Why more businesses are offering loyalty programs

Customer loyalty is declining—but ironically, some consumers are showing brand devotion by shelling out annual fees.

In the early days of retail, customer loyalty was secured the old-fashioned way: through high-quality products, reasonable prices, and brand recognition. But in 2024, consumers have a dizzying array of choices in a global, digital marketplace. Businesses eager to edge out the competition must get creative to attract and retain customers. One way to up the ante is through paid loyalty programs, which incentivize consumers to pay an annual or monthly fee by offering premium perks and rewards.

Attracting buyers with savvy sales tactics isn't new. Bonus gifts from retailers can be traced back to the 18th century, when merchants gave customers copper tokens with their purchases. Later, store coupons and trading stamps incentivized loyalty among customers who could earn discounts or exchange stamps for items like dishes and cookware at some department and grocery stores.

To explore the growing trend of paid loyalty programs, The RealReal examined the history of bonus incentives from retailers and investigated the factors driving more businesses toward pay-to-play rewards measures.

The history of brand loyalty programs

The first modern loyalty program emerged in the wake of the American airline industry's deregulation in 1978, which took the power to set fares and create routes out of government hands and gave it to airlines. Airline deregulation led to lower fares, prompting fierce competition among commercial airlines.

To find a way to become consumers' first choice for travel, American Airlines launched its AAdvantage program in May 1981, and the frequent flyer was born. The program allowed customers to earn miles that could be redeemed for travel rewards such as hotel stays. Fellow airlines launched similar programs shortly afterward; other industries quickly followed suit.

Securing customer loyalty spelled big returns for airlines and many other industries. Keeping customers is much cheaper than acquiring them over and over. Moreover, repeat customers tend to spend more within a single transaction and share referrals via word of mouth. It's no surprise that today, free-to-join loyalty programs are ubiquitous. Keychains and digital wallets are full of loyalty cards from restaurants and retail stores. They've trickled down to every type of business—even gas stations.

Introducing paid incentive programs

While it seems counterintuitive that consumers would pay more to save more, offsetting the cost to consumers with exclusive offers can encourage loyalty. Paying members of loyalty programs are 60% more likely to spend on the brand after joining, according to a 2020 McKinsey survey. Free loyalty program members, meanwhile, are only 30% more likely to spend on the brand after joining.

The standard-bearer for paid loyalty programs is Amazon Prime, which launched in 2005. The first paid loyalty program of its kind, Prime offered free two-day shipping to customers in exchange for an annual fee of $79. In a proof-of-concept for loss leaders, Amazon soon soared in valuation and outpaced its main competitor—eBay—to become the $1.9 trillion company it is today.

Nearly two decades later, the two-day shipping feature is a standard offering among major e-commerce retailers, including Walmart. What's more, Prime's massive success—which generated more than half of all paid retail subscription revenue in the U.S. in 2023, per eMarketer data—inspired a wave of paid loyalty programs across industries. Even Chuck E. Cheese frequenters can now subscribe and pay monthly for gameplay bonuses and discounts on food and drink.

Paid loyalty programs have had some early success within the restaurant industry. At Panera Bread, roughly 1 in 4 Panera transactions stem from the chain's Unlimited Sip Club, which offers customers unlimited beverages and no delivery fees on digital orders for an annual fee of $119.99.

Meeting customer expectations with personalization and premium offerings

Launching a "premium" product often accompanies reduced offerings of the standard, free perks. In one example, Target's free-to-join Target Circle as of April 2024 no longer allows consumers to add offers or deals to their cart. The application will automatically apply the same deals for everyone at checkout with the goal of providing a more personalized shopping experience.

This pullback coincides with the launch of three new memberships, including Target Circle 360, a paid version that offers free same-day delivery for orders over $35 through its partner, Shipt. Shipt, which offers delivery service memberships from its marketplace of retailers (including Target), has its own paid loyalty program that offers free same-day delivery for orders over $35.

In addition to steadier and increased revenue, paid customer loyalty programs offer businesses an effective way to collect consumer data. Personal information retrieved during signup, plus purchase history and patterns, are leveraged to drive marketing strategies or inform personalized offers. The seemingly invasive practice is tested and true in the broader consumer base: 7 in 10 consumers expect personalization in their shopping experience, according to a 2021 McKinsey report, and companies that prioritize customer intimacy grow faster than their peers.

Consumer expectations are high this year. Many have come to expect relevant and timely recommendations that make navigating stores or online marketplaces easier and more efficient. Loyalty programs are part strategic and part psychological. We all want to feel seen and understood—does it matter if an algorithm driven by our personal information is the silent observer?