A few days ago, India's leading e-commerce player Flipkart announced its fee-based membership service, Flipkart First, for its customers which it says is really aimed at rewarding the 18 million registered shoppers the company says it caters to. For starters, the etailer will offer the service free to 75,000 customers who are lucky enough to be randomly selected for the service.
So, what do these lucky few get by being selected for the program? Free shipping for all orders, free 'In-a-Day Guaranteed Delivery', same day guaranteed delivery at a discounted price, 60-day replacement policy, priority service from customer support and more—in other words, heavy-duty shoppers at the site who are lucky enough to win this lottery look to luck out.
The big question here is—is Flipkart First a shot at generating much needed revenue that can pad the bottom line? Or is it just a bid for publicity? Moreover, do these kinds of loyalty programs really work?
Well, according to this Business Insider article, loyalty programs are not very effective in general, if you as a company are counting on getting a bump in revenue or profit growth from them.
Apparently, a McKinsey study of 55 publicly traded companies showed that those with significant loyalty programs on average grew at rates that were on par or even slower than those that didn’t have any programs. In fact, companies that implemented these programs also had EBITDA margins that were 10 percent lower than those that didn’t.
However, market caps of those with loyalty programs did outstrip those without over a five year period which means that the market rewarded these players over the long haul for them even if their numbers didn't get a bump. Which brings us to customer loyalty.
Flipkart's homework has undoubtedly focused on benchmarking itself to the one global business that it should logically try and imitate, namely big daddy Amazon, which offers a Netflix-like video service and unlimited 2-day shipping under its loyalty program called Prime, for US$99 (recently upped by US$20).
As this Forbes article points out, the fee is irrelevant—you're not going to make money at that price point for free-streaming and shipping dozens of packages to a single family every year. The goal with these programs is to cement your relationship with your customer where it becomes exceedingly clear that the service and site is your go-to destination for shopping for anything, and that by the time you click your button, go to bed, get to work the next day and return home, last night’s shopping is waiting for you.
With pre-programmed account details, a huge merchandise selection and no running around to hunt for items, Amazon (and now Flipkart) is betting that going anywhere else to shop will simply be unthinkable. In other words, the loyalty program becomes a lure for shoppers rather than a revenue-generating scheme.
Still, the economics quoted by Forbes is undeniably attractive—the average Prime customer at Amazon apparently forked out USD$1,340 last year and if you factor in the company’s 26.5 percent gross margin, this comes to US$355, which is pretty attractive math.
Flipkart too will hope that its First service will imitate Prime's success in cementing a long-term future with loyal Indian shoppers who resort to the site as a default rather than an exception. And if they do so in hordes because it's just so much more convenient and economical to do so, it could also turn out to be a nice little cash pile as it has for Amazon.