To Fee or Not to Fee

The following post was originally published in November 2010

That is the question we think more business leaders should be asking. Under the right circumstances, it could hold the key to competitive differentiation and enduring customer loyalty.

Recently, we worked on an assignment for a start-up CPG business. This specialty retailer has premium products and a low-cost, direct-to-consumer distribution model. The business plan calls for conservative market share by Year 5, with revenues linked to consumer adoption and habituation (a ‘try it, buy it, re-order it’ model). We like the business, but saw an opportunity to develop a more consistent/persistent revenue profile. We recommended the company develop its offering in the form of a membership club. For a modest monthly fee, customers would enjoy lower retail pricing, favourable shipping rates, and a range of exclusive value added promotions.

Our recommendation was met with some resistance: “Why charge a monthly fee when we can appeal to more customers without one?” Fair enough question. Critics will argue that fee-based clubs are a tougher sell. No argument from us. In our experience, however, a fee structure can dramatically increase consumption and purchase frequency, resulting in a stronger net profit over time. Let’s briefly study two examples:

Costco is the poster child for fee-based membership marketing. It charges an annual membership fee with a powerful proposition: deep discounts on food, clothing, and merchandise. In general terms, Costco’s mark-up on merchandise covers its SG&A costs, leaving the membership fee as its profit margin. Costco has some of the most loyal retail shoppers and an average transaction size that is the envy of many of its competitors.

At the opposite end of the scale, there are small local wineries which focus intensely on converting visitors (tours, tastings) to members of their exclusive wine clubs. Billed at $30-40 per month, the typical club offers two bottles of select wines and exclusive savings and events. Having committed to the club, members become enthusiastic advocates for the winery, eagerly telling their friends about the exclusive ‘community’ to which they belong.

In both cases, a lower audience reach for each business is offset by the higher retail commitment of those who become members. Revenues from membership fees are more predictable, payback on launch marketing costs is quicker, and members generate substantial positive word-of-mouth and referrals.

The Bottom Line

To fee or not to fee is a business model choice well worth considering. While not all businesses can be easily architected to a fee-based membership model, those that can may realize the promise of competitive differentiation and enduring customer loyalty. For help on how to build membership solutions for your business, contact Stratum Five today.