Is Your Loyalty Program Rewarding the Right Customers?
When I walk into my favorite local restaurant, I’m not just another sale. I’ve been eating there several times a month for more than ten years. I’m what every business wants: a repeat customer. A regular.
So why would my favorite eatery ever do anything to jeopardize our long, happy relationship?
Suddenly one day, my beloved restaurant wanted someone new, younger, hipper. (Yes, only an old customer would use the word “hipper.”)
It’s a popular restaurant with several locations. It’s known for its tempting bakery case, local ingredients, dog-friendly patios, and the excellent policy of serving breakfast, lunch, and dinner all day. (What’s wrong with macaroni and cheese for breakfast?)
And when I first started eating there, it had a simple rewards program of the frequent-flyer sort.
The Straight Points System
For every $50 I spent, I got a free dessert. Since a slice of fancy cake at this place can run about $7, that was a pretty good deal.
At some point, the terms of the program changed slightly. Now the reward for spending $50 was a $5 voucher. Not quite as good as a wedge of pumpkin cheesecake, but loyal customers now had the option of applying their rewards toward something healthier than dessert (if for some reason that’s what they really wanted to do). And I still had the satisfaction of effectively getting a 10% discount on everything I bought there.
(That’s not quite accurate, of course. After spending $50, I had to spend another $5 in order to use my reward voucher. So I was getting $55 worth of food for $50 — an effective discount of 9%. Okay, but it was still enough to make me feel smart for participating in the rewards program.)
Random Rewards and Unreliable Data
But then the restaurant switched to a completely different rewards system. No more frequent-flyer-style accumulation of points. Instead, participants got a free cookie for signing up for the program and a free cookie for “liking” the restaurant on Facebook. They also received small monthly discounts and two free desserts per year.
The rewards no longer had anything to do with loyalty. I was disappointed in the restaurant for choosing this program, which seemed to favor new customers over existing ones. (The involvement of Facebook might also suggest a preference for younger customers — or at least for customers who were more active on social media.)
Another feature of the new program was that at every visit the participant had a chance to receive a random reward.
I’ve read that random rewards can be surprisingly effective, making people excited about going to a particular business. Still, I found it hard to believe that taking the reward out of the customer’s control could be a successful strategy. (There are plenty of rat studies about exactly this sort of thing.) But over the months, I actually did pretty well, randomly getting my coffee or dessert or even a whole entree for free on quite a few visits.
Or maybe I was doing too well. I had to assume that whatever algorithm controlled the handing out of these freebies was set up so that the restaurant wouldn’t lose money. But if you’re a restaurant, there’s probably such a thing as too many free lunches.
Clearly this system had other flaws as well. For one thing, it was to a participant’s advantage to be a new customer. If creating a new reward account (handing over your e-mail address) earned you a free cookie, then obviously signing up again under a different e-mail address would get you another cookie. I have to admit I couldn’t resist signing up twice myself (because, you know, free cookie!).
So the data collected through that program couldn’t have been terribly useful.
Not surprisingly, perhaps, the restaurant soon switched back to a points-style loyalty program, this time managed through a third-party app called Thanx. Again, for a certain amount of money spent, the participant receives a $5 voucher. The threshold is now $75 instead of $50, but that still comes to an effective discount of 6.25%, which is something.
And the program again rewards repeat customers. In fact, by eating at the restaurant frequently enough, a participant earns “VIP” status. And the current VIP rewards are free “specialty drinks,” a relatively pricey category that includes not only the familiar espresso-based concoctions but also the restaurant’s popular five-scoop milkshakes.
As long as my favorite restaurant keeps serving delicious food, it will continue to have loyal regulars. And as it happens, loyal regulars often bring along friends, family members, and out-of-town guests — also known as new customers.
If you’re a business, your main activity should be delivering the best version of your service or product that you’re capable of putting out into the world. A rewards program might be good too — just think of it as icing on the cake.