TORONTO, Canada — Spending on loyalty programmes is through the roof.

In 2016, the consumer loyalty management market was valued at $1.93 billion. By 2023 that figure is expected to reach nearly $6.95 billion — an annual compounded growth rate of nearly 21 percent. In the US alone, consumers now collectively hold more than 3.8 billion loyalty program memberships!

And who could blame retailers for wanting loyal customers? It’s a well-worn fact that retaining a customer costs a fraction of that of finding a new one. Returning customers also spend more than first-time customers — up to 67 percent more! And if that weren’t enough, even a small drop in loyalty can be enough to kill a business. No one disputes the intrinsic value of loyalty. Which brings us to an inconvenient truth.

The loyalty lie

Most loyalty programmes don't generate loyalty. In fact, a 2012 benchmark study from Edgell Knowledge Network, which surveyed the loyalty programmes of 60 retailers, found that customers of retailers that offer a loyalty programme were not recognisably more loyal than customers of those that don't. What's worse, according to the same study, is that 81 percent of loyalty programme members don't even understand what their rewards entitlements consist of or how they're redeemed. And this shouldn't come as a surprise considering the average household belongs to eighteen loyalty schemes!

Retailers are spending mountains of money to retain the very customers they had the least chance of losing to begin with.

These findings were echoed in a 2017 study by Accenture, which also suggested almost a quarter of consumers actually have either a “negative or non-existent response” to loyalty programs.

Here's the real punch in the gut though: According to a 2015 study by Colloquy, only 42 percent loyalty programme members are even active or engaged. Further research shows that, as consumers, we are most likely to seek out loyalty programmes with brands we already like. Thus, many retailers are spending mountains of money to retain the very customers they had the least chance of losing to begin with, in essence, subsidising purchases that would have been made anyway. Put another way, very few people will drink four bad cups of coffee simply because every fifth cup is free.

So, while it pays to have loyal customers, you can’t simply pay customers to be loyal.

But what if a business could turn transient loyalty into something deeper, more committed and more monogamous? What if the relationship between the retailer and the consumer could go from being transactional to being transformational and best of all, what if instead of paying customers to be loyal, those same customers actually paid the retailers they want to be loyal to?

It's a concept Amazon understands only too well. In its latest quarter, Amazon reported growing its paid Prime membership ranks by 47 percent. Prime consumption junkies spend 250 percent more each year than non-members. In fact, an astonishing 82 percent of US households with incomes over 110 thousand dollars per years are Prime members. And while standard loyalty programmes tend to bleed engagement over time, Prime members actually become more engaged. Consumer Intelligence Research Partners noted that 73 percent of 30-day trial subscribers end up paying for the first full year of Amazon Prime, 91 percent of first-year paid subscribers renew for a second year and 96 percent of second-year paid subscribers renew for a third year.

Amazon is merely the tip of a growing spear of retailers awakening to the power of paid membership.

The difference of course is that Prime is not merely a points or rewards system but rather a carefully curated ecosystem of value, service and content.  It’s the veritable key to the kingdom of all Amazon has to offer. Special pricing, promotions, streaming music, on-demand video and of course, fast, free shipping are among the benefits members are willing to spend $99.00 per year to access. And Amazon is merely the tip of a growing spear of retailers awakening to the power of paid membership.

For ten dollars annually, Sephora’s Flash programme offers members unlimited free two-day shipping with no minimum purchase requirements. GameStop’s Power Up Pro and Elite membership programmes, $14.99 and $29.99 per year respectively, offer members a select set of special gifts, discounts, benefits and privileges. Restoration Hardware’s RH Member programme costs $100 per year to join and offers members a range of perks and privileges including free interior design services and early access to promotional events.

What’s love got to do with it?

What Amazon, GameStop, Sephora and Restoration Hardware understand is that there’s a difference between loyalty and love. Loyalty simply means you’ve managed to put a card in the customer’s wallet. Paid membership means you’ve secured a place in the customer’s heart. Membership — even for a small fee — forms a sense of exclusivity and transforms the customer experience in a way that traditional loyalty programmes simply cannot. Getting a customer to lay down a membership fee forms an entirely new degree of mutual commitment.  Even a small sunk cost will make a customer implicitly more engaged with a brand.

Membership fees are true and present revenue a retailer cannot afford to lose.

By the same token, charging a membership fee creates an onus on the part of the retailer to deliver value against the heightened expectations the fee creates. After all, membership fees are true and present revenue a retailer cannot afford to lose, unlike the potential, future revenue traditional loyalty programmes hope to realise.

Perhaps the most compelling reason of all to consider membership over loyalty is that consumers clearly want it. Research by Loyalty One suggests “sixty-two percent of consumer respondents said they would consider joining a fee-based rewards programme if their favourite retailer offered one.” Among Millennials, the numbers were even more compelling with “75 percent of 18-24 year-olds and 77 percent of 25-34 year-olds saying they’d pay to belong.”

Lastly, for retailers with a genuine interest in understanding their customers across channels, membership is the Holy Grail. A membership is true and unfiltered permission to engage and eliminates any ambiguity about the relationship. Paying members are more inclined to share personal information because they inherently understand that doing so contributes to shaping their experience with a brand. It’s this level of consumer transparency that allows brands to more clearly understand customer actions throughout their ecosystem and across channels.

So if you're serious about creating truly loyal customers, I suggest you put their money where your mouth is. Paid membership is the new loyalty.

Doug Stephens is a retail industry futurist, founder of Retail Prophet and author of ‘Reengineering Retail: The Future of Selling in a Post-Digital World.’

Related Articles:

[ A New Era of Retail Is ComingOpens in new window ]

[ To Save Retail, Let It DieOpens in new window ]

[ Why Retail Is Getting 'Experience' WrongOpens in new window ]

Editor's Note: This article was revised on 21 February 2018. An earlier version of this article misstated that membership at Restoration Hardware costs $125. This is incorrect. Membership at Restoration Hardware costs $100.