Andrea Vassallo

Every week, the same tension fills boardrooms across the DTC landscape. As the week closes, the gap between projected and actual revenue widens, and the instinct is always the same: sacrifice price to force volume.

Blanket discounting becomes the business model. It starts as a temporary fix (a 30% off site-wide sale to bridge a revenue gap) but quickly metastasizes into a long-term dependency. While the immediate revenue spike provides short-term relief, the hangover is severe. Margins erode, brand equity dilutes, and most dangerously, customers are trained to wait.

Strategic discounting is a powerful lever for growth; panic discounting is a slow-motion liquidation of brand value. But if your business has real discount dependency, you already know that simply stopping isn't an option. You cannot turn off the tap without crashing cash flow.

The solution isn't to stop discounting overnight. The solution is to transition strategically. This guide outlines exactly why you are stuck and provides a phased operational roadmap to recover your pricing power without destroying your business.

## The Anatomy of Brand Erosion

To build the internal case for change, you must articulate the full cost of your current strategy. It goes beyond simple margin loss; it's about the structural degradation of your business model.

### Customer Conditioning

You are training your customers to be price-sensitive. Reference price theory explains why discounts work so well in the short term: customers enter with a price expectation shaped by the market, and when your offer undercuts it, the deal feels like a win. They buy.

But here's the trap: that discounted price becomes their new anchor. The next time they see your product at full price, it doesn't feel like the actual price. It feels like a markup. You won the acquisition and lost the customer's willingness to pay.

The pattern is consistent across the DTC brands we work with: customers acquired on deep discounts buy less often, churn faster, and generate significantly lower lifetime value than full-price cohorts. You aren't just acquiring cheaper customers; you're acquiring worse ones.

### Margin Math

The math of discounting is punishing. Consider a product with a $100 price point and $55 cost of goods (a healthy 45% gross margin). At a 30% discount, the selling price drops to $70 but the cost of goods stays at $55, compressing gross profit from $45 to $15 per unit. To maintain the same gross profit dollars, you now need to sell three units for every one you used to sell at full price.

At first, discount-driven audiences are large, cheap to reach, and fast to convert. The CAC looks great on a dashboard. But you've just tripled your volume while cutting your margin per unit by two-thirds, and you've filled your customer file with buyers who were attracted by price, not by your brand. They'll wait for the next sale, and the next one, and the next one. In the meantime, your CAC will keep rising as you exhaust your in-market audience, compressing your margins more and more until you're actually losing money, not making money.

## The Alternatives to Discounting

If blanket discounts are bleeding your margins, what's the alternative? You've likely tried some of these tactics before. The difference comes down to execution discipline, not the tactics themselves. These three strategies work when applied systematically, not as one-off experiments.

### Strategy 1: Lock Cash into Your Ecosystem

Instead of giving customers 30% off that they can take anywhere, give them that value back in a form that requires them to return to your brand. This means loyalty points or store credit.

The mechanics are simple: a customer who would have received a 30% discount instead receives equivalent value as points in a loyalty program or as a credit applied to their account. The cost to you is lower due to breakage (not everyone redeems), and you maintain your reference price. A $100 product stays $100; the customer just has $30 in their account to use on the next purchase.

Store credit works particularly well for win-back flows and cart abandonment. Instead of sending a percentage-off coupon, send a $20 credit. It maintains pricing integrity and typically increases AOV, as customers often spend more to use up the credit rather than letting it expire.

Loyalty points offer similar mechanics but with more flexibility in how customers redeem. Cash-back points are the default, but you can also allow redemption for other benefits depending on your program structure. The key advantage over direct discounts is breakage and the psychological commitment to your brand that comes with an account balance.

### Strategy 2: Add Value Instead of Cutting Price

Shift the offer from price reduction to value addition. The principle is simple: give customers something that feels valuable but costs you less than a percentage-off discount.

This includes tangible additions like free shipping, extended returns, or gifts-with-purchase using slow-moving inventory. But it also includes access and exclusivity: early access to new drops, exclusive products, VIP experiences, or priority support. These carry high perceived value at a fraction of the cost of a cash discount.

Value-adds work best when the perceived value is high but the actual cost is low. Free shipping on orders over a threshold costs you the shipping subsidy but increases AOV. An extended return window costs you nothing unless the customer actually returns something. Early access costs you nothing but makes customers feel special. A GWP using dead stock turns a sunk cost into a conversion driver.

### Strategy 3: Improve Your Discount Targeting

If you're going to offer cash discounts, stop broadcasting them. The damage comes from giving discounts to people who would have paid full price. Narrow targeting protects your full-price buyers while still giving you a tool for acquisition and reactivation.

This means retiring site-wide promotional codes and homepage sale banners. Instead, send discounts only to specific audiences via email or SMS: lapsed customers who haven't purchased in 6+ months, cart abandoners, first-time visitors who didn't convert. Use unique, single-use codes tied to the recipient so the offer can't leak to your full-price audience.

The key is channel discipline. Discounts sent via direct channels (email, SMS, retargeting ads) stay contained. Discounts displayed on-site or in social posts get shared, screenshot, and distributed to people who didn't need the incentive. If a customer is already on your product page ready to buy, don't show them a discount. If they abandoned their cart or haven't returned in months, that's when the offer goes out.

Narrow targeting also gives you attribution clarity. When every offer uses a unique code, you know exactly which customers are discount-dependent and which aren't. That data becomes the foundation for further refinement.

## Pulling the Plug on Discounts

With your alternative toolkit in place, you can begin the transition. This is not about flipping a switch overnight; it's about systematically replacing blanket discounting with targeted offers and alternative mechanisms that protect margin while maintaining revenue.

### Measure the Problem

Before you change anything, you need to understand how deeply discounting has penetrated your business model. Pull 12 months of order data and calculate three metrics:

1. **Discount penetration rate**: What percentage of total orders used a discount code? This tells you how normalized discounting has become in your customer experience.  
2. **Revenue at risk**: What percentage of total revenue came from discounted orders? If the majority of your revenue required a promotional code to convert, you have a structural dependency problem.  
3. **Average discount depth**: Across all discounted orders, what was the average percentage off? A brand running 15% average discounts has a different problem than one running 35% average discounts.

These three numbers determine your transition timeline. Brands with 70%+ discount penetration and deep average discounts typically need 12 to 18 months to fully recover pricing power without cratering revenue. Brands under 40% penetration can move faster, sometimes within a single quarter. The key is matching your pace to your dependency level.

### Execute the Transition

The transition is conceptually simple: stop giving discounts to people who don't need them, and change what you give to people who do. In practice, this means progressively applying your three strategies (narrow targeting, ecosystem lock-in, and value-adds) to replace blanket promotions.

Here's what that looks like over a typical quarter:

1. **Audit your promo calendar.** List every discount you're running: site-wide sales, email blasts with promo codes, homepage banners, cart abandonment offers, welcome discounts. Calculate how much revenue each one drives. This is your baseline.  
2. **Start tightening the screws.** Remove discount messaging from your homepage. Retire one site-wide sale and replace it with targeted offers sent only to lapsed customers via email using unique codes. Swap percentage-off codes in your cart abandonment flow for store credit. Test early access against cash discounts for engaged customers.  
3. **Measure the impact and iterate.** If revenue drops too much, you moved too fast. Stabilize and try a smaller change. If revenue holds or margins improve without significant volume loss, continue tightening.

Over time, your promotional architecture shifts. Lapsed customers get aggressive win-back offers via email, but never on-site. Cart abandoners get store credit, not percentage-off codes. Loyal customers get early access and exclusive products. New visitors see full price with strong brand storytelling.

As this happens, expect revenue to stay flat or dip slightly in the short term. You're replacing low-quality volume with full-price purchases, and that's a slower build. But the composition of that revenue changes fundamentally: gross margin dollars grow because you're no longer giving away significant percentages of every other transaction, and customer quality improves as your file tilts toward buyers who don't need a coupon to convert.

## What It Looks Like on the Other Side

Eighteen months into a disciplined transition, the business looks fundamentally different. Discount penetration drops from 70% to under 30%. Gross margin per order increases by 15 to 20 percentage points. Customer cohorts acquired at full price show 2x to 3x higher LTV than legacy discount cohorts.

But the hardest part isn't the tactics. The hardest part is the internal conversation. Finance sees short-term revenue risk. Marketing sees CAC spike as you stop subsidizing acquisition with margin-destroying discounts. The executive team has to hold the line while the business rebalances.

Need help planning and building the infrastructure to execute this transition? [We can help!](https://nebulab.com/contact-us)

Stop Killing Your Margins: A Guide to Smarter E-Commerce Discounting

Michela Frecchiami

With customer acquisition costs increasing by 222% between 2013 and 2022, modern brands must maximize retention and customer lifetime value. Over the last years, several brands have looked at subscriptions to help mitigate this challenge: by putting future purchases on autopilot, subscriptions can boost purchase frequency and drive more sustainable growth.

As more brands adopt subscriptions, however, many consumers have also begun experiencing [subscription fatigue](https://hbswk.hbs.edu/item/with-subscription-fatigue-setting-in-companies-need-to-think-hard-about-fees), which has led to a slew of cancellations. This trend can only get worse with the recent challenges in the macroeconomic environment, as consumers look to acquire greater control over their spending and cut back on unnecessary purchases.

In other words, subscriptions are a great business model, but they’re becoming increasingly challenging for e-commerce businesses to execute.

This is a complex, multi-faceted challenge that would take several blog posts to unpack. Today, we’d like to start by offering some tactical advice on how you can improve the pre-checkout UX of your subscription offering and incentivize more customers to subscribe based on our experience with brands such as [Cometeer](https://cometeer.com/), [MeUndies](https://meundies.com/), and [Blue Apron](https://www.blueapron.com/).

## #1: Create a “How It Works” Section

Every online store that offers subscriptions should have a “How It Works”section. This section can be a standalone page or embedded in the home page, landing page, pricing page, or any other prominent touchpoint on your e-commerce site.

A good How It Works section equips consumers with all they need to know about your product, pricing, and delivery options. It can be a significant make-or-break moment in the consumer’s decision-making process.

In our experience, a good How It Works page design covers:

* **Benefits, not features:** It goes without saying, but you should tell customers not just what you sell but also why it’s relevant to them. It’s good to know your meal delivery service only ships organic ingredients–but why should they care?
* **Subscription options:** Do you let customers pause, skip, and cancel deliveries at any time? (Hint: You should.) Say so! Let your customers know they will still have complete control and flexibility in managing their subscriptions.
* **Social proof:** UGC is always a critical component, but it becomes even more important with a subscription model, where there’s a significant trust barrier to overcome. Show your best reviews–even better if you include images/videos!

<figure>
   <img src="https://cdn.sanity.io/images/kqgmf0g2/production/0d6024043b61b8db3d4e760aab3ed3fa78b17283-1600x1052.jpg?fit=clip">
   <figcaption>Purple Carrot provides detailed information on its Plans page, which leads to customers to sign-up and eventually checkout.</figcaption>
</figure>

For example, Purple Carrot uses its Pricing page to guide aspiring home chefs through its plant-based meal delivery service. This page helps customers complete the purchase by clearly outlining the high-quality nature of their product, per-meal pricing, and delivery and subscription management options. (But it could still be improved by adding some social proof!)

## #2: Put Your Pricing Front and Center

While new customers may be willing to splurge on a one-time purchase, they will often want reassurance they’re getting the best value for their money when committing to a recurring subscription.

The first step is to make your pricing clearly visible. It seems simple, but you’d be surprised how many brands hide their pricing information in the product details or hard-to-spot sections of the page–see Lovevery or Summer Fridays, highlighted below, as an example.

<figure>
   <img src="https://cdn.sanity.io/images/kqgmf0g2/production/68294e038d95e6f577cc162a5c5035f34b0a6a04-1600x1052.jpg?fit=clip">
   <figcaption></figcaption>
</figure>

To improve the visibility and clarity of pricing, consider playing with:

* **Text size:** Adjust text size so it stands out from surrounding content.
* **Contrast:** Use contrast effectively to make text pop against its background and nearby items, enhancing readability.
* **Whitespace:** Incorporate white space to declutter the page, making important information easier to locate and the layout more appealing.

Whenever possible, you should also try to break down your pricing in clever ways that highlight the value of your product. For example, meal delivery services typically use “cost per meal” as the north-star metric, as it helps customers clearly understand how much they’re spending to feed themselves and their families.

<figure>
   <img src="https://cdn.sanity.io/images/kqgmf0g2/production/157481bf311a40b75dcec56a1bc087d57019ba1a-1600x1052.jpg?fit=clip">
   <figcaption>Both Athletic Greens and Graza do a great job of clearly showing pricing information and plans on their websites.</figcaption>
</figure>

Finally, featuring pricing on other key touchpoints, such as the homepage page, as done by Athletic Greens, can significantly enhance user experience. Graza also does a great job by detailing pricing information for first and recurring orders directly in the Buy section.

Refining these elements can dramatically improve navigation and satisfaction, steering users from curiosity to commitment.

## #3: Don’t Rush Customers to Checkout

When brands use calls to action (CTAs) like "Get Started," they often rush the customer straight into the checkout process. Yet many users interpret such CTAs as an invitation to start exploring the brand, not to immediately commit.

While it might sound counterintuitive, we often advocate for brands not to disorient or frustrate users by teleporting them to the PDP or–worse–the checkout funnel if they haven’t had a chance to learn about the brand yet.

<figure>
   <img src="https://cdn.sanity.io/images/kqgmf0g2/production/9091d6b62146d8ace325963e55f94ece32d64475-1600x1052.jpg?fit=clip">
   <figcaption>MeUndies provides clear subscription service information after clicking the primary CTA and asks users to sign up at the end of the process.</figcaption>
</figure>

MeUndies, a Nebulab client, knows this very well. They link the “Get Started” CTA on their home page to the “How It Works” page. They don’t ask for the customer’s personal information until much later in the customer journey.

By earning the customer’s trust with content and data before moving into the actual checkout funnel, brands can create a smoother experience, reducing friction and increasing conversion rates.

## Bonus: Optimize Your Quiz Experience

While quizzes are not exclusive to subscriptions, subscription brands often use them to help prospective customers find the ideal product variant, subscription plan, and delivery frequency.

As a bonus, here are some tips on how to nail your quiz’s customer experience:

* **Offer an ETA**: By clearly stating the number of steps and completion time of your quiz, you can proactively manage customer expectations and increase engagement. Of course, this only works if your quiz is _actually_ quick!
* **Allow moving back and forth:** Customers should be able to move between different steps of your quiz and revisit previous questions without starting from scratch. You should also ensure that navigation is consistent with your site’s design.
* **Store user progress:** Ideally, you should store a user’s progress as they go through the quiz so they can resume it later. Pro tip: Just like you send cart abandonment emails, ask for the customer’s email upfront so that you can enroll them in a “quiz abandonment” flow if needed!

These tips will help create a smooth and pleasant quiz experience, which can dramatically impact your add-to-cart and conversion rates.

## Ready To Master Your Subscription UX?

Here's a brief refresher on the best practices that can elevate your subscription service:

1. Craft a compelling "How It Works" section that focuses on benefits rather than features, clearly outlines delivery and subscription options, and establishes credibility through social proof.
2. Put pricing front and center, not just on the PDP but also at other touchpoints in the customer journey. If possible, break down your pricing to demonstrate the value you deliver.
3. Rather than sending customers from your homepage straight to the PDP or checkout, focus on educating them on the value of your offering and only then closing the sale.

And our bonus tip: if you have a quiz functionality, allow your customers to navigate back and forth between steps and store their progress for later.

If you need UX design for your subscription offering, we can help! Since 2011, we’ve been helping brands anywhere from pre-revenue to $500M/year with the design, launch, and optimization of their subscription experience. [Feel free to reach out!](https://nebulab.com/contact-us)

3 (+1!) E-Commerce Subscription Tactics You Might Be Missing

Alessandro Desantis

In the last few years, customer acquisition has become more challenging and expensive for direct-to-consumer (DTC) brands due to App Tracking Transparency, increased competition, and inflationary pressure. With Chrome deprecating third-party cookies in late 2024/early 2025 and the resulting “signal loss,” marketers expect campaign performance to take another hit, driving Customer Acquisition Cost (CAC) further up.

As a result, e-commerce executives have been paying increased attention to customer retention strategies. Existing customers are cheaper to re-engage, have a higher average order value, and can drive organic acquisition through referrals, UGC and word of mouth.

In our conversations with clients, Customer Relationship Management (CRM) strategies have been top-of-mind, and new or revamped loyalty programs are among the main projects that brands are putting on the roadmap for the next year–often coupled with more intentional zero-party/first-party data strategy and better personalization capabilities.

However, not all loyalty programs are created equal: different growth stages, categories, and business models call for different program designs. The loyalty ecosystem has become increasingly complex to navigate, with a deluge of tools and tactics that brands can tap into. While this leads to more flexibility and healthier competition, even expert practitioners are often at a loss when they want to launch a new program or when they need to understand the performance and pitfalls of their existing one.

In this article, we’d like to cover the e-commerce loyalty programs through a first-principles approach. We’ll look at how to pick a program structure, how to design the “earn” side and the “burn” side of your program to maximize ROI–based on factors such as your geography, target demographic, product category, and business model–and how to measure the effectiveness of your program.

Let’s dive right in!

## How to Structure Your Loyalty Program

The number one mistake we see brands making when rolling out their loyalty program is not being intentional enough when it comes to program structure. Instead, they just do the first thing that comes to mind, copy popular competitors or other brands they admire, or mindlessly adopt the functionality of whatever loyalty app they have decided to install (which, in turn, is often dictated by the app’s popularity).

Unfortunately, loyalty programs are extremely nuanced. The ideal program depends on factors such as geography, target demographic, product category, business model, internal capabilities, and several other elements that, taken together, make certain structures and rewards more effective than others.

If you don’t account for all these elements, you will end up with a program that’s underperforming at best and detrimental at worst. Think about a luxury fashion brand that releases a discount-based loyalty program: customers wouldn’t simply be uninterested, but some might actively resent the brand for putting forward a cheap, transactional program that is not consistent with your brand’s image.

In fact, we find that _consistency_, rather than _uniqueness_, is the primary trait of successful loyalty programs. **Good programs are consistent with the needs of both the brand and its consumers–at all times and across all touchpoints.** You don’t need to be cleverer than everyone else; you just need to consistently make your customers happy in ways that will ultimately benefit the brand. If you can align these two needs, you’re halfway there.

As you can imagine, that’s easier said than done. In reality, most brands are pulled in a million different directions, and a compromise is often needed to find the ideal structure.

In the following paragraphs, we’ll outline a streamlined, repeatable process that you can follow to design the foundational aspects of your loyalty program.

### 1. Pick a Loyalty Program Type

The very first step is to pick the structure of your loyalty program.

You’ll find a lot of conflicting and confusing information on the web about the different possible types of loyalty programs–most resources are trying to one-up each other by adding one more variation to a never-ending list of program structures.

Let’s simplify this. In our experience, all loyalty programs fall into one of two categories:

* **Balance-based programs.** In a balance-based program, customers are awarded points when they perform specific actions (e.g., spending with the brand) or at key moments (e.g., on their birthday). They can then spend those points to redeem rewards such as discounts or free products. This is similar to having a bank account where you accumulate money and then spend it.
* **Tier-based programs.** Tier-based programs are similar to transactional programs in that you design a way to “quantify” how loyal customers are. However, rather than the customer “spending” their loyalty, the customer is assigned a loyalty tier (which can be permanent or not). Based on the customer’s tier, they are then granted different perks, such as free shipping or early product access.

Everything else (gamified programs, [paid memberships](https://nebulab.com/blog/ecommerce-memberships), value-based programs, etc.) is a variation of the above. For instance, a paid membership is just a tiered loyalty program where your tier is determined by a digital subscription plan: you pay the brand every month just to have access to the perks of that specific tier.

Neither type of program is superior to the other. Whether to go with a balance-based program or a tier-based program is primarily a function of your brand’s positioning, price point, and consumer demographic:

* **Balance-based programs are better for brands selling to a price-sensitive audience** that worries about value for money and responds better to more tangible rewards. These customers are likely already subscribed to similar programs, e.g., at their grocery store, making the model more familiar.
* **Tier-based programs, on the other hand, are a better fit for a more affluent type of consumer** who worries about status more than about convenience. The aura of exclusivity associated with being on the upper tiers of a brand’s loyalty program is a perfect match for such a demographic.

Another factor to take into account has to do with the nature of the rewards you expect to give your customers: some rewards (such as freebies) are supposed to be one-offs, which makes them a better fit for a balance-based program, while others (such as free shipping) are better modeled as “permanent” rewards, which makes them a better fit for a tier-based program.

If you can’t decide, you should know that it’s not uncommon to see hybrid programs: Most airlines, for instance, have loyalty programs where consumers accumulate rewards as they travel with the airline. Certain perks (e.g., priority boarding) are unlocked through a tier-based mechanism, while others (e.g., free trips) are unlocked through a balanced-based mechanism.

**However, as we’ll see later, simplicity and ease of use are key elements that determine the success of a loyalty program**, so you should only take this approach as a last resort, _especially_ if you’re launching a brand-new program.

### 2. Model the “Earn” Side of Your Program

Once you’ve chosen the foundational structure of your loyalty program, it’s time to determine how your customers will earn their rewards. At Nebulab, we typically refer to these as _triggers_ because they trigger your customers to carry out certain behaviors.

When designing a trigger, there are only two elements you need to think about:

* What is the action you want customers to take?
* How are you going to reward customers for that action?

They might seem like trivial questions, but they’re really not. Think about it this way: a loyalty program is an investment. You’re giving away value (in the form of discounts, freebies, services, etc.) in exchange for a specific return. If you get your triggers wrong, you might fail to drive action or drive the wrong action, which means you’re giving away your loyalty program perks in exchange for nothing.

While most brands start by rewarding customers for spending more, you don’t have to stop there. Here are a few additional ideas that might be relevant:

* **Acquire zero-party data.** If you need more information about your customers, how about _asking_ them? You can use your loyalty program to collect data about a customer’s preferences, habits, and attitudes and then activate it as part of your personalization strategy or product manufacturing process.
* **Encourage event attendance.** If you host virtual or IRL events, you can encourage attendance by rewarding attendees through your loyalty program. (Note: Exclusive event access also makes for a very appealing loyalty perk, so this goes both ways!)
* **Collect user-generated content (UGC).** Are you struggling to collect UGC for your brand, or do you need some organic content for a new product launch? You can reward customers for posting content on social media and allowing you to reuse it across your digital properties.
* **Promote referrals.** For obvious reasons, referrals and loyalty go hand-in-hand. If you want to drive more referrals, you can use your loyalty program to encourage customers to tell their friends about your brand. Bonus: Make it an even better deal by also rewarding the _referee_, not just the referrer!

These are very generic examples that will apply to most brands. However, as we’ve already said, the sky’s the limit: find ways to activate your loyalty program that make sense for your brand, and keep in mind that the “right” triggers will change over time.

When working with brands, we encourage them to treat their loyalty program as a blank canvas that they’re constantly drawing on. At any given time, you should be able to draw a straight line from your current goals and challenges to your loyalty program’s structure: How does your program drive behavior that helps your business reach the next level?

### 3. Model the “Burn” Side of Your Program

Once you’ve established how customers will advance in your loyalty program, you need to determine what perks you’ll offer.

A common mistake at this stage is copying what everyone else does and offering discounts without thinking about what your customers really want.

Typically, we bucket loyalty program perks into four categories:

* **Exclusivity.** These perks include exclusive/early access to products, content, or events. They are typically a good fit for premium brands with an established “brand universe” (i.e., digital and physical IP) that they can expand, remix, and leverage as part of their loyalty program.
* **Cash.** These are more tangible monetary perks such as discounts, cashback, freebies, free shipping, and other forms of value add. They are typically a good fit for value-driven brands, where consumers are more price-sensitive and want to know they’re getting the most bang for their buck.
* **Services.** Think personal shoppers, pet grooming, and other services you can bundle with your product to create a holistic brand experience. They are a good fit for product categories that are service-adjacent (such as pets), require constant education (such as apparel/beauty), or both.
* **Community.** Exclusive communities are becoming increasingly popular, allowing customers to retreat from the open web into a “safe space.” These communities can double down as invaluable sources of UGC and customer feedback, creating a powerful loop.

It’s worth spending a few words on discounts, which are extremely common in loyalty programs. While discounts are easy to implement and seem like a safe bet, they are not necessarily the right choice for all brands. Discounting has several problems:

* **It’s expensive.** While this ultimately depends on your profit and operating model, discounting products year-round can severely impact your bottom line.
* **It scales poorly.** With most of the perks we have described, you can access economies of scale. That’s not the case with discounting: no matter your size, a 10% discount will always mean giving away 10% of revenue.
* **It hurts your brand.** Discounting lowers the perceived value of your product and can easily backfire, especially if your brand has a premium positioning.

So, how do you decide which perks to offer? It’s pretty simple, actually: you just ask!

Talk to 10-20 of your most loyal customers, i.e., those who will realistically reach the upper echelons of your loyalty program. You’ll want to ask them about their lifestyle, how your brand fits into their day-to-day, what other brands they shop with, and what they would value in your loyalty program. This should give you a comprehensive overview of what perks will resonate the most.

A final note: if your brand sells in different channels (e.g., online and in your physical stores), design your perks to appeal to customers no matter their shopping channel. For instance, a free shipping perk doesn’t make sense to someone who typically shops in-store, but having access to a personal stylist once a year is much more enticing.

## Optimizing Your Loyalty Program CX

When we talk about Customer Experience (CX), we refer to _how_ customers will interact with your loyalty program. Making your program as simple as possible to understand and consume is one of the main factors determining its success.

On that note, here are a few suggestions for creating an amazing loyalty program CX:

* **Unify the experience.** By funneling as many of your CRM operations as possible through your loyalty program, you will streamline the customer experience, maximize enrollment rates, and reduce operational overhead for your team. This can go as far as enrolling any customer with a registered account into your loyalty program.
* **Keep it simple.** At the same time, you want to avoid overcomplicating things: if customers get confused, they might stop engaging with the program. Provide clear instructions for earning and consuming rewards, and keep reminding customers of the existence and structure of your program across different touchpoints (e.g., via email, SMS, at checkout, etc.).
* **Leverage personalization.** Loyalty program personalization is a somewhat sophisticated but compelling technique. Some perks resonate more than others: if you can identify which customers are most likely to appreciate them, you can effectively maximize customer engagement.

Remember that if you’re using a third-party app to power your loyalty program, your ability to customize the CX might be somewhat limited. This isn’t a bad thing per se, but it is something you’ll want to account for when picking your ideal partner. You also shouldn’t be scared of deploying a little bit of custom technology, if it helps you stand out from the crowd and create a loyalty program that your customers will love you for.


## Measuring Loyalty Program Effectiveness

Launching your program is only half the battle. As we’ve mentioned, a good loyalty program is like a blank canvas: you should constantly adjust it to drive the behavior you want at that moment in time. To do that effectively, you need to measure the success of your program.

What KPIs to measure ultimately depends on your program's structure, perks, and rewards. At a minimum, you’ll want to look at the following:

* **Enrollment Rate:** % of unique customers who enrolled in your program
* **Engagement Rate:** % of unique customers that engaged with your program in any capacity (e.g., looking at their balance)
* **Redemption Rate:** % of unique customers that used a perk from your program
* **AOV, LTV, and Time-Bound Retention:** you’re already measuring these for your regular customers. For your loyalty members, you want to measure the program’s incrementality with respect to these KPIs–more on that below.
* **Program Costs:** you should have a clear picture of both variable costs (discounts, freebies, events, etc.) and fixed costs (IT, training, etc.).

Finally, don’t forget about customer feedback! Ideally, you should constantly seek qualitative and quantitative feedback from your customers in the form of NPS surveys and moderated/unmoderated interviews to improve the program.

### A Note on Self-Selection and Program Incrementality

Unfortunately, the literature on measuring loyalty program effectiveness can be extremely poor, when not misleading. Most resources will point you to metrics such as Customer Lifetime Value (CLTV) and leave it at that. Some will tell you to compare metrics between members and non-members, which is awfully incorrect.

**When it comes to loyalty programs, what you want to measure is their _incrementality,_ i.e., to what extent the loyalty program _actually_ affects your KPIs.** If you do that, you’ll find that the incrementality of any loyalty program is much lower than what you’d see if you just computed the performance delta between members and non-members.

For example, let’s assume you want to measure how much your loyalty program contributes to increasing Average Order Value (AOV). You look at the AOV of customers enrolled in your program and find that it is, on average, $25 higher than for non-members. You might be tempted to conclude that your loyalty program leads to a $25 increase in AOV, but you would be wrong–_very much_ wrong.

Think about it this way: many of your loyalty program’s members would have spent the exact same amount (or perhaps just a little less) with your brand, _even if the loyalty program was not there to begin with._ These customers are _not_ spending more because they’re subscribed to your loyalty program; instead, they have subscribed to your loyalty program _because_ they were spending more in the first place. This statistical mistake is called self-selection bias, and it’s unfortunately very common among inexperienced practitioners.

To properly compute program incrementality, you need to rely on techniques such as difference-in-differences analysis, where you measure a metric before and after customers join your program, and Propensity Score Matching (PSM), where you “cluster” customers by affinity and compare their behavior. Unfortunately, it would take an entire article to unpack these techniques, so we encourage you to do additional research.

## Loyalty Programs Are Powerful, but They Require Attention

As you’ve seen, launching a loyalty program for your brand is not an initiative you can treat as an afterthought. It requires careful planning, spotless execution, and continuous, data-informed iteration to maximize your ROI. Otherwise, you might end up with a loyalty program that’s more expensive than the incremental revenue it generates.

In this article, we’ve only scratched the surface, but there’s so much more: depending on the structure of your program, you’ll need to think about tier pricing or point expiration; interviewing customers is an art in and of itself, as is measuring program incrementality. All of these topics would warrant separate articles.

If you need help launching your program or overhauling your existing one, feel free to reach out! Together, we can create a program that will grow your business while delighting your customers.


The Ultimate Guide to E-Commerce Loyalty Programs

When it comes to customer loyalty in DTC, two strategies dominate the industry: subscription business models, where a consumer commits to a recurring payment, typically in exchange for a discount, and loyalty programs, where a consumer receives rewards–most often in the form of cashback–in exchange for performing specific actions, such as completing an order, referring a friend, or talking about a brand on social media.

These models, which both have excellent reasons to exist, are often implemented by brand executives desperately looking for a quick win: CPG brand looking for more predictable revenue? Launch a couple of subscription plans and profit. Diverse catalog that can support more frequent or larger purchases? Roll out a cashback scheme and live happily ever after.

And while it all makes sense in theory, the unfortunate news is that it doesn’t quite work like that–not anymore, at least, and most certainly not for everyone. **Both subscriptions and loyalty programs come with two significant drawbacks**, which have gradually reduced their effectiveness over the last few years:

* **Transactionality.** A customer signing up for a subscription service or your loyalty program tells you very little about that customer’s affinity with your brand–it simply means that they saw an opportunity to save some money and took it. You are–almost literally–paying customers to shop with you. There’s little preventing customers from switching brands as soon as they find a better deal–**short-term incentives drive short-term behavior.**
* **Saturation.** If you’ve heard anything about “subscription fatigue,” you’ll know what we’re talking about. Consumers are tired of juggling multiple subscription boxes, and they are instead looking for ways to streamline and consolidate. And while loyalty programs are less susceptible to this–since they’re free to use most of the time–**the fact that every single brand has some form of loyalty program has essentially leveled the playing field.**

So, does that mean that customer loyalty is dead? Not quite–it’s just that you can’t stand out by doing the same things as everyone else. **In the DTC sea of sameness, there’s a massive opportunity for brands to break through the noise and generate organic stickiness,** but the strategies look a bit different than before and require much more intentionality.

Today, we want to tell you about one of these strategies: membership programs.

## What Exactly Is a Membership Program?

Membership programs are an established concept for large brands but are still relatively unexplored in the DTC world. In fact, many brands confuse membership programs with traditional loyalty programs because of their similarities, which contributes to the confusion.

**At its core, a membership program is a loyalty program on steroids.** It is usually sold as a digital subscription rather than being offered for free, and program members get access to various benefits. Some might be monetary rewards (e.g., discounts and cashback), but you’ll also find perks such as early access to new products, exclusive communities, members-only content, and free or discounted services.

If you go back to the two problems we’ve identified with subscription models and loyalty programs, you’ll see how memberships address both:

* **They eschew transactionality and pursue identity.** By going beyond monetary rewards, **memberships provide brands with an escape from transactionality.** A well-rounded membership program elevates brands, enabling them to become a customer’s reference point for running a given aspect of their lives.
* **They eschew saturation and pursue exclusivity.** I can sign up for a thousand free loyalty programs and continue to shop from a thousand different brands, but I can only sign up for so many paid membership programs. No matter how insignificant, **the membership fee forces customers to make a choice and stick to it.**

The mix of identity and exclusivity makes for a robust customer loyalty flywheel: the initial cost of becoming a member motivates me to use my membership. As I use my membership–and barring any breaches of consumer trust–I identify myself more and more with the brand, which increases the perceived value of the brand.

All of this might sound like theoretical mumbo-jumbo, so let’s look at an example.

### How Petco Makes $120M/Year from Memberships

Petco offers a membership program called Petco Vital Care comprised of two tiers: a free tier which is a run-of-the-mill loyalty program, and a paid tier called Vital Care Premier. For $19.99/month, members can benefit from extra discounts and services such as pet sitting, grooming, and vet visits for their dogs.

The results are astonishing: **in Q4 2022, Petco Vital Care counted 500,000 paid members–about $120M/year in incremental revenue for Petco.** That number, by the way, is just the membership fee and doesn’t account for the fact that members have a lifetime value 3.6X higher than casual shoppers.

![](https://cdn.sanity.io/images/kqgmf0g2/production/efd6ac6c17c1fca084bac9df95a87b9a477b4eda-2560x2488.png?fit=clip)

Through Vital Care, Petco is not only diversifying their revenue streams but also creating a compelling unifying force for their products and services. If you’re an Amazon Prime customer, this concept shouldn’t be a surprise. **Just like Amazon wants to be your end-all solution for shopping, Petco wants to be your end-all solution for pet care.**

Of course, Petco is a publicly traded $6B/year retailer that operates thousands of stores across the US, and they have the economies of scale to offer their members an incredible level of convenience. Even for a relatively established DTC contender in their category, replicating Vital Care would be virtually impossible.

However, that doesn’t mean membership programs are inaccessible for small brands–they just need to be structured thoughtfully.

## How to Structure Your Membership Program

If we managed to convince you that rolling out a membership program is the right thing for your online store, awesome! But where do you start? In the following paragraphs, we’ll outline a five-step process you can follow to design, validate and roll out a membership program to your customer base.

### 1. Talk to Your Customers

Seriously, _do_ talk to them.

If you aren’t conducting regular interviews–[which you should](https://nebulab.com/blog/ecommerce-product-management), but just in case–f**ind 30-50 customers from different cohorts to understand whether they would have any use for a brand membership and what it might look like.** Ideally, you’re looking to answer as many as possible of the following questions:

* What problems are your customers solving with your product(s)?
* How do they currently perceive your brand? What do they love about it?
* What adjacent brands do they shop with regularly?
* What adjacent services do they consume regularly?
* Do they already have any memberships? What do they like/dislike about them?

![](https://cdn.sanity.io/images/kqgmf0g2/production/1a2947fe9354c18325c2bc8b9f25cb2d9d41d78c-1200x869.jpg?fit=clip)

Of course, you’ll want to adjust and enrich these based on which category you operate in. For example, if you sell workout apparel, where do your customers work out? If it’s at home, do they subscribe to a separate workout app to track their workouts? Do they also care about nutrition? If yes, where are they getting their educational content from?

**In addition to the interviews, you should look at analytics, primary and secondary competitors, and key market trends.** Your goal should be understanding how your brand fits into your customer’s day-to-day and whether there’s an opportunity to move into adjacent problem spaces.

As a final note, remember that **your membership will not appeal to all your customers–and it shouldn’t.** Memberships require customers to invest a significant amount of financial and social capital into your brand–as a result, they will only work for customers willing to take that leap of faith. Use this initial phase to understand what that ICP looks like, and double down on it when you do additional research about your membership program.

### 2. Design Your Member Benefits

Once you understand the opportunity space, you must decide what to offer as part of your membership. Generally, membership benefits can be put in one of five buckets:

* **Money:** this includes discounts, cashback, free shipping, birthday gifts, and any other monetary reward. These are things your customers could easily purchase themselves or find elsewhere, which makes them more immediate to understand but less likely to generate long-term loyalty.
* **Access:** very often, members have early access to new product releases, or exclusive access to certain pieces of merchandise. Even if you don’t have a large product catalog, you can get creative with partnerships, digital products, and other goodies.
* **Content:** given how valuable good content is, it might seem ridiculous to gate it. But making certain content only available to your members is a fantastic way to foster a sense of exclusivity and identity, as long as you have a unique or particularly valuable perspective to offer.
* **Services:** when you look at Petco Vital Care, the non-monetary part of their paid membership tier is comprised almost exclusively of services. Petco delivers most of their member services in-house, but you can always partner with a third-party service provider.
* **Community:** network effects make communities incredibly sticky. In addition to being an incredible perk, brand communities can become a solid sounding board for your new product ideas and a formidable source of organic marketing.

When it comes to your member benefits, you must balance putting together a package compelling enough that customers will want to sign up, and keeping it small enough for your team to launch and sustain over the long run.

**If you’re just starting out, we recommend starting with monetary benefits (which can be implemented almost for free) and an additional category your members deeply care about.** Once you launch your program, you’ll have plenty of time to adjust and expand it.

### 3. Determine Your Pricing

At this point, you’re ready to start thinking about your membership’s pricing structure.

Our recommendation for most brands is to start with two tiers: a free tier, which is essentially just a traditional loyalty program, and a paid tier, which gives customers access to member perks. **You shouldn’t separate your loyalty and membership programs, as that would most likely confuse customers.**

![](https://cdn.sanity.io/images/kqgmf0g2/production/e90b647471606b469b4141a39710bec2d252defb-2880x2149.png?fit=clip)

As for the exact price point, this will vary greatly depending on your target market, product category, and member benefits. A helpful tool for determining a range of acceptable prices is the [Van Westendorp Price Sensitivity Meter](https://www.forbes.com/sites/rebeccasadwick/2020/06/22/how-to-price-products/) (PSM). With this model, you ask your potential member for questions:

* What price would be so low that you start to question the membership’s quality?
* At what price would the membership begin to seem a bargain?
* At what price would the membership begin to seem expensive?
* At what price would the membership be too expensive?

By plotting your answers, you can determine the range of prices your customers would be willing to pay for your membership.

Obviously, you should still validate whatever numbers you get to ensure they work for your business. This is also where it pays off to offer a membership that is more heavy on non-monetary rewards, as they will typically be less burdensome on your margins at scale.

### 4. Define a Go-to-Market Strategy

You know who you’re selling to, what you’re selling, and for how much. All that’s left to figure out at this point is _how_ you’re going to sell it–that is, your go-to-market strategy.

The first thing to keep in mind here is that **when it comes to memberships, paid social–and other paid channels in general– should be approached with caution:** unless you have an incredibly compelling offering, it is extremely unlikely you will be able to achieve a reasonable CAC. As we’ve mentioned before, selling a membership requires a degree of trust much higher than your typical eCommerce conversion.

As long as you collect the right zero-party and first-party data, you can easily use email and SMS marketing automation platforms to identify and reach potential members. Ideally, **you want to reach out as soon as a customer is identified as a potential fit for your membership program**–what this means exactly will depend on the ICP you’ve outlined in phase #1 and will vary over time.

As for your website, you should design thoughtful touchpoints that remind customers of the value of your membership and provide easy paths to conversion. For instance, if you’re offering free shipping as part of your membership, your checkout flow should clearly indicate that and allow customers to opt into the membership and benefit from the free shipping perk in one smooth click.

Finally, **referrals and gift memberships can be very powerful in driving organic customer acquisition, so you should at least experiment with them.** These channels allow you to bypass the consumer’s initial “trust gate,” leading to higher conversion rates.

### 5. Launch, Track, and Iterate

You’re all set! Now you just need to launch your membership.

Depending on your tech stack and how you’re structuring your program, you will likely need to use a few different tools. On Shopify, our favorite membership apps are [Conjured Memberships](https://apps.shopify.com/membership-program?locale=it)–a solid solution with very accessible pricing–and [Inveterate](https://www.inveterate.com/)–a more modern and flexible platform, well-suited for brands that need custom functionality or use a [headless architecture.](https://nebulab.com/blog/headless-commerce)

If you’re looking to break beyond the walls of your eCommerce site, [Circle](https://circle.so/) is a standalone platform for brands to launch their private communities. It’s an incredibly powerful option if you want to create a dedicated space for members-only content, discussions, and events, and it can easily drive the entire Community aspect of your membership program.

![](https://cdn.sanity.io/images/kqgmf0g2/production/6ef9d98a89f6a19f6faa7cc1bf1ae597a94b263b-2560x2488.png?fit=clip)

**Whatever tools you use, take the time to truly understand their potential and make them yours!** Memberships are only valuable when they deeply resonate with the brands that drive them and the consumers they serve. If you’re just going through the motions, your membership program will be short-lived.

After the launch, use member interviews and exploratory analytics to gauge the effectiveness of your program and adjust course accordingly. Most brands will want to track at least some of the following:

* How many customers are you converting into paid members?
* Are members using all the benefits in their membership? How much?
* What is the customer lifetime value and LTV:CAC ratio of members vs. non-members?
* What are your margins for members vs. non-members?
* What does retention look like for your membership program? Why do members cancel?

Feel free to enrich these as needed to drive your brand’s goals, **but never lose track of the basics:** maintaining a healthy foundation will give you the peace of mind you need to grow your membership program.

## Is It Time to Switch to Memberships?

Many brands have already started to roll out membership programs as part of their offering, and we’re excited to see this trend unfold over the following years: while subscription-based models and loyalty programs will never lose their place, they can rarely foster true customer loyalty.

As you’ve seen, the caveat is that a membership program requires more maintenance than other models, so you should ensure your team has the bandwidth to support it before venturing down this path.

If you’re wondering what a membership program can do for your brand or looking for help rolling out your program, don’t hesitate to reach out!


The Nebulab

Stop Killing Your Margins: A Guide to Smarter E-Commerce Discounting

3 (+1!) E-Commerce Subscription Tactics You Might Be Missing

The Ultimate Guide to E-Commerce Loyalty Programs

Why Memberships Are The Future of Customer Loyalty