Restaurant Loyalty Program

Thursday, February 17, 2011

Just read this great article in the journal (it’s a few months old but still very relevant piece by Julie Jargon). The article talks about how restaurants are finally investing more in updating their loyalty programs as they are realizing the value of repeat customers in a down economy. This, of course, makes sense as it’s always cheaper to sell to your existing customers rather than to acquire new ones. Of particular interest were the numbers:

Restaurants decline to disclose what they spend on such programs, which are often marketed right on the menu or through the Internet or at food events rather than through TV or radio. Mr. Flickinger estimates that it typically costs a company 1% of sales to launch a rewards program, an upfront expense that includes the cost of the plastic rewards cards, in-store signage and advertising. The cost of the discounting that’sassociated with rewards programs can range from an additional 5% to 15% of sales during the period in which the perks are being offered. But he said the return on investment is typically 2% of sales.

If you look closely at these numbers – 1% upfront cost, discounting costs, 2% bump in sales – things look pretty bleak. These numbers are pretty typical and we frequently hear similar numbers from customers we talk to. Why do customers run these programs if they have such high upfront fees with offers that destroy the margins? The answer is that restaurant chains are often looking for an engagement strategy to boost revenues but sadly the typical points/swipe card programs just aren’t engaging enough. To compensate for this lack of engagement in their customer base, restaurants come up with margin busting offers. Net result – lousy ROI and a quickly discarded rewards program (too many examples to quote here some high profile ones Domino’s, Subway – tried a few times). Punchh solves this problem by delivering 4X the engagement of typical swipe card based programs:

  • Customers don’t have to waste their valuable wallet space on loyalty and referral program cards as the Punchh program runs on their cellular phones. This means more customers engage with restaurant programs.
  • A big problem with the swipe-card based program is that most customers don’t know the score (When they are going to get what) and without knowing the score its hard to be engaged. With Punchh, because of our easy to understand visual programs, customers always know the score.
    Swipe card loyalty programs don't work
  • Typical swipe card program treat customers as a number. This means that besides knowing the loyalty card number, restaurants typically don’t know much else about them (Most restaurants offer incentives for customers to register with the programs at home but typical registration rates are poor). With Punchh, customers opt into the restaurants program with their names, emails and even their pics. This means restaurants now have a new channel to communicate with their customers and can now further engage them with personalized offers like – “we haven’t seen you in two months, come back and appetizers are on us” etc.
  • Food is social. If you talk to restaurant chains or individual owners, they will tell you that a majority of their customers come in to their restaurants because they heard of the place from their friends. A typical swipe card based program completely ignore the social dimension of the food business. At Punchh we build social programs like referrals tracking, gifting and giving, group rewards to not only engage the customers but also to provide restaurants powerful tools to incentivize their best marketers – their customers – in order to achieve measurable results.Food is social

With higher engagement, restaurants will no longer have to offer margin-busting deals and can instead engage with their customers in a more sustainable manner.

Then there is the other issue of the efficacy of these programs that was well captured by Doug Pruden in the comments:

Every time I hear of a new loyalty points program I question how much incremental business is actually going to generate. Would those “best customers” who earn enough points to truly benefit from the program have purchased just as much and as frequently even without the points? After all, aren’t those folks who are most likely to join also the people who were most loyal in the first place? Have marketers just trained consumers to join every program to collect points at our convenience – without actually changing consumer behavior? Does the points program actually generate more revenue than it costs to operate? Most importantly, have any of the points programs ever been started slowly, with split tests that determine whether they are actually producing enough increased retention and participating customer spending to justify the program cost?

Typically with swipe card based programs, when a restaurants hands out 100 cards they only ever see 8-10 cards back. The people who come back are the people who are the most dedicated customers and are invaluable to the restaurants. But Doug’s question is would these ‘best customers’ still come back even when there was no program in place? Sadly, most restaurant owners and chain managers don’t really know the answer. One thing is pretty clear – when a restaurant is engaging with only 8-10% of the people who are interested in their programs, the program is not really working. With Punchh we deliver an engagement rate an order of magnitude higher than 10%. This means a lot more engaged, repeat customers to businesses so that restaurants can finally stop worrying about whether their program even matters, and instead focus on delivering great service to their customers.


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