Every E-commerce Site Is Selling a Paid Membership Now. What Are They Really Selling?

Shipping, discounts and streaming entertainment: retailers give up a slice of margin first, then use the membership fee — a sunk cost — to lock in swing customers, manage loyalty and raise purchase frequency

Jiang Jia, 27, spent nearly 1,000 yuan last year on digital memberships of various kinds, a third of it with Alibaba and JD.com.

It started with the June 18 shopping festival, when she paid 198 yuan for a JD Plus membership. She was about to buy a computer and found that the Plus member price was 200 yuan lower than the ordinary one. "So it's like I paid full price for the computer and got JD and iQiyi memberships for free, isn't it?" — that was her reasoning.

At the end of the year, ahead of Alibaba's two big shopping festivals, she spent another 88 yuan on 88VIP, the paid membership program Alibaba launched in August 2018.

Her math: she orders food delivery at least once a day, and a year of Ele.me membership alone costs 108 yuan. The 88-yuan 88VIP included Ele.me membership plus a range of other perks.

Jiang Jia works in social media operations in Hangzhou. She has been paying for QQ Music since early 2015 and started paying for e-commerce memberships in 2018. Moving from paying for content to paying for retail memberships is becoming more and more common in China.

Recently she noticed that her Taoqi Score had fallen more than 100 points from the year before. She thinks JD Plus made her shop on JD more often: "There are the free-shipping coupons, after all." The Taoqi Score is Alibaba's index of how actively a consumer spends across its various products; if it drops below 1,000, 88VIP jumps to 888 yuan — which will shape her spending next year too. Without her quite noticing, where she shops has already changed because of the memberships she bought.

This is exactly what online retailers are counting on when they roll out paid memberships.

Make a consumer pay a membership fee — a sunk cost — and they will "convince themselves" to concentrate their shopping on one platform. That is how retailers lock in swing customers and manage loyalty, which means raising purchase frequency. The model first appeared in the US in the 1980s; Amazon took it online in 2004; and JD Plus, launched in 2015, was the first paid membership from a major Chinese e-commerce platform.

By the end of 2018, nearly every e-commerce company in China apart from Pinduoduo and Vipshop had launched a paid retail membership.

E-commerce Sites Are Bundling More and More Into Their Paid Memberships

Almost every retailer is telling you its membership is worth the money. To justify the fee, retailers put out some combination of these: shipping subsidies, direct discounts or coupons, faster points cashback, virtual audio and video products, and the value-added VIP services traditional retail has always offered — one-on-one customer service, members-only sales.

1. Shipping — depends on how many orders you place

Apart from Alibaba's 88VIP, almost every platform leads with free shipping or shipping vouchers.

JD gives five 6-yuan shipping vouchers a month, which waive up to 360 yuan of shipping a year.

NetEase's Kaola and Yanxuan give free-shipping vouchers worth 360 yuan and 260 yuan respectively. But Kaola already ships free on orders above 88 yuan, and cross-border goods generally cost more than that anyway. Kaola also gives 260 yuan of tax vouchers, for goods shipped from overseas.

Xiaohongshu ships free to Black Card members with no minimum order. Amazon China essentially ships free to Prime members too.

2. Discounts — but not on everything

Almost every retailer gives paid members some direct discount, but on a limited range of goods, and not a deep one.

Tmall, for instance, gives 88VIP members 5 percent off at 88 official brand stores, recently expanded to 288 brands. Not every product from a given brand is discounted, though, and the same product is often cheaper at some other shop on Taobao.

Kaola takes 4 percent off selected products. JD Plus has member prices on selected products. Yitiao takes 5 percent off everything on the platform, but it carries very few SKUs and few brands.

Even if you do find something that looks like a good deal, the discount has a ceiling. An 88VIP member can save no more than 500 yuan a month, meaning the discount covers at most 10,000 yuan of purchases. JD Plus members get 10 percent off apparel, capped at 120 yuan a month — that is, only 1,200 yuan of clothes a month qualify, saving at most 1,440 yuan a year. NetEase Kaola caps the annual order value eligible for the discount at 50,000 yuan; if the full 4 percent applied to all of it, that would be 2,000 yuan a year.

3. Cashback — 1 percent at most

Another perk is faster-accumulating cashback points, a mechanic JD and Yanxuan both use: paying for membership speeds up how quickly points build.

Once you have bought the membership, JD's "JD Beans" work out to about 1 percent off your next purchase. NetEase's cashback is also around 1 percent, but harder to use — it can only be redeemed against specific products.

4. Bundled audio and video memberships

Seven years after it launched paid membership, Amazon added audio and video streaming to Prime in 2011. For an e-commerce company, virtual services like these carry a low marginal cost. Unlike logistics, where each extra user is expensive, one more viewer costs streaming very little, which is why both JD and Alibaba are happy to include the option.

Alibaba has Youku and Xiami of its own. JD Plus comes with an iQiyi membership. An iQiyi annual card costs 198 yuan, and JD Plus, apart from the price for brand-new members, runs 140 to 198 yuan — so consumers will buy Plus even if iQiyi is all they actually want.

5. Other services

Some of the other services that come with membership look like traditional retail's value-added VIP treatment: one-on-one customer service, members-only sales, product trials. Beyond giving users a sense of privilege, they are not much use.

A few of them, such as free doorstep returns and exchanges, can also be earned without paying, through points and tiers, in some e-commerce systems. Others you are unlikely ever to use, like a seven-day price-match guarantee.

Use every single perk and it is easy to conclude the membership pays for itself. But once the user base grows, selling memberships makes money for the platform in its own right.

In the US today, roughly half of Amazon's users have bought Prime. It has become, in effect, a service fee Americans pay Amazon: 119 dollars a year for two-day delivery.

Shipping is expensive in the US. Talking about the Prime program, Jeff Bezos once recalled that Amazon was prepared to lose money at the start. He compared it to opening an all-you-can-eat buffet: the first people it draws are the big eaters, but that is fine as long as everyday customers get into the habit of coming.

And when costs rise, so does the price. Across fiscal 2017, Amazon spent 21.7 billion dollars on shipping, 88 percent more than in fiscal 2015. Its sales over the same period grew only 61 percent. So in 2018 it raised the Prime annual fee from 99 dollars to 119. Prime originally cost 79 dollars a year, and had already gone up once, in 2014, when Amazon started buying video rights.

Most Chinese paid memberships are less than two years old, so not much has changed yet. JD Plus, the earliest, has already adjusted everything from its price to its cashback.

Besides not losing money, a paid membership builds loyalty.

Every Paid Membership Is Finally a Way of Holding On to Users

Consumers may still be loyal to particular brands, thanks to differences in positioning and marketing — preferring Zara to Uniqlo, say, or Pepsi to Coca-Cola. To retailers, most of them are barely loyal at all.

Online, loyalty is naturally lower still. Offline you at least had to think about which store was easier to reach. Now every store sits on your phone screen, a few millimeters from the next one.

Zhong Ming, president of Philips' healthy living business group for Greater China, said at Tmall's annual consumer summit that consumers do not distinguish between a flagship store on Tmall and one somewhere else. On average, a Tmall flagship store's customers jump to another e-commerce platform 15 times a year. Consumers, in other words, still follow the price.

Between the small number of loyal consumers and the indifferent ones lies a large mass of swing consumers. Duan Ling, who runs Alibaba's 88VIP, believes paid membership helps lock those swing consumers in.

How? With the fee the consumer pays. Rationally, that fee is a sunk cost the moment it is spent: however good the deals you get afterwards, you will never actually win the money back. But the urge to win it back is hard to resist. "Consumers think that since they spent 88 yuan on this card, they have to earn the 88 yuan back. That is the starting point of how a member shops," Duan Ling said.

Among the consumers QDaily spoke to, this is the common pattern. Zhang Qiya bought 88VIP the day it launched. "I saw that Tmall Supermarket, Tmall Global and some brands give 5 percent off. I often buy outdoor gear and cosmetics online, so a few orders would probably earn the 88 yuan back." She is 30 and works in Beijing.

Whether the fee is "worth it" is hard to say in general; it depends on each person's spending habits. Like rational shopping itself, it is a paradox — in a consumer society, most buying is not rational. Set out to get your money's worth from the membership fee and you may well buy more. Which is precisely what retailers want.

To use up JD's full 360 yuan of shipping vouchers in a year, you would have to place 60 orders. The average JD user places 8 a year. When a consumer is torn between JD and Tmall, the thought of spending one more shipping voucher and getting closer to earning back the annual fee may be enough to keep them on JD.

At Costco, which invented paid retail membership in the 1980s, the annual fee does the same work: it keeps customers from leaving when a competitor runs a sale. Research by Sang-Hoon Kim of Seoul National University and S. Chan Choi of Rutgers University found that Costco's membership fee correlates with how deep rival supermarkets' discounts are. What is interesting is that when a rival's discount is especially tempting, a higher annual fee holds customers better, because they keep wanting to earn that fee back.

Paid Membership Is an Old Idea. Why Now?

Since Walmart brought paid membership to China through Sam's Club in 1996, it has stayed a niche model in retail — around 2003, one Sam's Club that was doing badly had to be turned into an ordinary Walmart. Not until 2015 did JD launch JD Plus, and 2016 Amazon China get Prime. Xiaohongshu started paid membership in 2017; NetEase's Kaola and Yanxuan followed in 2017 and early 2018. In 2018 Alibaba merged its old Tmall (T1/T2/T3) and Taobao (V1-V6) tier systems and launched 88VIP.

Paid membership has clustered into the past two years. Why now?

When finding a new user costs less than keeping an existing one, retailers do not bother with this. Bringing in new users has got harder — which is why it took so long to start.

Growth in the number of internet users has itself been slowing. From 2005 to 2011, the online population grew at a compound annual rate of 30 percent; over the following six years, at just 7 percent. By the end of 2017 China had 772 million internet users. In the first half of 2018, 29.68 million more came online, 3.8 percent more than at the end of 2017.

JD has also seen its user numbers fall lately. According to its most recent earnings report, in the third quarter of 2018 the number of people who had bought something on JD at least once in the previous 12 months was 305 million, down 3 percent from the previous quarter. It was the first quarter-on-quarter drop in active buyers since JD went public. JD's year-on-year user growth rate, in fact, has been sliding for some time.

Tmall and Taobao's annual active users and mobile monthly actives are still growing, if not steadily, but neither has managed double digits in a long while. The one exception may be Pinduoduo, whose monthly active users are still growing at more than 200 percent. It is also the only one that has not launched a paid membership to hold users in.

Like the demographic dividend China once enjoyed, the traffic dividend is fading. National Bureau of Statistics figures show online retail sales growth slowing from 18.5 percent in 2010 to around 9.2 percent in 2018.

On the other side, the middle class is getting larger, and more people have both the appetite and the money to spend. In the first half of 2018, GDP per capita was 30,141 yuan and urban residents' per capita disposable income was 19,770 yuan, up 7.9 percent in nominal terms and 5.8 percent once prices are stripped out. China's GDP per capita in recent years is roughly where the US was in the late 1970s and early 1980s. Back then the "paid warehouse club" was a new thing, growing fast, and a round of consolidation left behind today's Costco and Walmart's Sam's Club.

Chen Zhiyu, a vice president of Walmart China who runs Sam's Club's e-commerce, marketing and membership departments, said in an interview that rising middle-class spending power made paid membership take off across the board in 2017. Sam's Club has 23 stores in China now and plans to reach 40 by 2020. It has more than 2 million members in China, with a renewal rate said to be above 80 percent.

Next: More Memberships Tied Together, and Higher Prices

Consumers' incomes are growing slowly, but the number of companies that want a cut is growing. Membership schemes run jointly by several companies have started to appear.

JD Plus launched a joint card with Sam's Club at 359 yuan. Given that Walmart is a JD shareholder, the partnership is no surprise. Chen Zhiyu said Sam's Club would work more closely with JD in 2019.

Ele.me and Bilibili launched a joint membership at 16.5 yuan a month; NetEase Kaola and Tencent Sports have a joint card too. For many retailers, winning customers has got harder, and they have little choice but to help each other. 88VIP has successfully brought new customers to Alibaba services that are not the leaders in their categories. By Alibaba's own figures, out of every 100 88VIP users, 38 signed up for Youku membership for the first time, 32 for Ele.me and 27 for Taopiaopiao.

At the same time, the one-price-for-everyone membership fee may start to change.

Membership can be understood as a way of treating consumers differently: by paying an annual fee, or not, a consumer buys certain services and discounts and at the same time tells the retailer which needs and products they do and do not want. Different kinds of customer are worth different amounts to a retailer.

Consumption stratification may be the most accurate description of Chinese commercial society right now — some people are trading up, others down. Pinduoduo is finding room to grow in lower-tier cities even as luxury spending stays strong. In retail, a finer, multi-tiered membership system is what that stratification looks like.

By the end of 2018, Sam's Club had already introduced a tier in China above its 260-yuan ordinary individual membership: an "Excellence Membership" at 680 yuan a year. The extra 400-odd yuan buys "rights and benefits" such as points vouchers, dental services, lifestyle services and free shipping on online orders.

Chen Zhiyu said the aim was to raise members' repeat-purchase rate and stickiness. The urge to earn back 680 yuan will always be a little stronger than the urge to earn back 260.

Paid retail memberships in the US already have tiers. Sam's Club there has a level above the standard membership (45 dollars a year) called Sam's Plus, at 100 dollars a year. Costco also offers individual consumers two tiers.

This is what Amazon has begun doing in the US. In 2015 it launched Prime Fresh, a membership that includes grocery delivery, adding 14.99 dollars to the standard Prime fee of 12.99. A fuller music library, or unlimited reading through Kindle Unlimited, costs more again.

88VIP may keep adding tiers too.

Alibaba believes a Taoqi Score of 1,000 and an 88-yuan annual fee already filter for high-value users. Brands think it could go higher. Artistic & Co, a beauty-device maker whose products sell for around 10,000 yuan apiece, was represented at an 88VIP event by Wu Yin, who said half-jokingly that she wished Taobao had a membership costing 8,888 yuan a year — that crowd would be closer to the brand's target customers.

88VIP will add more Alibaba services in the future, and bring more brands into the Tmall 5-percent-off camp. But the head of 88VIP believes services and perks cannot be piled on without limit, and that dividing consumers by their needs may become necessary. What matters more right now, she said, is getting the consumers who have bought the service to renew — but "in the long run, there will definitely be tiers."

Chen Zhiyu expects more companies to enter paid membership over the next two years, and then a round of them to be weeded out. Paid membership, he said, is a story investors like to hear, "much like shared bikes and unmanned convenience stores before it."

Buying cheap, too, is getting more expensive.

Photo by Bianca Lucas on Unsplash