Fee or free? Should you charge a fee
to join your loyalty program?

	A customer who spends $250 a year may be considered an excellent customer by the business and may not want to pay the $10 fee - resulting in an opportunity lost.

The decision to charge a fee for participation in a loyalty program or to have a free program really depends on the program goals.

Businesses trying to build a profile of their customers as one of their key primary goals, may want to plan a fee free program. Be happy or be warned - more people will join your program and the conversion rate from first customer to loyal customer will be lower (as a percentage) than programs that charge a fee. Businesses, particularly retail, need to examine their budgets to determine how many new customers they want in their program. While it can be very cost effective to get a card in a customer's hand and capture their demographic data, businesses should still plan for a cost of one dollar per member.

It is still possible to limit the number of people who will sign up for a loyalty program by managing the rewards even if the program is free. Suppose that a program is established that provides a first reward at a cumulated spending level of $200 (anyone who spends $250 a year could be considered an excellent customer by the business). $200 of spending may be beyond what some participants believe they will spend (even though many may spend that much), and free or not, they will not join the program. Retailers need to be careful when intentionally limiting participation to a program in this manner - a key critical success factor is to make rewards attainable for participants. Potential members who believe they might only spend $100, and whose behaviour could well be changed by the promotional aspects of the loyalty program may not join. Others who are in denial about what they actually spend also will not join the program. The business loses the opportunity to convert these customers to loyal ones.

Businesses not so interested in a broad profile of their customers and more interested in their very best customers may choose to offer a fee based program. Fee based programs often provide value back to customers very quickly as part of the value proposition for joining. For example, join the program for $10 and receive a coupon for $10 off of a future visit. The goal is clear - a business can justify any costs associated with signing up a new member through the fee. The $10 coupon is for a future visit and getting a second sale starts to build the right customer behaviour.

The challenge of a fee-based program is to ensure that customers who the business wants in the program actually sign up. The fee clearly becomes a barrier to entry to customers who the business doesn't want in the program (those $50 annual spenders) but also can be a barrier to those it does want in the program. Some of the customers in the above example who spend $250 a year and would be considered an excellent customer by the business may not want to pay the $10 fee - opportunity lost.

Both program styles can work. About 3/4 of the programs Ernex manages are operated on a fee free basis. Thoughtful planning and recognition of the goals and objective of a loyalty program allow businesses to make the right decision with their programs - free or fee!

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