Restaurant Loyalty Program - Flourish or Flop?
by Rudy Vener
September 6, 2007
It's a jungle out there!
The battle for restaurant patrons can be fierce and ruthless if not downright bloody. Restaurants are high frequency markets with cutthroat competition.
This makes them an ideal business for loyalty programs. So why don't more restaurants use them?
One problem is that many restaurant owners have severe misconceptions about their value and cost. They think the loyalty program is too expensive, won't work, or is too much hassle to administer.
The key to a successful loyalty program depends on understanding how it really works and what it can and cannot do.
The purpose of a restaurant's loyalty program is to increase order frequency and spending from your most loyal customers.
The first thing to realize is that unless you are a McDonalds or a Dominos, your most loyal customers return for your food, not your prices. Price driven customers will visit you only when they can get a deal. They will follow the coupons, not their taste buds.
Price driven customers may be frequent customers, but only as long as your price is right.
Your loyalty program is not going to entice cheapskates away from low end eateries to your door. Instead, it will make loyal customers feel special. This in turn will encourage them to come back more often and to spend more at your restaurant.
Who Are Your Most Loyal Customers?
Most restaurant owners believe that about 60% of their customers are frequent buyers.
This is not the case. Analysis of over a million credit card transactions show that about 15 percent of your customers purchase from you frequently. On the other hand, the small number of loyal customers account for a third of your revenues.
This small group is who your loyalty program should target. The goal is to encourage this small loyal following to come back more often and spend more money when they do.
Great Goal! But How To Achieve it?
To work correctly, your loyalty program has to meet some very specific conditions.
Doctors Xavier Dreze and Joseph Nunes of the Wharton School of Marketing have conducted extensive research on loyalty programs.
One of their more significant findings shows that as people make progress towards a loyalty program goal, their efforts to achieve the goal increase. That is, the closer customers are towards receiving their loyalty reward, the more frequently they purchase from the restaurant.
That's the driving force which makes a loyalty program possible.
Dreze and Nunes also discovered that when progress is measured by points rather than total dollars spent, customers will try harder to reach the program goal.
And finally, they learned that customers are more likely to actively participate in the loyalty program if they are given a reason for doing so, even if it is as spurious as: "Thank you for signing up for our online ordering service. As a token of our appreciation we invite you to take part in our Online Pizza Points reward program."
What Not To Reward
The biggest mistake a restaurant owner can make when selecting a loyalty reward is to offer some sort of discount.
Remember, your most loyal customers are there for the food, so reward them with something tasty, imaginative and above all, edible.
Loyal customers don't care about discounts, they care about food. You have plenty of ways to deal with bargain hunters, but your loyalty program should not be one of them.
Ideally, you want to have a number of tasty, enticing and savory rewards to please a variety of palates. Dreze and Nunes found that the value of the reward is not a primary factor.
It is far more important that the reward be intrinsically desireable to the customer. You can be creative with your rewards. For example you can offer sample combos of some of your more popular entrees. Not only does this seem very special to the customer, but may lead to future purchases of the item since it lets the customer try before they buy.
Putting It All Together
The loyalty program achieves its goal by inviting each customer to participate, providing a selection of rewards for the participants to choose from and by awarding a point to each participant when they place an order. Each participant is kept advised of his or her progress and when they have accumulated enough points, they can trade them in for their reward.
Does this sound simple and obvious? You bet it does.
Does it work? Yes indeed.
Some Final Thoughts
As we learned from Dreze and Nunes, it is critical that customers know their progress towards reaching the program goal. With an online loyalty program this is done automatically. Every time a customer signs in to their account, they see their loyalty program points.
With paper or card based programs, they should see a punch card or some tangible evidence of their progress.
The results of a loyalty program are measurable. Fifth Group Restaurants of Atlanta reported that spending increased by 17 after customers began to participate in their loyalty program.
Spectrum Foods Table One in San Francisco increased sales by 10% with their loyalty program.
Loyalty programs are long term investments, but when properly implemented, they are well worth your time and effort.
