Article

Creating Successful Restaurant Loyalty and Purchase Incentives Programs

For restaurants, there are two kinds of incentives that offer the best bang for your marketing buck: coupons that offer some kind of cost-saving for a particular purchase, and loyalty programs that give away free food or other benefits to customers who reach particular spending targets. Which should you use when, and how do you make sure they work for you?

If you want to increase your restaurant's revenue without changing your prices, your best options are to attract new customers or get your existing customers to visit you more often. And that means offering deals of some sort to incentivize guests to buy. But just sending out a blast email offering discounted lunch specials isn't likely to work terribly well. What you'll need is a well-considered and well-designed purchase incentive program that taps into how your customers think and behave.

Decades of consumer behavior research has given us a lot of insight into how people decide to buy a sweater or a gym membership or a super-sized cappuccino. No matter what they are buying, customers measure the value of a potential purchase by comparing what they need to spend versus the benefits that the purchase offers them. On the benefits side of the equation, what customers get for their spend can be emotional just as much as physical, and being able to buy something with greater value for less outlay amplifies the emotional aspects of a purchase. People feel great when they score a deal, and of course the bigger the deal, the better the buzz.

But the decision to purchase something goes well beyond how attractive the price is. What guests need to spend to make a purchase includes time and effort as well as money. Restaurant guests might visit you because stopping in saves them time ("this coffee bar is right on my way home from the gym") or because your restaurant offers them a sense of belonging or status that they don't get in other places ("this coffee bar is where all the cool kids hang out and I want to be seen as a cool kid"). This means that any purchase incentive program you create has to resonate with your customer base and their reasons to try you or to become a regular.

You need to know your intended customer well. What benefits are most important to them and which of their resources is in shortest supply? There are those who will only make a purchase if they are getting some kind of discount while others who are motivated by exclusivity or status. In a high-end restaurant, guests might value recognition over getting reduced prices. In a quick-service spot, it's cost and convenience that is usually the biggest concern so customers will be highly motivated to find deals. Consider these situational differences among your customers as you figure out what incentives to offer rather than rely on outmoded ideas like "women use more coupons than men" (no longer true, given the rise of mobile coupons that don't require hunting and clipping) or "only affluent people join loyalty programs" (everyone likes to get recognized and rewarded for being a regular).

Enticing New Visits with Coupons

Let's begin with coupons. Coupons have been around forever in one form or another, although today's coupons are almost always digital. Coupons can encourage new customers to try you or steer them towards ordering a certain item. One consumer behavior study found that two-thirds of coupon users have made a purchase that they hadn't planned on making just because they received a coupon offering a good deal.

Coupon users tend to be highly price-sensitive and if they already use coupons for other things, they are more likely to use restaurant coupons as well. But coupons don't encourage customer loyalty. That's because people who start out buying with coupons tend to want to go on using coupons for all future purchases. Big box retailer Bed Bath and Beyond has found this out the hard way. Their frequent coupon promotions have effectively trained their customers to only make purchases when they have a discount coupon, really hurting the retailer's bottom line.

In a 2020 survey performed jointly by Paytronix (a loyalty and engagement services company) and PYMNTS (a business media company) 47% of respondents indicated that they were members of at least one restaurant loyalty program. And membership has been growing as more restaurant companies roll out new or improved programs.

The same couponing problem can occur with restaurants. One restaurant in Indiana saw its sales increase by over 20% when they launched a coupon promotion but then drop by more than 30% after the promotion stopped — that's a net drop in sales of 10% to say nothing of the cost of offering the coupons.

What's more, about half of the restaurant's customers that used those coupons were regulars who actually reduced their visits once they no longer could get the discount. So, in addition to cutting into its sales, this restaurant's coupon program converted formerly good customers into fickle bargain hunters.

Coupons can have other negative effects if they aren't properly planned or executed. A restaurant that offers coupons is seen as being lower-end and consumers may consider a luxury experience to be less valuable when it is made available at a discount. Coupon users also typically spend less overall than other patrons even after accounting for any discounts offered by the coupon. Finally, if a customer tries to use a coupon and is denied by the restaurant's staff or online ordering page — even if the coupon they are trying to use is clearly invalid — the negative repercussions from an angry review or a shellacking on social media can be substantial.

Despite these arguments against them, there is a place for coupons in a restaurant's purchase incentive program but you need to be strategic in how you use them. The classic "buy one, get one" or similar offer is a far better approach than offering a discount because deals like these are still attractive but don't train the customer to expect to pay a lower price for your products.

Consumer research backs this up: free items are psychologically worth more to your customers than items they pay for at any price. Behavioral economist Dan Ariely's famous "Hershey kiss" study is a great example of the power of "free". When he charged people a penny for a Hershey's kiss and 26 cents for a Lindt truffle, his participants were equally likely to pick the Hershey kiss or the Lindt truffle. But when one cent was cut from the price of each treat (making the Hershey kiss free), about 90% of those in the study chose the free Hershey kiss over the discounted truffle.

As much as possible, only issue coupons to potential new customers rather than send them to your current guests. You can rent or purchase lists of possible customers within your trading area or work with a third-party online marketing company to push targeted coupons to consumers with specific characteristics. (For more tips on using coupons to drive traffic to your restaurant, see the sidebar on coupon best practices.)

Many POS systems allow you to track coupon use through specific codes, an important element in determining whether your promotional efforts have paid off. Generally, coupon use isn't that high – 30% is considered a very high redemption rate.

Rewarding Regulars with Loyalty Programs

Assuming your coupon strategy is working and you are attracting new customers, the next phase of your purchase incentive program should be a way to reward your regulars. In a 2020 survey performed jointly by Paytronix (a loyalty and engagement services company) and PYMNTS (a business media company) 47% of respondents indicated that they were members of at least one restaurant loyalty program. And membership has been growing as more restaurant companies roll out new or improved programs.

We tend to think of loyalty programs as being something that restaurants have adopted from airlines and big box retailers but really, it's the other way around: restaurants have long known the value of repeat purchasers. Sending out a special dessert to recognize a regu- lar's birthday, making sure a guest gets her favorite table when she comes in for lunch, or even stamping that coffee club punch card are all forms of loyalty programs that restaurants have used, well, forever.

Of course, there are good financial reasons for encouraging your customers to come back again and again. Repeat customers spend more – as much as two-thirds more – than a new customer. Just a 5% increase in repeat business can grow your profits by 25% or more because there is some evidence that repeat customers have higher check averages. And it costs at least five times more to attract a new customer than it does to keep a current one. That's why we have to really recognize our regulars in ways that resonate with them and with the kind of operation you are.

Loyalty programs should be designed first and foremost to make your guests feel recognized and appreciated. Recognition of your regulars is vital. One study found that customers want more than just savings or the occasional free dessert if they are going to be enticed to join a loyalty program. They want to be made to feel special and to have access to benefits that are not available to just anyone. Rather than refer to your program with the words "rewards" or "loyalty", consider adopting terms like "friend" or "insider" which suggest an emotional connection that goes beyond mere transactions.

In the RestaurantOwner.com 2022 POS survey, we found that about 44% of restaurants that said they had access to a loyalty program through their POS was using it, and of those about 70% were satisfied with the package.

Many higher-end restaurants recognize their loyal guests by customizing their experiences with everything from remembering that a guest likes their dressing on the side to having their cars detailed while they dine. Good restaurants have always offered this kind of generous hospitality and you don't need a formal loyalty program to make regular guests feel special. But if you promote some kind of customization as part of your loyalty program, you need to execute on this perk without fail. Excellent training and record keeping are key because not delivering for a consumer when they feel they have a right to a particular benefit is far more detrimental to the guest relationship than making a simple mistake on their order.

A second goal for your loyalty program should be to encourage the kinds of behaviors you want from your customers. Getting them to come back frequently is certainly important but you may want to direct your guests to visit on particular days or times in order to smooth out demand. Loyalty programs that feature point accumulation are a good way to do this. You can offer bonus points for purchases made at a particular time, or made through your website or app as opposed to by phone, or for ordering a particular item. One restaurant I know has a clever deal: loyalty club members get triple points for any bottle of wine they purchase on a Tuesday. Not only does the restaurant sell more wine that way but it also drives traffic, food sales and tips on what would normally be a slow night.

If you are a member of any kind of loyalty program, you know the motivating power of points. Well-designed programs allow participants to accumulate points relatively quickly and they regularly communicate how many points a customer has in order to stimulate further purchases. These features tap into what researchers call the "endowed progress effect": if a customer feels that they are almost at a goal, they are much more likely to take action to achieve it. Try giving a signup bonus of double points for a customer's first purchase so that they see rapid progress toward their first program benefit.

If you want to have membership tiers, keep it to only three or four levels and ensure that it is feasible to achieve each tier in a timely manner. (Having to dine with you 200 times in a year in order to reach "platinum" status isn't particularly realistic.) You could also limit the number of people in a particular tier of your loyalty program so that you can ensure the top benefits – a guaranteed table on Friday night, for example – can actually be delivered. But each tier needs to be earned, not bought – people put more value on something they have earned over time and will work harder to keep it.

Running Your Purchase Incentive Program

As with any initiative, make sure that your program generates more value for you than it costs. Don't shoot from the hip – carefully plan your program before you execute which includes training for your staff and think- ing through the logistics of making good on your program's promises. Look at demand patterns, food costs, and labor costs as you determine the benefits you'll offer and when. Promoting a free cup of soup with every sandwich may backfire if your kitchen can only make one forty-quart batch of soup at a time.

Your coupons and loyalty program need to integrate seamlessly with your guests' digital experience. Coupons that can be redeemed by QR code or with a simple click are easier for your guests and also let you measure redemption rates while capturing contact information where this is permitted, while digital loyalty programs give you better insight into your members' buying behavior, something that a punch card in a wallet cannot do.

Research shows that people love receiving an exclusive offer tailored to them. But there's a fine line between using data to customize an experience and using data in ways that make your guests uncomfortable. In general, the younger your clientele, the more comfortable they are likely to be with you using their data to create exclusive opportunities. No matter who your customer is, always communicate how you will be collecting any personal data and how you'll use it, using clear language and a formal "opt-in" during signup. Depending on where you are, there may be privacy laws that you need to follow so always confer with professionals if you plan to collect or store guest data.

Happily, most of the major POS systems have built-in purchase incentive tools that handle much of the administrative and legal aspects for you. In the RestaurantOwner.com 2022 POS survey, we found that about 44% of restaurants that said they had access to a loyalty program through their POS was using it, and of those about 70% were satisfied with the package. Most of these packages allow you to set up a points program where you can define the rate of accumulation and the benefits, exclude certain menu items, and be notified if there is unusual accumulation activity which could suggest fraud. But if you want a more elaborate loyalty program with tiers and experiential benefits, you may have to work with specialized loyalty platforms that can customize a program for you and integrate it with your POS.

One note of caution: beware of third-party coupon or discounting programs that pay you upfront for discounted sales later. These may feel like a valuable way to smooth a cash flow problem but actually these deals are essentially high-interest loans that will end up costing you more in the end.

You Have to Promote It

Once your purchase incentive program is in place, you need to promote it. Use social media tools to push messages to your current guests and consider using email as well if your customer base is older. (Hands up, those of us Boomers and Gen Xers who still use email every day.) To attract new customers, note that 77% of people are more likely to try a new place if a friend or family member recommends it, so consider ways to reward loyalty program members who share positive word-of-mouth.

With any purchase incentive program, you want to shift your customers from having a purely transactional relationship with you to one that engages them emotionally and creates a lasting connection. Of course, you need to offer concrete benefits like freebies or savings as the base of your program but including experiential and emotional rewards the difference to growing your business.

Best Practices for
Restaurant Loyalty Programs

Use emotionally resonant language to describe the program. Calling it a "rewards" program puts the emphasis on the transaction, whereas names like "Insider's Club" or "Friends of…" focuses on a deeper relationship between you and your members.

Get to rewards quickly. Guests are more likely to purchase again if they know that they are close to earning a benefit. Reduce the number of points needed to earn a free item so that it's feasible to get a reward on every third or fourth purchase. Offer accelerants like "double point" days.

Show progress toward the next goal. After every purchase, notify members that their visit has earned them a specific number of points. Show them how close they are to achieving the next benefit available to them.

Consider rewards that go beyond free food. Benefits like getting first dibs for high-demand reservations or being invited to a members-only event are powerful ways to create a loyal guest and are more likely to drive positive word-of-mouth.

Customize your rewards. Many POS systems allow you to tailor your messages and rewards to different categories of customers. Aim to "delight and surprise" by making rewards match or complement your members' individual purchase behaviors.

Let members know you appreciate them. Birthday messages are nice but those are table stakes. Send a thank you message after each member purchase and vary the messages to reflect that member's behavior.

Ensure your staff is thoroughly trained. Any employee who comes into contact with guests needs to be very well-versed in the program and know what to do when a guest wants to claim a reward.

Best Practices for
Restaurant Coupon Promotions

Never offer discounts. Discounts train your customer to pay a lower price which suggests your offering isn't worth as much as you are charging at full price. And bargain hunters will only visit if they get a discount which drags down your profits and your servers' tips.

Instead, offer a freebie. There is plenty of research showing that people prefer getting something for free rather than getting a discount, even if the absolute value of the discount is greater. In other words, giving a guest a free bag of chips along with their sandwich is much more valuable to them than saving fifty cents on their purchase.

Encourage increased spending. Coupons with offers like "buy two get one free" are smart – they often push up the check average more than the value of the coupon because they can increase party size and drive sales of add-ons like beverages.

Don't offer what you can't deliver. Make sure you have the supply chain, equipment, staffing and equipment to make good on whatever you are promoting through a coupon campaign.

Don't issue more than one coupon type at a time. Decide on which particular behavior you want to encourage for a given coupon promotion, such as driving demand during a slow period. Then issue a coupon tailored to that behavior ("Come in on Mondays to get two chicken sandwiches for the price of one.")

Don't issue coupons too frequently. There's no set rule of thumb for how often to send out a coupon promotion, but you want coupons to be infrequent enough that they grab your potential customer's attention. If guests learn to expect a coupon every couple of weeks, they won't feel any urgency to visit you.

Track your results. Use digital coupons through your POS or a third-party provider so you can measure the redemption rate and see how successful your promotion has been.