Each year, thousands of U.S. restaurants and cafés start or consider starting a customer loyalty program. Typically these programs involve giving the customer a card that is stamped for each purchase. After a typical 10 purchases, the customer gets a free meal or drink. Given the popularity of these programs and the ubiquity of the cards in many people’s wallets, many would think these programs add value that justifies the cost to the business. However, there is little evidence to support this.
You can do a search on the internet and find numerous arguments for and against customer loyalty programs. Most of the ones in support of them are from companies that sell services like digital loyalty tracking programs. A typical program will have a press release with an ambiguous statistic like “Of those patrons that are aware of a loyalty program at a favorite restaurant, 87% participate in the program.”
So what does this tell us- that most people who know they can get something they like for free will take it? We don’t need a statistician to figure that out. What you never see from these companies is hard data that strongly correlates an increase in revenue and profit with the implementation of a loyalty program.
A typical New York City client of ours sells 200,000 drinks per year with cups they buy from us. At an average $3 per cup, that’s $600,000 in revenue. If this client had a loyalty program in which they gave a free drink for every 10 drinks and assuming all customers participated in the program (which I realize would not be the case in reality), they would be giving away up to 18,000 drinks a year. Another way to express this is that they’d be effectively spending $54,000 from their marketing budget to give away free product. Would these customers really change their behavior for what amounts to a 27 cent discount on each cup of coffee?
One can think of a lot of ways to engender loyalty with $54,000. How about just keeping the shop clean, hiring evening musical entertainment, or creating education programs that show why your coffee is much better than the big chains. For $54,000, one could have a cheerful full time staff member who greets everyone by name at the door and already knows what drinks they want. I guarantee customers would appreciate that and want to come back more than they would if they were given 27 cents in exchange for carrying another loyalty card. Or a business owner could throw a huge private party each year for all their top customers and their guests, one they would never forget and tell everyone about.
In a competitive market, if every merchant has a loyalty program of some sort, how would this make customers more loyal? Like any business, restaurants need to be creative to stand out. Customers want a unique experience. Loyalty programs are already too overused and are simply a waste of money better spent elsewhere. What do you think?
