Meaningful rewards

Dec. 28, 2005

The pace of the modern marketplace and its decreasing emphasis on personal attention can make customers of any business feel a little less loved. Nowhere is this more evident than in the airline industry, where huge increases in air travel — beginning in the 1980s and continuing unabated — have customers feeling like cattle being herded into and out of airports.

Airlines once were admired for their successful loyalty reward programs. Flyers chose Delta knowing their patronage would get them free tickets sometime in the future. But as competition stiffened and ticket prices plummeted, the incentive to stick with one or two carriers offering rewards diminished as air travelers sought bargains.

The foodservice industry traveled a similar path by creating its own frequency-reward programs to drive customer loyalty. But as the advent of "value meals" gave birth to deep price discounts, patrons once enticed to trade frequency for a free meal found it equally simple to enjoy

What's Important

Loyalty-reward programs are excellent tools for taking care of and getting more sales from valued patrons.

Many successful programs charge customers for membership but reward them almost instantly.

Programs that focus on why customers come to an operation, rather than on price or special deals, also tend to attract more loyal patrons.

a cheapie at a similar restaurant whenever they liked.

Bob Gordman endured the loyalty-to-low-price buying transition firsthand as a multiunit Quizno's Sub operator several years ago. Not convinced the punch card loyalty rewards program used by the company was working, he started surveying customers to ask why they came to his sub shops. He learned that loyal buyers came back because they liked Quizno's food, not because Quizno's offered incentives.

"Almost never did anyone say they came back because of the punch cards," said Gordman, now chief executive of The Gordman Group, a profit-development strategy consultancy in Breckenridge, Colo. "If the customer was price driven, nothing really brought them back consistently. Eventually, we eliminated the program and it never affected our business."

That same purchasing pattern has borne itself out in multiple industries, Gordman added, even when loyalty rewards are substantial. A department store client of his firm believed its incentive program was a major reason its customers returned to its stores, but focus group interviews of 1,200 shoppers proved otherwise.

"We found that the driver of the loyalty was satisfaction with the merchandise, not the loyalty program or the weekly promotions," Gordman said. "The most loyal customers said, 'I spend the most there because I like the selection of merchandise.' They came back because they were going to find what they wanted."

John Usedom agreed with Gordman. As president of Clever Returns, a Geneva, Ill.-based firm that designs and runs customer loyalty programs, he said customers patronize businesses they like.

Loyalty programs must "make the people who use them feel like they're special, or they don't work," Usedom said. "I can have a frequent customer who may leave me if there's a price change, but a loyal customer is going to be there even when their discretionary income gets tighter."

While Gordman said there is nothing wrong with catering to price-sensitive customers, he said operators mistakenly believe lower prices equate to loyalty. He said his Quizno's experience taught him that if people came there because they liked the food, then he needed to reward them with food if he was going to get them back. He eventually targeted employees of nearby businesses and offered free samples.

"There's this pecking order in people's minds that leads them through a thought process about where they're going to go when they want something," said Gordman, who is also the author of the book, "The Must-Have Customer: 7 Steps to Winning the Customer You Haven't Got." "The question they ask is, 'Where am I most likely to be successful in finding what I want?'"

Programs that work

Research of the loyalty programs designed for his restaurant customers showed Usedom that they work, but in ways most operators don't expect. Most of his restaurateur clients assumed about 60 percent of their customers were frequent diners. However, data culled from 1.1 million customer credit- and debit-card transactions proved that fewer than 15 percent come frequently.

The good news is small number of loyalists represents about 33 percent of an average restaurant's revenue. Even better news is that customers involved in loyalty programs spend more per visit and return more frequently. According to Clever Returns research done in 2002, the average "ValuedMember returned to our participating restaurants every 42 days, while nonmember patrons returned an average of every 97.1 days. In those more frequent visits, ValuedMembers also spent an average of $93.92 per visit, while nonmembers spent an average of just $80.13."

Pizza customers, Usedom added, are even more loyal than regular

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restaurant customers, which should lead operators to find ways to give them some TLC. "Pizza has higher repeat business, somewhere around 40 percent. The rest are just trying you out or shopping on price."

Neal Hollingsworth, vice president of marketing for Taco Del Mar, a 178-unit burrito and taco chain based in Seattle, said his company's punch-card loyalty program has been extremely successful in driving repeat business -- so successful, in fact, that its "Double Punch Mondays" program is listed in the chain's Uniform Franchise Offering Circular.

"It started in 1992, when we were looking for a way to build traffic on Mondays," Hollingsworth said. "We used to allow it for almost any item, but we decided to offer it only on what we did best, and that was burritos."

With every 10 burritos purchased, customers got a free one. On Monday's however, their burrito cards get punched twice.

While Hollingsworth said it's hard to prove the card increases loyalty to Taco Del Mar, it clearly drives frequency; Mondays are always jammed. Still, what makes him believe it boosts loyalty is the mood inside stores on Double Punch day. "It's almost a cultural thing because people are having fun. It's not just a meal."

That Taco Del Mar's program is fun for customers likely is another reason it's successful. Enthusiasm about a loyalty program produces that most valued form of marketing, word of mouth.

"You can't buy that kind of marketing, but your loyal customers, when you treat them special, are the ones who are going to go back to work the next day and say, 'This place is great. They take care of me,'" Usedom said.

One of his customers operates a white-tablecloth Italian restaurant and gives members of his loyalty program a pint jar of his housemade spaghetti sauce every year — but only when they're in the restaurant. The resulting stir it causes in the dining room, Usedom said, generates attention for the loyalty program. "He comes out with jar of spaghetti sauce and gives it to the customer, and then the people at the next table ask, 'Why do they get that?' That gives the waiter the chance to say they're members of the loyalty program, and they ask to sign up for a program (the owner) charges $15 to belong to."

Ironically, loyalty programs are highly successful when patrons are charged to join. Earlier this year, Pizza Hut reported

start quoteWe found that the driver of the loyalty was satisfaction with the merchandise, not the loyalty program or the weekly promotions. The most loyal customers said, 'I spend the most there because I like the selection of merchandise.' They came back because they were going to find what they wanted.end quote

— Bob Gordman, CEO, The Gordman Group

its fee-based VIP (Very Into Pizza) loyalty program increased members' incremental orders by 93 percent and raised incremental net sales 65 percent in stores using the program. According to AdWeek magazine, VIP participants paid $14.99 to join for a year and received a large pizza in return. After that, for every two carryout or delivery orders of at least $10, customers received a free large pizza (up to two free pizzas per month). Plus, every month, participants get an order of free breadsticks or baked cinnamon sticks just for participating. (Pizza Hut did not respond to a request for an interview for this story.) Such results don't surprise Usedom.

"It's absolutely true that charging puts a value to it," he said, adding that fee-based programs also weed out customers that really aren't interested in your product. "Not everyone's going to join, but those who do feel special."

Fee-based loyalty programs that give immediate, tangible rewards, such as gift certificates or food equal to the cost of joining, work well because they eliminate any risk for the customer, Usedom said. Those that promise discounts on future purchases might not be as appealing to patrons looking for more immediate gratification.

But don't deliver the reward too quickly, Usedom said. Ensure the reward comes with a purchase on the next visit back.

Membership has its rewards

Creating a sense of exclusivity also boosts the effectiveness of loyalty programs. When members get e-mail or standard mail containing exclusive offers, it reinforces that feeling of membership in the club because the operator is staying in touch through more personal means. But a sure way to make a member feel "regular," Usedom added, is to mail them deals accessible to anyone.

Another means of ensuring the program works is to design all deals with a call to action. Simply sending out a menu or a reminder of business hours does little or nothing to motivate a loyal patron to greater frequency or to spend more. A specially tailored deal, however, does.

"I've always wondered why more sit-down pizza places don't have special events for their regular customers," Usedom began. "Do something like sending an offer that says, 'Come in and try a pizza with these toppings you've never tried before.' Give it to them for free and do it on the slowest night of the week. They'll still buy drinks or appetizers and maybe a dessert, and you've gotten them to try something new. Plus, they feel like they're getting special treatment, which they are."

Topics: Marketing , Operations Management

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