Your loyalty program might be losing you money With Jeremy Gray.

From Amazon Prime to Panera Bread’s Unlimited Sip Club, loyalty programs have become commonplace in a wide variety of industries. However, despite their popularity, it’s not always clear whether these programs are actually profitable. The authors analyzed data from 24,000 customers at a large Asian retailer to explore the various factors that can drive a program’s profitability, and identified three takeaways to help managers ensure their subscription programs are a net positive: In February 2020, Panera Bread announced the Unlimited Sip Club and rocked the coffee world. For just $8.99 a month, members could get unlimited refills of their favorite coffee or hot tea at any Panera location. With the average American consumer spending more than $2,000 a year on coffee, this sounded like an incredible deal for coffee drinkers — begging the question, how could Panera possibly justify such generosity? Loyalty programs like this are common in industries as wide-ranging as retail, food and beverages, health and wellness, and more. Proponents argue that increases in sales justify the costs — for example, while Panera may lose money on its drinks, if loyalty members buy a croissant every time they get a coffee, the program could still be quite profitable for the company — but these effects can be hard to quantify. For example, the average Amazon Prime member spends more than twice as much as the average non-member. This may seem to imply that the program is responsible for a substantial increase in revenues, but the difference in spending could also be driven by self-selection (that is, customers who already intend to spend more may be more likely to choose to become members). The costs to the company of providing membership benefits can also be substantial, whether that’s a free cup of coffee, exclusive product offers, free shipping, or other perks. In light of this complexity, how can managers ensure their loyalty programs are truly profitable? To explore this question, they conducted a large-scale study in partnership with a major Asian retailer that was launching a new, paid loyalty program in 2015. We analyzed 15 months of transaction data for more than 24,000 customers, about half of whom had joined the program, and identified three key takeaways for managers: Go beyond averages and analyze trends on an individual level.

On average, we found that customers spent more than twice as much per month after subscribing to the retailer’s loyalty program. However, this increase was not evenly spread out across all the members in the sample: Some customers contributed substantially to the increase in revenues, while others did not. This illustrates how a better understanding of whose spending is likely to increase the most after joining a loyalty program can help marketers better target prospects going forward.