Systematically sort out member economics

Membership is essentially marketing. In the current economic cycle, membership has become the core of a company's defensive strategy. In this article, we will systematically sort out membership.

In 2024, membership is very popular.

Alibaba is paying more and more attention to 88VIP, Meituan has launched its God Member program, JD Super 18 has also issued large coupons to Plus members, Starbucks has rarely expanded its membership benefits, and Hema has suspended and then restarted its membership.

Membership is not only in the e-commerce and retail fields, but also in the content field. Netflix, Youku, iQiyi and Tencent all have their own membership products. Moreover, some of these membership products require payment, some are free, some rely on points to exchange for benefits, and some have discounts when spending a certain amount.

Membership has evolved from an additional benefit to an explicit benefit, and companies are increasingly operating membership services in a more visible and expanded manner. For some companies, membership services still need to be operated even if they may be an investment-based rather than revenue-generating business for a long time.

So, why do platforms value members?

If membership is a necessary means to maintain existing users during an economic downturn, then why doesn't Pinduoduo have memberships, and Apple doesn't have its own membership products?

What is the essence of membership? How to operate membership in different industries with different demands? How to price membership and set rights and interests?

Based on this series of questions, we had a discussion with Frank, a member researcher and former product manager of JD.com. Frank told us that the essence of membership is marketing, which is a marketing product and marketing method launched by enterprises to improve the loyalty of core users.

However, due to different business models of enterprises, there are different pricing and benefits settings for members. Frank divides the membership products on the market into four quadrants based on whether users have to pay to enjoy the services and whether the enterprises have to bear the income.

Frank Drawing

For example, companies that can use it for free and do not regard membership fees (if any) as their core income include: Starbucks (points redemption), and Alibaba 88VIP, JD Plus, and HEMA Fresh, which are paid services but have benefits far exceeding the charging standards and whose platforms are mainly subsidized.

Users can use it for free, but membership fees constitute the company's core income, including: Bilibili membership, Himalaya membership, etc.

Users can only use it after paying. At the same time, membership fees are the core income of enterprises, mainly paid subscription content platforms, such as Netflix, Youku, iQiyi and Tencent Video, as well as some warehouse discount membership stores, such as Sam's Club and Hema X Membership Store.

Users have to pay to use it, but membership fees are not the core revenue of the company. There are relatively few such companies, the most typical example being Costco. Costco also charges membership fees, but when users spend a certain amount, the membership fees will be returned to the users. In Frank's opinion, the core of Costco's paid membership is to screen target customers, rather than to continuously expand revenue.

These dimensions form the basis for our understanding of the endless stream of membership products currently on the market that are constantly changing in price and benefits. They also serve as a window for us to peek into companies' strategies in user operations, market size, price, revenue, etc. from the changes in membership products.

01 The essence of membership is marketing

Narrow Broadcast: You have participated in the JD Plus project. In addition to your work experience, why do you think membership is so worthy of attention today?

Frank: It is true that I came into contact with membership products because of work: In 2015, JD.com launched the Plus membership project, and I was deeply involved in this project as a product manager; in 2016, Walmart subscribed to a portion of JD.com's common stock, and Walmart also opened a Sam's Club online on JD.com. This opportunity allowed me to gain an in-depth understanding of how Sam's Club actually operates, and I became more interested in Sam's model.

Recently, from a macro perspective, the cost of acquiring customers on the Internet, especially new customers, is very high. Many companies and enterprises have turned to the operation of old users or members. With the macro economy in a downturn, everyone's logic has changed from growth to efficiency, and even to a defensive strategy in the face of competition, so more attention is paid to the construction of member loyalty. For these reasons, I have also paid more attention to and learned more about membership products.

Narrowcast: Can you briefly review the history of membership, including what it was like at the beginning, what transformations it has gone through, and what are the main forms it currently exists in China?

Frank: It is generally recognized that the earliest membership model was the Babbitt Soap Company. Around the 1850s, it used the packaging trademarks on soaps as a form of points that could be exchanged for small gifts.

The second stage was the economic boom in the United States after World War II. A company called Blue Chip Stamps sold stamps to local retailers and consumer brands. Stamps can be understood as a kind of bill or token. Consumers get such stamps after buying goods at a certain retailer. When a certain amount is accumulated, it can be exchanged for some gifts. Buffett and Munger both invested in Blue Chip Stamps because it had good cash flow. In the 1970s, the company's sales reached a peak of $140 million. At that time, there were many such companies in the United States, and rewards for points and stamps were relatively common.

The third example is the well-known membership warehouse club retailer Costco. Walmart founder Sam Walton is an iconic figure in the US retail industry. He founded Walmart supermarkets and Sam's Club. The inspiration for Sam's Club came from a very innovative person of the same period, Sol Price, the founder of the membership warehouse retail model. Later, his company merged with Costco to become the current Costco. During this period, the US economy also experienced inflation and depression. This membership model has a good discount retail model in terms of member retention, especially for middle-class consumers.

Around 2000, the Internet came into being, and two important companies emerged, one is Netflix and the other is Amazon. Netflix led the subscription model, and DVD rental fees changed from paying by quantity to paying monthly, which greatly expanded the consumer base. With the development of network infrastructure and the increase in bandwidth, the subscription system has become a very good membership business arrangement for streaming media, and it is also the model with the largest number of members in the world. Amazon Prime was launched in 2005 and should be the most successful paid membership method to date. Its founder Bezos also mentioned in his autobiography that he was inspired by Costco to create a paid membership product.

Back to China, let's take Tencent as an example. Currently, the two platforms with the largest number of paid members in China are Tencent Video and Tencent Music, both of which are owned by Tencent.

Narrowcast: So in the process of membership evolution, there have emerged points redemption, discount, subscription, and payment categories. What is the core business model behind each of them?

Frank: There are many different names for membership-related businesses, such as membership operations, membership marketing, membership system, etc.

If we understand it in essence, it is actually very simple: members are part of marketing. From the perspective of business management, it should be classified as marketing management. Simply put, it is for companies to create value and establish stable relationships in order to obtain benefits from customers.

Should a company do marketing? If the product is good enough, you may think that good wine needs no bush. But if your wine is good, you can also do some marketing. These are different choices for companies. At the same time, there are still only a few companies with such good product power. Most companies still have to do marketing actions. At least you have to consider whether you want to do loyalty programs, become a member, or even a paid member at the corresponding stage and with the corresponding strategy. Understanding from the perspective of marketing is relatively less complicated.

02 Types of Members

Narrow broadcast: There are many membership products around us, such as paid memberships of long video platforms, 88VIP and JD Plus of e-commerce platforms, Meituan God membership, etc. How should we classify them?

Frank: Membership products can be simply divided into two categories: one is paid membership, or subscription. The other is free value-added, where you can use part of it for free, but you have to pay for advanced features or content. I added another dimension to these two, financial and complex. The overall category is divided into four quadrants.

Financial membership products have a certain revenue orientation. For example, Bilibili, Himalaya, Baidu Netdisk, etc., all of which have to bear the company's revenue.

Some complex membership products also charge fees, but companies do not view paid membership as a means to increase revenue. They rather hope to give back value to customers and allow customers to participate in the platform community brand building, creating a symbiotic relationship and increasing the customer's complete life cycle value.

For example, Costco requires a membership fee first, which is a subscription system in a sense, with an annual fee. However, its senior members can get 2% rebate after shopping, so if the annual consumption reaches US$6,000, the membership fee can be recovered in the form of rebate. Therefore, this situation is more focused not on fees or income, but more on establishing a long-term and stable relationship with members to build loyalty.

Narrowcasting: According to this classification, Bilibili should have both types of income.

Part of it is paid subscriptions. The challenge for Bilibili is that the cost of content procurement is very high, and it is very dependent on blockbuster products. Only when the supply is continuous can the income be stable. Once the supply is cut off, or the influence and attractiveness of the supplied IP, that is, the ability to attract payment, cannot keep up, this part of the income will be significantly affected. Some content on iQiyi did not perform well a while ago, and the membership scale and overall income were affected. This logic can explain part of the reason.

Another part of Bilibili's income needs to be considered from the perspective of the free Internet traffic model: whether the traffic scale and traffic distribution efficiency are particularly high.

The core factors and logic that can drive these two types of profits are different, and the final income situation will also be affected by the two logics.

Frank: Yes. For this kind of streaming media or paid knowledge content platform, the core is whether it can have original content. For long video platforms, each drama must be made by a large investment and a professional team, and the exclusivity is very strong. But for short and medium videos, some are of high quality, but it is impossible to guarantee that all the content on Bilibili or all the content produced by knowledge bloggers on paid knowledge platforms are very scarce, so it is impossible to adopt a complete subscription system, but to continuously increase their income by increasing the penetration rate of paid members.

Narrowcast: Do e-commerce membership products have both the features of paid subscriptions on long video platforms and the qualities of maintaining user loyalty in retail channels?

Frank: E-commerce platforms, including the fast-growing Hema Fresh, Xiaoxiang Supermarket, Dingdong Maicai, and PuPu Supermarket, have also made paid membership a standard feature. At this stage, users need to pay membership fees, but the platforms are still doing it with subsidies as the guide. Whether it is subsidies for logistics or subsidies for customer service and after-sales services, including membership prices and membership days.

88VIP is an ecological model that combines the rights and interests of many of Alibaba's ecological partners. Therefore, it is more like Costco, providing some solutions for member life services and going one step further. Other e-commerce platforms are also working in this direction.

The development of e-commerce in China is still many years behind that of the United States. In this process, I believe that eventually large platforms will provide services that are both welfare-oriented and meet all aspects of members' lives, rather than focusing on a relatively limited positioning such as "I am a member of a supermarket, so I will only give you discounts on some products."

Narrowcast: Since paid membership may not be profit-oriented, how should companies decide how much to invest in membership business?

Frank: In the long run, companies will definitely pursue profit efficiency, but from a phased perspective or different cycles, sometimes there will be a period of strategic investment.

Different industries have different cost structures. For example, in the fast food industry, there is data showing that after deducting labor, water, electricity, and rent, restaurants still have a profit margin of more than 10%. If the membership card launched is 10% off, at least it can avoid losses. However, because membership has a certain scale effect for restaurants, more people come here to order food, and the fixed costs are actually unchanged. From this perspective, it is possible to make profits by further expanding the membership scale.

In the e-commerce industry, whether it is Amazon Prime members or domestic paid members, long-term, especially in the early stages, strategic investment is required. Amazon's Prime members have to subsidize consumers' logistics costs. The logistics and delivery costs in the United States may have been $10 per order in the early days, but now it may have been reduced by half. The $139 payment also includes Amazon's streaming services, videos, music, and e-books, so Amazon will definitely continue to subsidize Prime members.

I have seen a calculation that the market price of many benefits of Prime membership is close to $1,000. So why do users like Prime membership so much? Because it is cost-effective. But for enterprises, subsidies in the early stage are expected to have a scale effect, such as logistics costs will continue to decline. In addition, the annual consumption frequency and consumption amount of paid members are also increasing. So in the long run, it will still reduce costs and increase revenue and profits in the later stage. Overall, it will be better than if we only look at the ROI of the early investment. So this is a strategic investment, but it relies more on scale effects and membership benefits to continuously stimulate consumers' consumption potential.

03 How to set membership scope and rights boundaries

Narrowcast: How is a membership product designed? What dimensions are considered when launching this membership product?

Frank: First, we need to think clearly about what the company wants. Is it to enhance member value, build member relationships, or generate revenue or profit? Different goals require different indicators for rights design, pricing, and changes in user behavior. This must be agreed upon from top to bottom within the company before the corresponding resources can be mobilized.

Second, you need to think clearly about what members want. There are two things to do here. The first thing is to clearly define your members and do member stratification. You can refer to the RFM model. Every company will attach great importance to this work, and we can also see some external manifestations, such as Taobao's requirements for naughty points, and Bilibili must answer the questions first.

The second thing is to understand what members want. Before Amazon started offering membership, it also conducted research on two types of people: the first type knew about Amazon but had not purchased anything; the second type had purchased something but had not increased their repurchase or transaction frequency. The answer from the research was obvious: shipping was too expensive. So later on, shipping subsidies became very important in Amazon Prime. Only by knowing what core customers want can we design and price the benefits later.

Ultimately, there are three core goals that companies should achieve when launching membership benefits.

First, increase the intimacy between the brand and the platform and customers or members. You need to have a high frequency of links or interactions and value exchanges with members. Each interaction may not make money, but only with intimacy can there be subsequent loyalty. For example, Hema members have the right to receive free food every day. You can't make money by receiving free food, but you have to use a way to occupy the minds of user members. Only when they keep in touch with you, they are more likely to have a more comprehensive understanding of your products and services and have more favorable impressions.

Subscription is the biggest way to improve intimacy, because once you pay the membership fee, you think you have to continue to enjoy the service and earn the membership fee, and your behavior changes. When it is time to renew, you will renew because of loss aversion, otherwise you will feel that you can't enjoy so much. But not many people can do this model, and it has extremely high requirements for products and services.

The second is recognition, which is first reflected in the real value feedback, so that users can truly feel the sincerity of the platform when enjoying their rights and interests. For example, the earliest membership of Lao Xiangji was called the 77 Membership Card, which offered a 77% discount on the most expensive dishes purchased, and users could also combine their own rights and interests, but the effect was not good. Later, it was upgraded and simplified, with an 12% discount on the entire order. Although it seems that a 73% discount is more affordable, in fact, an 12% discount is simpler and more practical. It is a discount on the entire order, and the feedback data is very good, which can make users have a good perception and thus have a higher recognition of the brand service. From the perspective of value feedback, the improvement in recognition is the highest.

The third is a sense of belonging, which is more about the brand level. It is necessary to make users recognize the brand. For example, the return flight plan of Santonban can arouse your environmental protection concept and have a higher recognition of the brand. In addition to discounts, the membership rights of enterprises should also increase the display of brand level.

Narrowcast: There is a view that for enterprises, 80% of revenue is provided by the top 20% of users. Does that mean that when designing membership products, enterprises only need to focus on the top 20%? Is there any misunderstanding in this?

Frank: First of all, we need to stratify consumers. High-potential members have formed relatively high consumption capacity, frequency, and loyalty, and some members have high frequency but may not be of high value. How to define the value of members, each company has its own indicators and views.

The current membership penetration rate is the ratio of paid members to annual active users. Among e-commerce platforms, JD.com has a higher rate, nearly 7%, and 88 VIP should be 3%. That’s why it is working hard this year, because there is still a lot of room for it. Relatively speaking, the membership penetration rate of subscription-based platforms is higher. For example, Tencent Video’s paid rate is 27%, which is relatively high in China, and the membership scale is also very large, with more than 100 million members.

The penetration rate of foreign platforms may be higher, but do you think it will eventually develop into 80% paid members? Not necessarily. Currently, there is only one, Amazon Prime members, with a payment rate of 75% in the United States. This is related to the logistics situation in the United States. Users need a good logistics experience and next-day delivery, so the payment rate is very high. In addition, the penetration rate of most paid members of 20%~30% is already very high, and the payment rate of the free value-added model is only about 10%.

Narrowcast: Is there another trend in the development of membership now? That is, different rights and interests are graded for membership products. For example, 88VIP now has three levels of membership, and Sam's Club and Costco have different rights and interests. Is this also a visible trend that membership is becoming more and more complex and refined?

Frank: I think it should be moderate. Costco has two types of membership, ordinary membership and premium membership. The more the better, otherwise there will be no scarcity. If the division is too detailed, the difference in rights and interests will be smaller in the future, and the membership operating costs will increase instead.

04 Current status and trends of mainstream membership products

Narrowcast: Why does Alibaba attach so much importance to 88VIP this year? What internal, external, macro and internal factors does this have to do with?

Frank: From the data, we can see that its annual transaction users have reached 900 million, which is a very large scale for e-commerce. It also means that it is unrealistic to continue to increase the number of new customers. Now the cost of acquiring pure new users for e-commerce may be several thousand yuan, and companies will definitely transfer the cost to the activation and improvement of old users.

The second is the penetration rate of paid members. The penetration rate of 88VIP is 3%, which is quite low compared with the domestic market. Although it has a large base, it still has room for growth. The current competition in the e-commerce market is also imaginable. It is necessary to keep your core users and continuously improve the payment rate in your relatively large stock.

In addition, the new management's strategy is to return to Taobao and return to growth. The high-value 88VIP members must have a Taobao value of 1,000 points. This threshold is very high, so it is a very advantageous tool for returning to Taobao.

Narrowcast: Our basic judgment on Alibaba's e-commerce is that it is bound to make a comeback. In this process, what role can 88VIP play?

Frank: I think 88VIP is a very important tool for Alibaba, at least at this stage. Judging from its latest financial report, it is a very rare achievement to return to double-digit growth. Although the profits it disclosed are not very good, it has made a lot of investment in the price power of goods and the rights of members, and has put real money into members, users and consumers. If we look at its financial reports later and see that it continues to rebound in terms of growth, 88VIP's high-quality members have made an indelible contribution, and the value of its decision will also be revealed.

Narrowcasting: Can it play the same role as the 10 billion yuan subsidy for Pinduoduo? The 10 billion yuan subsidy is equivalent to an IP of Pinduoduo, which is highly recognizable and helps Pinduoduo attract brands to enter.

Frank: Although the two cannot be directly compared, they are essentially feedback to members, which is called consumer surplus in economic terms.

Pinduoduo is now in the stage of high-quality operation, while Alibaba is returning to growth. The two companies are in different situations. Suppose you have a full lunch and hope to have a good meal at night. Another situation is that you don’t have time to eat in the morning or at noon, and hope to have a good meal at night. The same dinner in these two situations will have different effects and feelings on you.

88VIP obviously belongs to the latter, and it is one of the more important and critical business tools for Alibaba at present. I say one mainly to be more rigorous, because its current membership penetration rate is only 3%, which is not that large in absolute terms.

Narrow broadcast: Meituan also launched its own membership product during this period. What are the similarities and differences with Alibaba’s 88VIP?

Frank: We all face very fierce competition, this is the same.

Meituan's members in the past were mostly members of takeout, but the God members are members of the entire platform. From the perspective of internal operating efficiency, there is room for improvement, and merchants will also set their own marketing strategies in more dimensions. The number of God members is in the tens of millions, which is a high-band and medium-band according to Meituan itself. These users can generate a lot of cross-selling and driving effects in Meituan's other businesses.

Narrowcast: Meituan has its own ecosystem. If the God Membership can play the leverage effect we mentioned, or the effect of improving the user life cycle, it must not be just a discount product.

Frank: Yes, this is also a key point for improvement this time. I think this time it will not be limited to just expanding its coupon package types, but will provide more value from the perspective of the past, business, and Meituan members.

Narrowcast: What challenges does this process bring to Meituan? Will there be any changes or adjustments in its understanding of users and the degree of stratification?

Frank: The challenges are definitely huge. In addition to the many things that need to be coordinated during the organizational integration process, the upgrade of Shen members in the food delivery scenario is, in a sense, from the bottom up.

Unlike 88VIP, which converts users with high Taobao scores into members, it upgrades members. This bottom-up approach is rare in membership products. Generally, platforms define the target group of members as high-value, that is, high frequency, strong potential, or having shown good annual sales contribution. From this perspective, takeaway members are only very high in frequency.

If it wants to ensure scale while having good consumer behavior in new and medium-frequency businesses, it needs some innovations in user screening and rights setting.

Narrowcast: How much room do you think there is for improvement in the paid penetration rate of JD Plus?

Frank: This prediction still depends on the rights and interests of users. JD.com launched membership relatively early, in 2015, three years earlier than 88VIP. At the same time, the user scale has grown quite fast. Because the difference in the experience of self-operated logistics was very large at that time, the willingness of users to pay was also quite high. Now the difference in the time efficiency of domestic logistics infrastructure is not that big. Whether it is JD.com Plus or 88 VIP, they need to continuously create member value. When members see good services, they are naturally willing to pay.

At this stage, we must first improve our price competitiveness, and secondly, in terms of service, especially in terms of after-sales returns and exchanges, we must dispel members' concerns about transactions and allow them to place orders and trade without worries. This is a short-term focus.

05 Why does Pinduoduo have no members?

Narrow broadcast: Why doesn’t Pinduoduo have its own membership product? Are the 10 billion yuan in subsidies for Pinduoduo’s membership? It originally targets a group of people with higher paying value.

Frank: Not all companies have to have memberships. Neither Pinduoduo nor Apple has one. But whether in terms of products or pricing, they are either scarce enough or competitive enough, which is itself a basis for consumer loyalty.

These two companies are member-oriented. They are not limited to tangible marketing products such as membership products, but have a strong user-oriented and user-first philosophy. Therefore, the lack of membership products at this stage does not affect operations. As for whether there will be membership products one day, we can only wait and see, but now they are still doing well without them. So this is also a good point of view: if our product power pursues unremitting innovation and creates value for consumers, it is also a kind of corporate membership thinking, and it is not necessary to make a set of actual membership products.

But there are very few such companies. If our company and brand have not reached this level at the current stage, or are just starting up, and if we face relatively fierce industry competition, we still have to consider membership products and membership marketing.

Narrowcast: It is quite interesting to think about Pinduoduo and Apple together. Huang Zheng previously defined Pinduoduo as Costco + Disney, and now we find similarities between it and Apple. Of course, Pinduoduo has been deified to a certain extent, but we still need to look at the company's model from more perspectives. While it brings great convenience to consumers, it also has a certain degree of violence to another group of people.

Frank: We cannot define Pinduoduo accurately now, because its development time is still very short, less than ten years, compared with domestic or foreign e-commerce. It has also been using the coupon package model to increase intimacy and do some marketing. So I suggest that you continue to pay attention to Pinduoduo, but don't define it or even judge it.

06 Is membership related to the economic cycle?

Narrowcast: At what stages do companies usually launch membership products?

Frank: There are relatively clear points in the development stages. For example, when a company has a monetization demand, before and after the listing, like Tencent Music went public in 2018, its paid membership penetration rate has increased from 3% in 2019 to 27% this year, and we can see a rising curve. Before 2018, it also did green diamond nobility and monthly membership payments, but at that time the focus was more on content construction, copyright procurement, and coping with market competition and expanding scale.

When competition intensifies or new businesses are launched, members will become members, or their membership rights will change. For example, Uber has changed from taxis to food delivery, and its membership rights include both taxi and food delivery rights, and food delivery revenue now accounts for a large proportion.

The more general answer is, not in the early stage. Paid membership is still a stage that can increase revenue and even improve corporate gross profit, so at this time he will do it, or will invest more in the construction of this membership product.

Narrowcast: At a macro point in time, is there any relationship between the launch of memberships and the economic cycle?

Frank: This is a good question. I think one relatively clear point is that the correlation between the downward economic trend and discount e-commerce or discount retail is still very obvious.

For example, after the Japanese economic bubble burst in the 1990s, discount retail formats such as MUJI and Don Quijote developed rapidly, and Germany's Aldi also offered hard discounts when the economy was down. Although Costco was not necessarily born when the US economy was at its worst, everyone's consumption concepts would change in the years after the economic depression. During this period, the middle class would flock to Costco stores because they wanted to reduce certain expenses while not reducing quality, and Costco could satisfy them. Therefore, during several oil crises and economic depressions, the size of Costco's middle-class members grew.

In this cycle, the membership strategy must also be more competitive in price, or have incremental services to make users feel that the price-performance ratio or quality-price ratio is higher. This also echoes what we just said about rights and interests and strategies, which are ultimately for member satisfaction and loyalty. The changes in retail are also reflected in the rights and interests of members.

But it does not absolutely mean that I only focus on members and ignore other non-members, or that there are no other marketing actions. It is just about the main contradiction and the secondary contradiction, or the main group and the secondary group.

Compiled by | Fen Nancy (Hong Kong)

Producer | Pang Mengyuan (Shanghai)