The Impact of Premium Programs on Consumer Purchases

We’ve known for some years that premium programs are effective and profitable. The results of an extensive study¹ , involving over 20,000 consumers, provide some interesting new data.

 

Premium program: also known as a paid loyalty program, this type of program requires members to pay a monthly or annual membership fee in order to gain access to additional or exclusive services and benefits.

The study measures the impact of loyalty premium programs on purchasing behavior by analyzing the transactions of 24,000 consumers, accumulated over over a 15-month period.

Here are the key findings:

1. Increased purchases

On average, customers spend more than twice as much per month after enrolling in such a program.

Note that this increase in spending is not evenly distributed across all sample members. Some customers contribute significantly to the increase in income, while others contribute little or nothing.

2. New products purchased

Nearly 75% of the increase in revenue comes from new products that customers had not previously purchased.

R3’S POINT OF VIEW The ability of a premium program to encourage members to explore products beyond their usual purchases is an important success factor.

3. Lower average basket

While the total number of purchases increases after a member joins a premium loyalty program, the average basket size decreases. On the other hand, purchase frequency increases significantly.

R3’S POINT OF VIEW In certain situations or industries, enrollment in a premium program includes free shipping. Customers no longer need to combine their purchases into a single order in order to reach a minimum purchase threshold.

4. Conversion of less active members

14% of the members who contribute the most to the company after enrolling in premium program are not those who bought the most before.

R3’S POINT OF VIEW Although these customers were less active before subscribing, they were interested in exploring new products and were more receptive to promotions. A test market allows us to determine which customer profiles are most likely to benefit from this type of program.

However, there is always a certain percentage of customers who join the subscription program and only moderately increase their purchases. They still enjoy all the benefits of the program.

R3’S POINT OF VIEW A retailer would be better off if this customer segment had not joined the program. So it’s important to understand who is enrolling. Subscription offers need to be targeted to segments that are more profitable for the company.

An example

With the right strategy and well-defined customer segments, premium programs can have a big impact on the business.

For a recent example, let’s look at Panera Bread. The restaurant chain offered members of its loyalty program the opportunity to subscribe to its premium component, “The Unlimited Sip Club”. For $8.99 a month, members can get unlimited refills of their favorite coffee or hot tea at any Panera Bread location.

Results²:

• The average number of monthly visits by members was 4; after joining a premium program, it was 10.
• Food sales added to coffee orders increased by 70%.

The impact of a premium programs is not limited to the restaurant industry. This type of strategy can be applied to a wide range of industries. PC Insiders (pharmacy and supermarket) and Indigo Plum+ (books and home decor) are two examples that have developed a premium component for their best customers.

 

What is the potential of a loyalty premium program for your company? R3 Marketing can help you create a benchmark and identify the best practices in your industry. Let’s talk about it!

 

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¹  The Impact of Subscription Programs on Customer Purchases, Raghuram Iyengar (University of Pennsylvania – Marketing Department), Young-Hoon (Park Cornell University – Samuel Curtis Johnson Graduate School of Management), et Qi Yu (Singapore Management University; University of Pennsylvania – Marketing Department), January 2022.

² Retail Wire, Will unlimited free drinks pay off for Panera?