Paid programs can help companies grab more customers with perks such as free shipping and exclusive offers, especially as consumers look to cut costs and find added value amid high inflation. But new research co-authored by Wharton marketing professor Raghuram Iyengar — titled “The Impact of Subscription Programs on Customer Purchases” and published in the Journal of Marketing Research — reveals potential pitfalls of this approach.
The Study
The researchers collected months of sales data for thousands of members in a subscription program with a cosmetics retailer in Asia as well as data for customers who didn’t join the program.
The Results
The program was an instant success. But some red flags emerged:
1. With membership, customers’ average number of purchases went up, but their average basket size decreased, contributing to increased shipping costs.
2. Fourteen percent of members spent the most, but the retailer also incurred the highest costs from them.
Thoughts From the Expert
“There are lots and lots of positives,” Iyengar said of subscription programs on Wharton Business Daily (SiriusXM 132). “The big negative, which [surprised the company] and speaks a lot toward some of the other subscriptions we’ve seen failing, is that not only do the revenues go up … but the cost to serve customers also goes up.”
Takeaways for Retailers
- Go beyond averages and analyze trends on an individual level. Understand the customers who are most likely to increase spending after joining a program.
- Don’t just measure change in profits; measure what drives those changes. For the cosmetics retailer, two potential drivers were the number and size of purchases.
- Don’t forget about the cost of serving customers.
Published as “Are Subscription Programs Paying Off for Retailers?” in the Fall/Winter 2022 issue of Wharton Magazine.
