Background
You are thinking about launching a loyalty program in the near future and you have asked Fishbowl to answer a variety of questions regarding a program and about loyalty in general. We believe that any program needs to be developed with a strategy and quantifiable objectives. Without objectives then we are “flying without a flight plan.” However, this document is intended to explain and answer some of your questions. We can conduct a strategy planning session where we can assist you with developing the strategy or at least a framework for the search process.
1) Why a Loyalty Program?
The ultimate goal of any loyalty program is sales and profit growth, achieved by growing individual customer sales (frequency or transaction size) and profits while reducing attrition or defection of customers. Specifically, a loyalty program can be leveraged in three ways to build sales and profits:
- Customer Insight - learn about your customer buying behaviors such as spend, frequency, lifetime and lifetime value. This data is especially relevant over time and in comparison to industry averages. A customer database can also be strategic asset for conducting product and other market research.
- Marketing Knowledge - loyalty data can be used to develop marketing programs or marketing tactics geared at increasing frequency of visit, spend per transaction or to buy new products or purchase through new channels (retail merchandise, gift cards, etc.).
- Operational Metrics - loyalty data can provide hard evidence against which to measure operational initiatives, while excluding short-term variables such as seasonality or local economic conditions. For example, a store redesign, new menu, or service initiative, can all be measured against changes in frequency and/or average spend to determine the long-term economic impact of such changes.
To sum up, Loyalty is a core strategy decision to organize around a customer-centric model and to measure performance against customer-focused metrics. Loyalty marketing may be the most visible elements of a strategy decision to embrace loyalty. But it is unlikely to be successful as a tactic. Rather, it must cross all the disciplines of a company (into Finance, IT, marketing, training, operations, and HR) and be clearly understood and embraced.
2) The Technical Aspects
A loyalty program can be implemented using custom developed software, a POS company’s software or a loyalty partner that has a canned program. There are advantages and disadvantages of each system.
- Custom programs are expensive to develop but monthly maintenance costs are often low or non-existent. It can be developed with the objectives and strategies developed by you. This is managed by your in-house IT department.
- POS companies have developed software to run a loyalty program using a module that is interfaced into their system.
- Stand-alone program through a 3rd party vendor Usually uses a separate verifone or some are (can be) integrated into POS. Charges are typically based on a monthly fee per location, plus transaction fees, plus fees for add-on services such as data entry, changes, web integration, mailings, customer service, et al. They charge a premium for these add-on services. While these expenses may appear to make this option more costly, remember that you will have to incur most of these same expenses if you choose the more “do it yourself” options of in-house or POS vendor.
The first two options require most of the marketing decisions to be made by the restaurant company. The learning curve might be steep. The first two options of implementing the technology require the coordination of several vendors to support the program such as:
- Data entry to enter in the names, addresses and email of members
- Fulfillment to send out awards (unless the program automatically issues awards at the point of sale)
- Webmaster assuming the program is integrated with your website. This benefit allows customers to verify points, redeem awards, change address/email and reduces customer service issues. Sales of gift cards and merchandise can also be promoted through the member website and handled by the fulfillment company.
- E- Mail marketing company
- Agency/print vendors to design and produce brochures, member cards, etc.
Most of the companies offering the complete package loyalty programs have been developed by technology or POS companies. As such they only address the first reason to develop a loyalty program – Customer Insight. They lack the experience and the marketing knowledge to incorporate the program into the long term vision, culture and business plan of any restaurant.
3) Enrollment
Enrollment into the program can be in-store or online. You could charge a fee to enroll but customers will only pay to join a club if the value they receive equates to or exceeds that enrollment fee. Capture postal addresses or at least zip code so you can use the data for analysis. Analysis could be used for marketing purposes (demographic or psychographic profiling), research (online, trier/rejector, focus group recruitment), and site analysis or cannibalization studies. Obviously capture e-mail since much of the communication can be via the internet which is personal and inexpensive.
Many companies struggle with wanting guests to show their card at every visit and that is becoming more challenging from the guest’s perspective with every retail, airline, hotel and restaurant developing their own program. How many cards can you hold in your wallet? The simple answer to this question is to find a way to identify guests so the manager/server/counter person knows they are a VIP. And in order to accomplish that you need to create a value to the card – an express line for members, a free drink or other incentive.
3) Point accumulation and redemption
Part of the loyalty program strategy is determining the currency of the program and the ratios of awards. For example,
- one point per dollar spent or
- 10 points per entree purchased
- No points accumulation, but incentive to show card such as free dessert with each visit.
- Awards might equal 10% of the earned points or 5% of the earned points
Most of these are decisions are based on economics, profit margins of the product, ROI of the program, budgets, etc. Two recommendations I can make without knowing the above economics include:
- the first award should be achieved after 3-5 visits
- awards should start with more of your own product.
Points are a currency and a liability on your balance sheet. Unless you expire all points annually they need to be accounted for. This has obvious financial implications and the CFO will need to be included in the decisions.
