Outside Insights | November 2013 | By Zachary Goldstein

The Race for Long-Term Customer Loyalty

Brands must turn to innovative loyalty-program approaches to keep guests engaged.

Loyal customers spend 67 percent more at restaurants than new guests.
Loyal customers spend 67 percent more at restaurants than new guests. www.thanx.com
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Identifying, rewarding, and retaining your best customers is one of the hardest challenges for any restaurant. It’s both a marathon and a sprint, and with loyal customers spending 67 percent more than new ones, it’s a race you can’t afford to lose. The right loyalty program can help get more customers across the finish line.

Traditional plastic-card loyalty programs have long been the gold standard for restaurants, but recent data suggests that consumers simply aren’t engaging with them like they used to.

According to Colloquy, 54 percent of loyalty memberships are inactive (almost all within the first year), and many restaurant programs are performing even worse. One California quick-service chain, for example, gave out 37,000 plastic cards over the last two years (at a cost of about 50 cents per card). Only 56 percent were ever used, only 26 percent were registered with an e-mail address, and only 18 percent were still active six months later.

As consumer demands have changed, the greatest enemy of the traditional loyalty model is program churn. When earning rewards takes effort, many customers ultimately stop trying. And if you can’t keep your customers “in the game,” you can’t hand out any medals.

For consumers, earning a reward in a loyalty program is like running a race. You have to run around the track (make purchases), and only when you make it to the finish line do you earn a reward. Some customers will never make it to the finish line because they weren’t dedicated. But most are running the race (making repeat purchases) with the finish line (reward) in their sights.

Traditional loyalty programs put hurdles all the way around the track. Forgot your card? Oops, you’re out of the race. Have to remember to print out a coupon? Sorry, that’ll trip you up. No wonder churn is so high. The same customers may still be spending money with you, but you wouldn’t know it because they took off their bib number. Or worse, maybe they really did stop coming altogether.

A 5 percent increase in customer retention can produce as much as a 100 percent increase in annual profit.

This is a problem for two reasons. First, you actually want your best customers to make it to the finish line. Just like an Olympic runner accelerates on the final 100 meters, when your customers are nearing a reward, they run significantly faster. At Thanx, a technology company that helps restaurants identify and reward their best customers, we have measured a 25–45 percent increase in visit frequency on the final two transactions (the homestretch) leading up to a reward.

Similarly, you actually want those rewards to be redeemed; customers redeeming cash-back rewards via Thanx spent 10–15 percent more on that transaction than their historical average ticket.

And finally, recent reward recipients are twice as likely to refer a new customer on their victory lap immediately after earning a reward.

The second reason you should tear down the hurdles: High customer churn ruins your data quality and undermines the value of your entire program. When you can’t tell the difference between a true churned customer (one who stopped patronizing your business) and one that just ditched the loyalty program, can you really trust the insights generated by the program? According to Fred Reichheld, author of The Loyalty Effect, a 5 percent increase in customer retention can produce as much as a 100 percent increase in annual profit.

So how do you create smooth sailing around the track? How can you encourage more of your customers to reach the finish line? Fortunately, there are some exciting new technology trends making loyalty a whole lot more accessible to your business and less painful for customers.

  • Using a phone number as a “loyalty card”: While the consumer still has to do something new at checkout (provide their phone number), the risk of losing or forgetting their card has been eliminated. Many point-of-sale integrated loyalty vendors (Aloha, Givex, and Paytronix, for example) now allow consumers to register their phone number when they activate a new plastic card and use either interchangeably to earn rewards.

  • Using your name as a “payment card”: While they don’t yet offer sophisticated loyalty programs, Square (and recently Paypal) has taken ease of use one step further. The name of consumers who have checked in (or are within close proximity of the restaurant) automatically shows up on the point of sale, allowing the consumer to just “pay by name.” The technology will ultimately allow for frictionless loyalty, but mobile-payment technologies have yet to really go mainstream, so it might still be too early to count on this approach.

  • Using the credit or debit card as a “loyalty card”: At Thanx, we have tried to remove all of these hurdles by linking the entire loyalty experience to any credit or debit card. Consumers pay as usual and automatically earn rewards—reward-progress notifications are delivered in real time to the consumer’s phone. Once active in Thanx, less than 1 percent of customers opt out of the rewards program by unlinking their card.

Zach Goldstein is founder and CEO of Thanx, a next-generation CRM and loyalty technology for restaurants and retailers that leverages the power of the credit card network to capture customer data without any integration or upfront cost. Prior to Thanx, Zach was a consultant at Bain and Company where he worked with national restaurants and retailers on customer retention and satisfaction.