How For-Profit Membership Models Are Evolving
What's up with Costco and Amazon Prime these days? The for-profit membership models, which have proved hugely profitable for these companies in recent years, appear to be headed toward a transition. Also worth watching: a membership-driven food-delivery startup.
Companies like Amazon and Costco don’t operate exactly like associations, obviously, but their member-driven business models are worth studying every once in a while.
And now’s as good a time as any to take a look, as Amazon is making significant changes to its Prime program and Costco is shifting its own approach. Here’s what’s worth discussing in the world of for-profit membership.
Amazon Primes the Pump
With Prime quickly becoming an essential part of Amazon’s business, the company appears to be eyeing exclusivity as a strategy to further boost subscriptions. Last week the company drew attention by putting a handful of videogames and popular movies behind the virtual equivalent of a velvet rope: “This item, sold by Amazon.com, is currently reserved exclusively for Prime members.”
The products, which have since lost their exclusivity, drew questions from sites such as Gizmodo, which was curious about what the scope of the experiment was. In a statement to the website, Amazon defended the strategy:
From time to time, Amazon offers exclusive selection and pricing on select items for Prime members. Customers who are not Prime members can sign-up for a 30-day free trial of Amazon Prime to benefit from these exclusive prices or they can purchase these items or similar products from third party sellers often fulfilled and shipped by Amazon.
Additionally, Prime members receive 20% off pre-order and newly released video games and 30-minutes early access to select Lightning Deals.
Meanwhile, the company has been experimenting with how it dishes out Prime membership, which it has traditionally offered for $99 per year. Recently, Amazon launched a $10.99-per-month Prime membership, which provides nearly all the benefits of the yearly plan, and created an $8.99-per-month Prime Video membership, which gives subscribers access only to its TV and movie streaming service, allowing the company to compete more directly with Netflix.
The $99-per-year plan remains the cheapest, but the new options allow the company to stay competitive with competing services that feature similar offerings through monthly plans.
The Amazon Prime offering includes free two-day shipping, unlimited access to e-books, unlimited music and movie streaming services, and a cloud-storage platform for photos.
Time for Costco to Boost Prices?
Is the membership-based bulk retailer Costco going to increase its annual membership fees in the coming months?
That’s the word on the street, with the financial-services firm UBS predicting in a recent analyst note that the company may put through a price hike on its cheapest plan (Gold Star Membership), from $55 to $60, and on its premium one (Executive Membership), from $110 to $120. It would be Costco’s first increase in nearly five years (the last was in 2011), according to UBS.
“The conditions are in place for Costco to bump up its membership fee early next year,” analyst Michael Lasser wrote, according to CNN Money.
The possibility of a price hike—which Richard Galanti, Costco’s chief financial officer and executive vice president, did not confirm or deny in an interview with The Huffington Post last week—likely would have a modest effect on member renewals. The reason? The deals with the chain are often so good—Retail Dive reports a markup rate of just 15 percent on its bulk items—that renewals of annual memberships stand at 90 percent.
Delivering a Discount
And, not to be outdone, at least one startup in the food-delivery space is eyeing a membership model to drive revenue.
The fancy-food delivery service Munchery, which delivers food prepared by its local chefs, recently drew attention for its decision to require new customers to enroll in an $8.95-per-month membership. As Fortune reported last week, this will entitle clients to a 20 percent discount on its meals and kits. The company—operating in San Francisco, Los Angeles, New York, and Seattle—aims to use the strategy to expand its popularity with frequent takeout consumers.
The reason? It helps drive consistent revenue and ensures that people who are already hooked are staying on board.
“It’s a commitment. We know that customers want to come back to Munchery so that allows us to bring down the cost,” Tri Tran, the company’s cofounder and CEO, told Fortune.
The membership plan is not, however, a smart idea for those who rarely turn to takeout as a dining option. According to Tran, the company wants to preach to the converted, essentially.
“If you only order takeout once every six months, I agree, this is not a service for you,” he told Fortune.