It’s still all about the margin!
Last week we explored how some retail brands had introduced warranties, service plans and set-up charges, to help bolster gross margins. In this post we’ll look at models of membership and finance.
Membership models can charge customer for, well in some cases nothing actually just a card or permission to shop with you. When i deliver workshops on retail experiences, I imagine a store so incredible, it charges an admission fee at the door. Well in some cases, membership models are effectively doing this. Such models can also lock customers in, making them less susceptible to market forces or attempts by competitors to woo them away with lower prices and promotions.
Go Outdoors, the JD Sports owned out of town outdoor chain, charges a modest £5 annually for their Discount Card. This gives customer access to their “…Famous Discount”, saving at least 10% off the retail price of everything. Customers also get a “Price Guarantee” and “Exclusive Offers”.
Costco have model not too dissimilar, charging customers between £26 and £74 per year, on a scaled membership scheme, in order to shop in their warehouses. Costco currently have 90 million members, with numbers likely to grow to 100m by 2020, on current growth trajectories. Based on an average membership fee of £45, this generates over £4bn. This is before Costco have even sold a product.
Costco reportedly price in a way that the warehouses or depots, need only cover their local costs. This means that the gross margin of a product sale can be lower, in comparison to a traditional retail model. Profit to cover other head office and operational costs come from selling more membership, which is, well… at a margin that would make us all smile. “We are a membership warehouse club, dedicated to bringing our members the best possible prices on quality, brand-name merchandise” says Costco.
Part of why this model works so well, is something that Amazon have picked up on with their Prime membership. Prime members who invest £79 a year for membership perks, shop differently to non-prime members. The average member spends approximately £970 a year, nearly double that of a non-prime members. With close to 100 million global members, this models is brilliant on two accounts. People pay to shop and buy more. Amazon have invested considerably in their streaming TV model, commissioning a number of high profile shows, as a vehicle to get new members signed up. In the UK they have 4million members and are the fastest growing TV subscription network, despite trailing in numbers behind Netflix. The TV subscription is merely a means to get signups.
What services could you offer they got customers to be a member of your brand, in the knowledge they will go onto to spend more with you as a result of being a member?
Dixons Retail, parent company of Currys/PC World and Carphone Warehouse, announced to much fanfare how they intended to “Reinvent Retail” with a membership model. Leveraging their “Know How” tech support arm, they planned to lock in customers with a monthly subscription. Details on what you will get and exactly how much it will cost are sketchy at present, but Dixons see this as a way of tying-in customers to their stores. Perhaps ‘reinvent’ is the right word, as it feels like the clocks are being wound back to 1980, where many households rented their TV and video player from Radio Rentals or similar.
This type of model is designed to move a customer’s attention away from the total selling price, which is increasingly easy to compare online, to a monthly subscription or payment plan. This has worked well for mobile phone networks, that may have otherwise struggled to sell £600-£900 phones every 2 years without it.
Brighhouse charge an eye-watering 69% APR, giving its customers “the choice of top branded products, cutting edge technology and essential household goods at affordable weekly prices”. By allowing the spread of payments over 1, 2 or 3 years, on a weekly or monthly payment plan, Brighhouse customers focus on affordability, rather than the final selling price of a sofa or TV.
In Next’s accounts year ending January 2018, they reported just short of 2,500,000 active credit customers, what we would have previously called Next Catalogue customers. Averaging £441 on their account. Many of these customers buy from Next because they can shop and acquire items whether they have available cash today or not. This generates around 40% of the brands sales. In terms of Next accounts, they generated £170m in interest payments alone last year.
Instrument Rental is nothing new to music retail. Brass and woodwind rental, in particular, is big business in the USA. Whilst brass bands and orchestras play a greater role is US schools, it is interesting to see how many US music retailers focus on rental schemes and tuition programmes. In the 2017 NAMM’s Top100, many music retailers cited rental and tuition as a means to reconnect and build relationships with local musicians and learners again. “By focusing our marketing online to a national audience, we lose sight of our local music community.” It will be interesting to see some of the stories that come from this years NAMM Top100 announced in Nashville soon.
Rental schemes need not be limited to brass and woodwind. They could include pianos, guitars and PA, assuming the lifespan of the product made the numbers stack up.
The Brighthouse and proposed Dixon’s Retail models are similar to a rental model. The recent boom in subscription models for music, film and TV illustrate consumers are comfortable with these types of approaches. Focus on monthly affordability rather than the ticket price. If this monthly subscription includes a product, maintenance, tuition and extras it is quite difficult to compare.
Don’t forget to sign up for the regional workshops, starting Mid June. Designed for store managers, assistant managers and those responsible for sales teams in their business.
The event and online training tools are FREE to MIA member retailers. Non-MIA members are welcome to attend the workshops for just £149+VAT.