The Role of Rewards in Restaurant Loyalty (Part 1)

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Trying to keep up on what’s happening in loyalty marketing can be daunting. There are a couple of constants: a lot of articles are written with a singular viewpoint, suggesting that there are basic precepts of loyalty that apply across all categories (something I don’t think is necessarily true…), and every week seems to bring news of a restaurant rewards program launch or re-launch. These two points intersect because restaurants in particular have very different decision profiles, and there are different tiers even within the overall restaurant category that demand different loyalty/rewards treatments. So I wanted to to attempt an exploration of restaurant loyalty/rewards in three parts:

1. What are the goals of loyalty/rewards programs, and why do restaurants in particular demand different program structures? (This post)
2. Decoupling restaurant loyalty/rewards from the “digital experience.” (Part 2)
3. What is the ongoing role of rewards for restaurants? (Part 3)

The goals of any loyalty/rewards program, in any category, are in essence the same: generate incremental revenue that would not be realized in the absence of the program, at a level that exceeds the cost of running the program plus the cost of fulfilling rewards, through some combination of attracting new customers and getting existing customers to visit more often and/or to spend more per purchase occasion. Pretty simple.

Is there a difference between loyalty and rewards? Many people think of them interchangeably. For the purposes of this discussion, a loyalty program is any mechanism that aims to increase share of category spend and deepen 1:1 engagement between a brand and a consumer, outside of the actual product/service experience itself. That could include promotions, mobile apps, subscriptions, etc. A rewards program is a specific type of loyalty mechanism that tracks purchases over a long timeframe and gives benefits back to the consumer in proportion to their spend or visit frequency.

What are the benefits restaurants hope to achieve from running a rewards program? These can overlap or differ from the goals as outlined above. A quick web search reveals numerous articles discussing the potential benefits to the restaurant, which commonly seem to center around:

• Drive customer retention/more customer visits - as per the goals
• Increase check size - similarly
• Improve margins - not sure this follows, but a lot of talk about it
• Show customer appreciation and increase customer satisfaction
• Build brand awareness/preference and drive word of mouth
• Allow for data capture and customer database build
• Connect with customers directly

Why wouldn’t you want to realize those benefits? You would, if they could be achieved profitably! Paytronix reports 27.3% higher spend after joining a restaurant loyalty program, with an 18% increase in order frequency. Restolabs.com suggests customers enrolled in a loyalty program visit 2 times more often and spend 4 times more money than others.

If that were true across the board, then in an efficient market with low barriers to adoption, everyone would launch a loyalty program and would expect to realize those gains. But… if that in fact happened, unless overall OOH dining frequency increased, only those that deliver an overall better customer experience would see sustainable increases at the levels reported by Paytronix and Restolabs.com. You could argue that is where we are today, certainly in QSR where pretty much every chain now has a mobile app with a rewards component. But it is doubtful that every program is delivering those benefits profitably.

That raises a different question: why would these benefits be specific to loyalty programs? Or rewards programs in particular? Some of those are simply business objectives, while others could be supported by any number of potential tactics. Hmm. I’ll explore those questions in Part 2.

In the meantime, those listed benefits do seem fairly generic, so it is important to understand why restaurant usage is different and the implications for engaging with consumers. Motivations, barriers, purchase frequency, spend level, category involvement and other factors all have influence on the decision process, and accordingly those factors should influence how a program within a specific category should be structured and measured. This is especially true for restaurants, where some of those factors include:

• Frequency - a decision on where to dine can be made as often as multiple times per day
• Budget/number of diners/availability of deals - can be different for each individual decision
• Familiarity and need for variety - even the most loyal fan gets sick of eating the same thing over and over, but they typically have a limited consideration set
• Convenience - things like distance, side of the road, method of pickup, number of cars in the drive-thru line may all influence the decision
• Multi-tiered ownership structures - influence how program cost burdens get shared

So to summarize, the goals of restaurant loyalty programs are simple: more people, more often, spending more money. And structuring a loyalty program in the restaurant category is different because it needs to take into account a very different combination of factors that impact consumer decision making and restaurant choice.

That leads to another area to explore: how does the expanded functionality and high penetration rate of mobile apps, especially in QSR, influence loyalty and rewards? On to part 2…

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