Justifying membership fees through quality and pricing in a competitive supply chain

While membership-based retail has experienced substantial growth, how membership stores can justify membership fees through product quality remains underexplored from a supply chain perspective. This study examines a supply chain consisting of a manufacturer, a membership store, and a traditional retailer, where consumers differ in their perceived value of exclusive membership services and may exhibit the sunk cost effect generated by the prepaid membership fees. We investigate how this behavioural mechanism affects retail pricing and the manufacturer’s quality investment. The results show that the sunk cost effect not only reshapes the membership store’s pricing strategy but also affects the manufacturer’s quality investment decision, thereby enabling the membership store to justify its membership fee. The equilibrium outcomes are jointly determined by the membership store’s competitive advantage and the perceived membership fee. Based on these two dimensions, we derive a strategic decision matrix comprising four equilibrium regimes. We use several business cases to help understand how membership stores can adjust their quality and pricing decisions according to their specific characteristics to justify membership fees. This study thus translates analytical results into a managerial framework and provides managerial insights for membership stores’ strategic decision-making.