Legacy retailers turn to subscription programs to hook loyal customers

Legacy retailers are taking a page from Amazon Prime by adding subscription services to lock in loyal customers.

In recent weeks, a number of players in the category, including Lululemon and CVS, have rolled out membership programs to build loyalty. The programs keep a retailer’s most valuable customers coming back regularly, while helping to counteract growing customer acquisition and retention costs as e-commerce platforms broaden product choices.

“It starts with the realization that the only way to survive is to have repeat customers,” said Corey Pierson, co-founder of predictive marketing analytics platform Custora. “For the longest time, [retail business] was very product-focused, as in how many shoes did you sell, but given Amazon’s growth and how easy it is for customers to do price comparisons, retailers are realizing that if [customers] don’t become repeat buyers, the economics of the business won’t work.”

Lululemon’s membership program, currently being tested in Edmonton, Canada, offers subscribers a pair of pants or shorts designed exclusively for the program (it’s unclear if this is a one-time or repeat offering), access to classes and events and free expedited shipping for e-commerce purchases, for a $96 annual fee. Subscription rewards will be rolled out monthly to users. The company’s CEO, Calvin McDonald, told investors last week that it was considering raising the program fee depending on customer interest, which has been strong so far.

Meanwhile, Best Buy, widely known for its staff members’ tech expertise through the “Geek Squad,” in May began offering a yearly tech support subscription-based product called “Total Tech Support,” priced at $199.99 per year.

Similarly, DSW has been experimenting with subscription-based services. Last year, the company launched an “innovation lab store” in Columbus, Ohio, offering services like a shoe concierge and a nail salon. The location is reportedly driving 10 percent higher annual sales compared to other locations. The company is also offering TechStyle Fashion Group-owned online subscription services JustFab and ShoeDazzle space within the store to test how physical retail can help grow their customer base. The company earlier this year revamped its loyalty program, offering its 25 million members personalized rewards based on their purchase behavior.

Building on the nail bar, repairs, orthotics and other service-based offerings, DSW will be looking at growing its service offerings into 2019 and beyond, DSW CEO Roger Rawlins told investors.

Analysts say the emphasis on building a loyal group of customers through subscription-based programs is a shift away from a traditional emphasis on customer acquisition and is a strategy to grow revenue as acquisition costs rise. Lululemon, CVS and Best Buy are also using physical locations to build a community of customers invested in the brand and the expertise it represents, which helps drives loyalty and subscribers. Like Best Buy with electronics, Lululemon’s play is to position itself as an expert in the health and wellness field, and build a subscription model on top of that.

“Subscriptions change the conversation from customer acquisition cost to the long-term value of the customer which signals retention,” said Juozas Kaziukėnas, the founder and CEO of e-commerce research firm Marketplace Pulse. “Customer-acquisition costs keep rising because Facebook, Instagram and Google ads are more expensive.”

While subscription services help retailers capitalize on recurrent purchase behavior among loyal customers, retailers still need to ensure the programs can help build customers’ emotional connections to the brand. A subscription program that isn’t priced correctly and isn’t effectively responding to customer needs can actually be a drain on a company’s bottom line, particularly if customers aren’t convinced they’re getting extra value.

“Brands are looking to build subscriptions into their business model, but the risk is that you’re just going for behavioral loyalty — you’re locking the customer into a recurring stream of revenue, but you’re doing nothing on the other side to build emotional loyalty,” said Forrester senior analyst Lily Varon.

Though an incentivized subscription program may appeal to customers who appreciate the predictability of ongoing purchases, industry watchers say retailers still need to be careful about pricing and product selections.

“It can work if it’s not a major cost consideration, and [the customer] enjoys the serendipity of what comes every month,” said eMarketer retail and e-commerce analyst Andrew Lipsman. “But [goods] can pile up if they come too frequently they can add expenses through returns — it has to be finely tuned to create value for the customers.”

For Lululemon’s part, subscription is about nurturing customer connections that go beyond the products.

Deep Dive: Amazon strategies

“Guests are seeing value in this curation of services and content beyond just our product and in buying into the program and driving value through the loyalty,” McDonald said.

Lululemon said it’s going to continue testing the membership pilot through the first half of next year, and roll it out to a yet-to-be-named set of additional markets.

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