year, one that the company’s chief executive Calvin McDonald said in December had “exceeded expectations.” For US$128, members received either a pair of pants or shorts, expedited shipping on e-commerce purchases and access to monthly classes and curated events. According to a McKinsey & Company report released this month, the subscription e-commerce market has grown by more than 100 per cent per year over the last five years.

These subscription programs are certainly not a new concept for retailers and brands – they are essentially loyalty programs, but with a fee attached in exchange for certain benefits. Eric Matusiak, a partner and national retail leader at BDO, said in an interview with Yahoo Finance Canada that with consumers having more choices than ever before thank to the rise of e-commerce, it has become increasingly vital for retailers and brands to secure loyalty and keep customers coming back.

“We’re in an age of what I call product ubiquity. You can essentially get anything from anywhere,” said Matusiak.

“It’s a wonderful world that we’re living in, but if you’re a retailer in this space, it’s a battleground. People don’t have to come to you and many are struggling with how to get people coming back to them on a regular basis.”

Amazon Prime recently expanded its one-day delivery service to 13 more Canadian cities, one of the perks of its service.

According to McKinsey, the largest subscription e-commerce retailers generated more than $2.6 billion in sales in 2016, a massive jump from just $57 million in 2011. Net sales from Amazon Prime subscriptions – considered the industry standard that proved paid loyalty programs can work, and work extremely well – came in at $3.9 billion in the fourth quarter alone.

“Amazon Prime has proved that this thing has legs,” Matusiak said.

“Now we’re in a gold rush period. There are so many retailers and so many categories rushing towards subscription programs.”

But not every retailer is going to succeed in this model. Michael LeBlanc, a senior retail advisor with the Retail Council of Canada, says what will separate the winners from the losers in this field is the finding the “secret sauce” – essentially the benefit that people are willing to pay for on a regular basis. Leblanc said the perks could be a “hard” benefit, such as Loblaw’s online grocery pickup offer, or “soft” benefits, like access to exclusive Lululemon events.

“That’s the art and science of these loyalty programs,” he said. “It’s figuring out what is important and interesting to the customer that is worth that exchange of value and paying money for.”

High cancellation rates a risk

Determining what will keep customers paying is key. McKinsey researches said in a February report  that the churn rates for subscription services are high and consumers often quickly cancel services that don’t deliver a superior end-to-end experience.

“Overall, we found that nearly 40 per cent of e-commerce subscribers have cancelled their subscriptions,” the McKinsey report said.

“Many consumers who churn do so quickly, which suggests that companies should be careful not to overinvest in free trials or heavy discounts unless these promotional investments have a clear payback.”

So while not every retailer will turn their own paid loyalty program into something as successful as Amazon Prime, it’s clear that many consumers are craving these subscriptions models.

“I think there has been a rewiring of consumer behaviours and expectations that has been happening since the rise of the Internet,” LeBlanc said.

“Now, you can have things like access to music and storage for photos that you could’t have before that people now find of actual value. It’s an evolution, not just of loyalty programs, but of consumers themselves.”

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