You can be on Entrepreneur’s cover!

Why the Membership Model Makes Sense The key is to play upon consumers' sense of thrift and the social capital exchanged when telling a friend about a new service.

By Will Ford

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

lolacottoncandy | Foap.com

Brick-and-mortar retailing is a rough business. Even established players like RadioShack and Borders have found it impossible to stay afloat in such a cut-throat environment. Yet Costco has a happy oasis in the category, able to thrive and pay its staff well, even in the face of larger competitors.

How? One explanation is membership fees. Patrons at Costco pay $55 a year for the privilege of shopping at the retailer and enjoying deep discounts. It's said that, since Costco shoppers save about $5 on each bottle of wine, after purchasing 11 bottles of wine, you'll have justified the yearly fee.

For Costco, it's a win-win; some 75 percent of the chain's operating profits come from those yearly fees. The warehouse chain's renewal rate is 90 percent, indicating that most customers are happy to pay them as well.

Related: How Do I Launch a Membership-Based Website?

Cost savings for consumers and financial security for retailers are just two reasons why a membership model makes sense. Here are a few others:

Develops brand loyalty

Pay an annual membership fee and suddenly you have a strong reason not to shop anywhere else.

For instance, if you pay $99 to join Amazon Prime, then that's pretty much where you're going to do your online shopping, as many of its products arrive in two days. Otherwise, you'll have to pay shipping costs.

Builds a strong customer base

If you multiply the scenario above by millions, you have an army of brand-loyal customers who keep coming back. Those satisfied customers are likely to spread the message, which is the best form of advertising. As a 2012 study by Nielsen showed,92 percent of customers say they trusted earned media including word-of-mouth recommendations from friends and family. That figure was up 15 percent over the previous five years, showing the power of word of mouth continues to grow.

Creates upsell potential

Shoppers may go to Costco to buy toilet paper in bulk, but they're exposed to some big-ticket items, including diamond rings that go for $52,000. While such items aren't impulse buys, repeated exposure during shopping trips can plant a seed for a future purchase.

Related: How to Improve the Success of a Membership Program

Provokes perceived value

Consumers know you don't get something for nothing, and the best way to save money is to pay up front. If you buy a house for cash, for instance, you'll save thousands of dollars you would have spent on mortgage payments.

By paying an annual fee, consumers feel like they're smart, savvy shoppers -- and they're right. That's why, when Marc Lore, a former Amazon executive, started Jet, an Amazon rival, he chose a membership model. "Every household in America should have a Jet membership, Lore mused. "Why not spend $50 bucks to save $200?"

Consumers have made similar calculations in other areas. Sales of digital music are down, because people would rather pay a monthly fee to stream their music. Businesses are scrapping their data centers to pay for cloud services. Some are forgoing car ownership to pay Zipcar every month to get a car when they need one.

Now, don't get me wrong. Amazon, Zipcar and Costco are thriving not only because they employ a membership model; they are also great companies.

The membership model doesn't make sense in every case, but there are some distinct advantages for those who embrace it. The key is to play upon consumers' sense of thrift and the social capital exchanged when telling a friend about a new service. This requires building a strong brand. As the old slogan said, membership has its privileges.

Related: 10 Subscription Companies to Start Now

Will Ford

Co-founder and President of PetBox

Will Ford is the co-founder and president of PetBox, a subcription delivery service for your pets.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Business News

I Designed My Dream Home For Free With an AI Architect — Here's How It Works

The AI architect, Vitruvius, created three designs in minutes, complete with floor plans and pictures of the inside and outside of the house.

Business News

This Fan-Favorite Masters 2024 Item Is Still $1.50 as Tournament Menu Appears Unscathed by Inflation

The pimento cheese sandwich is a tradition almost as big as the tournament itself.

Making a Change

Learn to Play Guitar Even if You Have No Previous Training for Just $20

Start with the beginner's crash course and learn how to play guitar in no time.

Side Hustle

This Dad Started a Side Hustle to Save for His Daughter's College Fund — Then It Earned $1 Million and Caught Apple's Attention

In 2015, Greg Kerr, now owner of Alchemy Merch, was working as musician when he noticed a lucrative opportunity.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Business News

Here's One Thing Americans Would Take a Pay Cut For — Besides Remote Work

An Empower survey found a high percentage of respondents would take a pay cut for better retirement benefits and remote work options.