#27: Why Your Favorite Brand Offers a Membership Program
Hint: it's not for you
I find the consumer brand landscape fascinating because it’s constantly evolving. Every year, new trends and technology force brands to rethink how they win and keep customers. And since most brands offer commoditized products, they rely on outside-the-box marketing tactics to differentiate themselves from their competition. It’s common for two companies that offer the same product to have very different value propositions thanks to their respective brand positioning.
Speaking of differentiation, enter paid membership programs. Generally speaking, you pay a monthly fee, and in return, receive store credit equivalent to your monthly fee, gain access to special perks such as site-wide discounts, exclusive product drops, and in some cases, in-person events. I’ve started to see these programs pop up, particularly for fashion and beauty brands, but the broader concept can be applied to any industry.
Now, a paid membership offering doesn’t make sense for every brand. It’s the best fit for brands with a large assortment. For a customer to justify pre-paying (in the way of the monthly fee) every month, you need to offer them a wide selection of items to choose from. Otherwise, why do they need to come back to the store each month? To buy the same thing? No need for a membership program in that case.
Also, you need to have the resources to support a membership model as you’ll need separate operations and marketing strategies to be able to provide an elevated service to your members. If members can’t tell what they’re getting, why would they pay? In my opinion, this would be tough to pull off if your goal is to be as scrappy as possible.
But for brands that can pull it off, there’s a major hidden benefit. More on that later.
Case Study: Fabletics
Check out Fabletics, the fast-growing, affordable athletic wear brand. They currently offer a paid membership model where you pay $59.95 each month to receive this amount in Fabletics credit. The difference in pricing between Fabletics’ VIP members versus non-members is gaudy, with members receiving frequent 80% discounts. In exchange for your monthly payment, you also gain access to cash off future purchases and first dibs on exclusive product releases.
Candidly, dropping $60 a month assumes you’re planning to spend $720 a year at Fabletics. That’s a lot, especially given how cheap the clothes are. You’re basically committing to buying a new wardrobe from them. If you track your expenses like me, you’ll be scratching your head at year’s end on why you spent nearly a thousand dollars on Fabletics clothes.
But the program must have decent traction otherwise Fabletics wouldn’t offer it.
Why Brands Love It
Guess what? It’s genius. Not only has Fabletics created a reason for customers to buy their products on a recurring basis, but they’ve also solved a major flaw of the consumer brand business model.
Cash flow.
The consumer goods business model is cash flow intensive. Even with the most favorable payment terms from your manufacturer, you’re likely still waiting a few months before your inventory investment starts to pay itself back.
Think about it. You have to manufacture the product, ship the product to its destination country, store the product, and then ship the product to the customer. All this costs money and happens before the customer pays you. Cash goes out the door today, and not seeing a dollar back for 120 to 180 days is not an uncommon occurrence. Many businesses flounder because they can’t pay their day-to-day bills in between buying the inventory and selling the product.
Monthly fees give brands predictable cash flow, which is rare in retail. This cash can help replenish the coffers in the float period between the inventory purchase and the product sale. Simply put, you’re fronting the brand money in exchange for perks.
With that being said, there are costs associated with membership programs. For instance, Fabletics offers huge discounts to their VIP members. Although they make less money per member order (compared to non-member), they receive an exorbitant amount of cash each month in the way of the monthly member fees. This helps fund general business expenses and make inventory investments. So, a lower profit per order is made up for in likely a higher volume of orders on a recurring basis and strong cash flow.
Furthermore, a customer pays their monthly fee today but may not decide to make a purchase for a few months down the road. Perhaps they are saving up for a sweatshirt that costs $100. That’ll take two months of credit buildup before they buy that new sweatshirt. That’s two months of cash received before the customer buys the sweatshirt.
My bet is that Fabletics’ analytics team has figured out that customers bank their store credit for a big purchase a few months down the line, if not longer. Pretty much, they’re rewiring consumer purchase behavior by incentivizing customers to pre-pay for something they normally don’t need to pre-pay for. Fabletics better manages their cash flow, and the customer gets special perks.
Also, this will likely help increase the accuracy of their sales forecasts as they’ll have a better sense of how much product people will buy based on the store credit they have queued up.
It’s worth calling out that the monthly membership fees aren’t considered revenue until a customer makes a purchase and uses the store credit or the store credit expires. So, there is a need for prudent management of the fees collected, however a brand can also park the cash in a high yield savings account or money market fund and earn a return on it too.
To wrap it up, if you’re a big fan of a brand and plan to shop there frequently, you might as well become a paid member for the perks. But don’t think they’re offering the program out of the goodness of their hearts.