How Technology Enables Businesses to Build Lifelong Relationships with Customers

Examining membership models in the digital age

In 2001, Amazon.com was losing money. The stock lost value, prospects remained dubious, and growth appeared to be slowing.

Like any company, Amazon raised its prices. Bezos, desperate at the time to save his company, signed off on the price hike — but he changed his mind almost immediately because of the lessons he learned from one man: Jim Sinegal, then CEO of Costco.

That spring, Bezos met with Sinegal to strike a deal between Amazon and Costco. Sinegal dismissed the deal, but outlined the reasons behind Costco’s success. As Sinegal explained, despite its low prices, Costco consistently beat its competitors because of one differentiating factor: its membership model.

This model, still in place today, generates roughly 70% of Costco’s operating profit. Above all, it has allowed Costco to maintain a loyal customer base. Today, we most commonly recognize this membership model in Amazon as Amazon Prime. Clearly, Bezos took the lessons he learned from Sinegal and applied them with a vengeance.

Disruptive Trends and the Role of Technology

At the time, Costco was an anomaly among its competitors. But today, a whole new league of digital businesses has disrupted industries by embracing membership models.

Netflix changed the way we watch TV. Spotify reimagined the way we listen to music. Amazon changed the way we shop.

Subscription and membership models allow companies to build direct relationships with customers. Technology is enabling this model to be one of trust. Because of digitization, services and products are abundant. Music and movies can be streamed online. CDs are a thing of the past. E-books can be downloaded immediately for readers to access. Anyone can hop onto any device, at any time, and access services. This means that companies can interact with their customers regularly. Moreover, these companies can use real-time data to build a profile of their customers to cater to individual and unique needs.

How Digital Businesses Can Effectively Utilize Data

According to the World Economic Forum, nearly 2.5 quintillion bytes of data are created every single day. Companies like Spotify, Netflix and Amazon use data as an asset to personalize their content and build lifelong relationships with customers at scale. Netflix, for example, was one of the first companies to introduce a recommendation engine that many of us today rely on.

Amazon, meanwhile, generates a tremendous amount of data every minute and uses it to create adaptive, personalized journeys for customers. Above all, as consumers we genuinely trust Amazon. In fact, the company managed to convince members to sign up for its Amazon Key service, which lets a delivery person open your front door and drop off a package inside your home.

Amazon has managed to earn our trust by delivering the products we want, on time, intact, in the same branded brown boxes — consistently. But above and beyond that, like Netflix, Amazon has become a reliable advisor by providing recommendations that we want. Amazon surfaces credible reviews from peers, giving us the impression that we have the autonomy to choose our items after we’re given all the relevant, objective information. By effectively utilizing customer-generated data, Amazon has mastered the customer relationship.

A New Trend: Long-term Subscriptions and Memberships

Building trusted relationships with customers is the holy grail of unlocking sustainable value.

In today’s day and age, we all want to feel connected, recognized and treated as individuals. Customers rely on digital retailers and service providers to provide this individualized experience and seek consistency, value and convenience. As a result, the e-commerce industry has exploded. In 2017, retail e-commerce sales amounted to 2.3 trillion USD and are predicted to double by 2021.

Selling products is a concept of the past. In 2017, over 6,700 brick and mortar retail stores across the U.S. shut down. Today, consumers want to be subscribers, or better even — life-long members. This idea has become increasingly popular, with Americans spending $420 billion on subscriptions in 2015. Trusted services and consistency are valued above products, and customers want to be engaged for the long term.

The Membership Economy

As technology evolves at a rapid rate, so do customer expectations. In the future, customers will want real-time product delivery, AI powered conversational interfaces that are human-like, and increased personalized online shopping. Membership models that make use of data are key to meeting these expectations. Robbie Kellman-Baxter, former consultant for Netflix, calls this massive transformation the Membership Economy.

According to Baxter, technology has enabled the move from anonymous transactions to known, formal relationships and from one-way messaging to two-way communications between businesses and its members. Baxter predicts that membership models have infiltrated almost every industry and will continue to do so: from software companies, to retail, to consumer product companies.

Exponential Technologies in the Membership Economy

Exponential technologies like 3D mapping and virtual reality will transform the shopping experience, allowing consumers to entirely trust their online purchases.

Ikea, for example, is already using virtual reality to transform the furniture shopping experience. According to a study by L.E.K consulting, between 70 to 80 percent of consumers said they are eager to use virtual and augmented reality technology to design rooms, try on apparel, and take virtual shopping trips.

Meanwhile, AI will change the landscape of customer service. AI will be able to perfectly respond to every customer query and act as a virtual assistant for online service seekers, much like Alexa or Siri. In fact, the company Soul Machines recently introduced the world to Ava, a virtual customer service agent that brings a whole new level of personalization and brand experience to the customer.

Technology has democratized and demonetized several services. The membership models implemented by Amazon, Netflix and Spotify have already taken precedent. Increased inter-connenectedness has allowed businesses to reach billions more customers by utilizing the power of the cloud. In the future, the membership models built on the cloud will allow companies to store data and build a portfolio of their members to optimize their digital experience, keeping them hooked for the long-term.

I work @VMware. Philosophy, Psychology, Technology, Ethics, Policy