Guide 39 · Program design
Paid or free loyalty membership?
Run a paid loyalty program only when it buys a saving or benefit members can calculate and recover with their normal spending, and that a free program cannot offer. If you cannot show in one line how a typical member earns the fee back, keep the program free. A paid program then lives or dies on its renewal rate, so measure that first.
A paid loyalty program charges members a fee for its benefits; a free program costs nothing to join. The choice changes the whole relationship. A free program earns its keep through extra purchases. A paid program has to repay the member’s fee before any loyalty effect begins, and members check whether it did every time it renews. Charge only when members can see, in one line of arithmetic, how they earn the fee back. This guide explains when a fee works, how to test it, how to handle trials and billing, how subscription loyalty differs, and what to measure once you charge.
Paid vs free
What is the difference between paid and free loyalty?
In a free program, the business funds rewards from the margin on the extra purchases the program brings. Sephora’s Beauty Insider, for example, is a free rewards program in which members earn points on merchandise purchases and redeem them for rewards. In a paid membership, the member pays up front for benefits such as member prices, free delivery or higher rewards. The fee brings revenue before any purchase and gives members a reason to concentrate spending with you. It also turns members into customers who expect a return: if the benefits do not cover the fee, the program becomes a reason to leave.
Some programs combine the two, with a free base level and an optional paid level. That works when the paid level offers something clearly different, not just more of the same, such as member pricing or free delivery that the free level never gets.
When a fee works
When does a paid membership make sense?
When the fee buys a saving or benefit members can calculate, that they get again and again through normal buying. Costco shows the logic. Its US Gold Star and Business memberships cost $65 a year, and paid members can upgrade to an Executive membership for an additional $65, which earns a 2% reward on qualified purchases (generally up to $1,250 a year), redeemable at Costco warehouses. A member who spends $3,250 a year on qualified purchases earns the $65 back; above that, the upgrade pays. The member can work this out, and Costco says Executive members accounted for about 73.6% of its worldwide net sales in fiscal 2025.
Paid membership suits businesses with frequent, predictable purchases, benefits that cost less to deliver than members value them, and customers who buy often enough to notice the saving. It suits occasional purchases poorly, because few members would earn the fee back.
A fee also changes what members expect from service. Paying members notice every missing benefit, and judge the whole fee by those moments. Before charging, check that operations can deliver the benefits every time, at every location and in every channel the membership covers. Cancelling should be as easy as joining; a hard exit damages trust more than it protects revenue.
Sources for this section
Costco Wholesale Corporation Form 10-K, fiscal 2025 (sec.gov) F-G4-10
Test the fee
How do you test the fee against member value?
Write the member’s arithmetic in one line, then check it for the members you expect to sign up.
| Annual spend of a member | Benefit at 5% back | Fee | Member’s result |
|---|---|---|---|
| $1,800 | $90 | $120 | $30 out of pocket |
| $2,400 | $120 | $120 | Breaks even |
| $3,000 | $150 | $120 | $30 ahead |
In this hypothetical paid level with a $120 fee and 5% back in points, every member below $2,400 of annual spend loses money and is a likely cancellation. Two further checks help:
- Count only benefits members will use. Value a coupon book, priority access or an event at what it costs you to replace, not at what it seems worth in marketing.
- Ask whether the free program could offer the same benefit by removing a weak reward. If it could, the fee is a convenience charge rather than a new source of value, and it will work only where members save money or time in a repeatable way.
Trials and billing
How should you handle trials, billing and cancellation?
A fee is a barrier at sign-up, so most paid programs need a way to show value before the first charge. A free trial works when members can use the main benefit within the trial; a 30-day trial of free delivery is pointless if a typical customer orders every two months. A money-back guarantee on the first period does a similar job for benefits that take longer to show.
Billing choices change behavior too. Annual billing gives a full year for the member to earn the fee back and fewer renewal decisions, but a larger price at sign-up. Monthly billing lowers the entry price and gives members a decision point every month. Whichever you choose, state the price, the renewal date and how to cancel at sign-up, send a reminder before a trial converts or an annual fee renews, and check the automatic renewal rules that apply where you sell.
Watch which customers convert. If the first paid members are your heaviest buyers, part of the fee simply discounts spending you already had. Compare their spend before and after joining, or against a control group, before you credit the membership with their sales.
Subscription loyalty
How does subscription loyalty work?
Subscription loyalty rewards members for staying subscribed. Each successful renewal is the earning event: a fixed number of points per paid month, or a higher tier after a set number of consecutive paid periods.
The design details matter. Pause earning when a payment fails, and decide how long a grace period lasts before a streak resets. Make the first reward reachable within the first few billing cycles, because members who cancel before their first reward never see the program’s value. Do not award points for unpaid trial periods. And record tenure, not just the points balance, so tenure-based benefits are possible later.
Perks on a subscription
Should you add loyalty benefits to an existing subscription?
Only if the benefit reduces cancellations by enough to pay for itself. A subscription’s renewal is already a loyalty decision, and a second reward system has to earn its cost.
Work out the break-even. Divide the monthly cost of the benefit by the margin on one member’s monthly fee: the answer is the number of extra members per month who must stay because of the benefit. Then ask whether that reduction in churn is realistic. Benefits delivered inside the subscription, such as a free month, a better service level or early access, usually reinforce it better than a separate catalog of goods. A pilot with a control group of subscribers who do not get the benefit is the cleanest test.
Measure it
How do you measure a paid program?
Start with the renewal rate, the share of members whose membership comes up for renewal and who renew. It is the clearest sign that members think the fee is worth it. Costco reported a renewal rate of 92.3% in the US and Canada and 89.8% worldwide at the end of fiscal 2025, and noted that memberships sold online, including through digital promotions, renew at a slightly lower rate on average. Track renewal by acquisition channel for the same reason: members who joined on a discount often renew less.
Next, track benefit use: how many members actually use the benefits that justify the fee. Low use today becomes low renewal next year. Finally, treat fee revenue carefully in reports. Costco’s membership fee revenue reached $5,323 million in fiscal 2025, and it recognizes that revenue over the one-year membership period. Fee revenue earned over a year is not a profit until the benefits it pays for have been delivered; see retention rate for how to read the member side alongside it.
More answers
Frequently asked questions
What is the difference between a paid and a free loyalty program?
A free program costs nothing to join and pays for itself through extra purchases. A paid program charges a fee for benefits such as discounts, free delivery or higher rewards, and has to give members back at least the value of the fee to keep them renewing.
Are paid loyalty programs better than free ones?
Neither is better in general. Paid programs suit businesses with frequent, predictable purchases where a benefit can be priced. Free programs suit broad audiences and occasional purchases, where a fee would keep most customers out.
How do you set the price of a paid membership?
Work back from the benefit. Estimate the value a typical member will actually use in a year, then set the fee clearly below it so the member wins on ordinary spending. Check the cost of delivering that value against the fee before launch.
Can a program be both paid and free?
Yes. Some programs have a free base level and an optional paid level with extra benefits. The paid level has to offer something the free level cannot, or members will not see a reason to pay.
Do paid members spend more because of the fee?
Partly at most. Customers who already buy often are the ones most likely to pay, so paid members would spend more than average even without the fee. Only a comparison against a randomly chosen control group shows how much extra spending the membership itself causes.
How is membership fee revenue accounted for?
Typically it is deferred and recognized over the membership period rather than when the fee is paid. Costco, for example, recognizes membership fee revenue ratably over the one-year membership. Your accountants decide the exact treatment.