Membership Rewards Drive Long-Term Growth

Membership Rewards Drive Long-Term Growth

Companies have long offered incentives to consumers in an effort to drive revenues and help the bottom line. Buy one, get one free, buy three tires get the fourth for free, etc. Over the last decade we have witnessed a number of companies in a variety of sectors begin to focus their attention on providing their customers membership rewards, or loyalty programs, in both the benefit of the customer and the company itself.

By selling customers memberships or having membership rewards programs, the companies are effectively building brand loyalty, saving themselves advertising expenses, transaction costs, and most importantly growing revenues through increased spending. In this article I would like to take a look at a few companies across a number of industries that have perfected the membership model over their history and stand ready to reap the rewards for the long term ahead.

Getting gold
I have been a huge fan of Starbucks , both as a consumer and an investor over the last year. While global coffee demand and a stellar product has helped the company to expand its presence, the company's membership rewards program has been a key driver of revenues as of late.

During the third quarter the company generated over 30% year-over-year growth in total dollars spent in its stores from My Starbucks Rewards members in the U.S. This growth was helped by 3% year-over-year growth in total dollars loaded on Starbucks cards in retail North America and nearly 100% year-over-year growth in dollars loaded on our cards via Starbucks mobile apps. By pushing its customers to get more involved with the program, we have seen the company generate more revenue from these consumers while saving themselves costly transaction fees.

I would expect to see a number of retailers emulate the mobile gift card success seen by Starbucks. Within the competitive coffee space, loyalty is the key to keeping its customers and growth intact during price increases and retail packaging distribution. With the launch of a number of new retail offerings later this year, I would expect membership loyalty to carry into non-Starbucks distributions points.

Since 1850
For over 160 years American Express has dedicated itself to offering its customers superior service that has allowed the company to build its reputation as a leader in the financial industry. Today the company's 102.4 million card holders which generate over $888 billion in annual purchase volume on American Express cards, bolstering the company top line.

I love the American Express business model, the company charges its customers between $95 and $450 to carry its rewards cards. At this point, customers will receive a predetermined number of points for every dollar they spend using their American Express cards. (Ex. 3 points for ever dollar spent on gas) Customers can then use these rewards one everything imaginable including travel, electronics, gift cards, and cash.

By offering such great rewards to high spenders, the company can afford to be exclusive and demanding of its customers in terms of credit score. The company continues to pull the best customers, thus keeping its delinquency rates at the lower end of the industry's range. At only 2% delinquency, the company remains in a strong financial position even through times of economic turbulence in comparison to its plastic counterparts.

To make up for the rewards paid to consumers, the company charges its merchants a number of fees for accepting its cards including authorization, swipe, and acceptance to name just a few. By offering a membership program the company has pushed consumers to spend more on its cards while attracting only the most financial well off consumers.

Toilet paper king
While CostcoWholesale may sell everything and anything, can you guess the company's number one selling product?

Based off the title you probably could have guess it, toilet paper. The company has gone as far as to set up a laboratory in an attempt to perfect the stuff. Back to the theme of the article, Costco offers its customers, or forces it customers, the ability to become a member and gain access to bulk-buying discounts on everything under the sun from Kirkland Bourbon to tubs of peanut butter. Over the last few years the company has been steadily growing its membership base despite increases in the cost of membership. During this time the company has kept a 93.9% renewal rate of current customers.

The company reported its third quarter results earlier this year where management announced a 19% year-over-year increase in the number of new member signups. The growth was fueled in large part to the company's Asian expansion, a geographic segment with great potential ahead. Membership fees came in at $531 million, up 12%, or $56 million, from last year's $475 million helped by increased executive membership sales. As with American Express, the company has established a rewards structure in which customers pay to shop at the retailer creating two great revenue streams.

Starbucks has developed a increasingly digital rewards program which has proven successful in increasing customer tickets and helping margins. American Express has consistently pulled the most credit worthy customer base as a result of its rewards program, thus helping to keep delinquencies low and profits high. Costco has consistently upped the cost of membership with little customer push back while increasingly the number of new members quarter after quarter.

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Nathaniel Matherson has a long position in Starbucks. The Motley Fool recommends American Express, Costco Wholesale, and Starbucks. The Motley Fool owns shares of Costco Wholesale and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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