Why Loyalty Programs Are Broken — And How to Fix Them

Jun Loayza is a guest author. To submit a guest post, click here.

Customer loyalty in the restaurant space has had it wrong for a long, long time. In simplest form, the premise of a punchcard or loyalty card has traditionally been to increase frequency of visits based on the promise of a free product after 10 purchases. Unfortunately, this is an incredibly ineffective approach to influencing consumer behavior.

A recent study by First Data found that only 4% of rewards program members indicated that their membership influenced their decision of which restaurant to visit. In other words, a customer that buys a product nine times is going to buy the product a 10th time regardless of whether it’s free or not.

If a business is giving away food for free without getting anything in return, it’s effectively throwing money away.

What a customer loyalty program is meant to do
Ideally, a customer loyalty program should give consumers a compelling reason to patronize a business by differentiating a brand from its competition. It should be a means by which a business can engage with consumers to build allegiance by providing a value proposition that effectively incentivizes brand loyalty.

Customers are loyal to a restaurant because of good food and good service — not because of a deal, coupon, or a buy nine, and get the 10th free offer. No customer loyalty program in the world can drive customers to a restaurant with bad food and bad service.

Then why create a loyalty program?
The answer is simple: to increase revenue by influencing consumer behavior.

The potential implications of doing this successfully can be seen clearly in the example of how Target uses customer data to influence customer behavior. Target knows a small segment of its customers (the members of it’s loyalty program) so well that it can predict if a woman is pregnant five months before she has the baby. Though a bit creepy, the value of this information for marketing is the very definition of power to influence behavior, and it is made possible by business intelligence generated by a customer loyalty program.

And this is precisely the technology that the restaurant industry lacks.

What data should a business collect?
A business needs to collect the following three data points at every transaction to fully understand a customer’s behavior and shopping patterns:

— Dollar value spent
— SKU data: what the customer bought
— Timestamp: what day and time the customer made a purchase

A business should also collect the following data to follow up and connect with the customer:

— Mobile number
— Email
— Birthday

How can a business utilize this data to influence a customer?
Though the majority of businesses do not have a team dedicated to marketing like the one Target has, there are still a myriad of techniques that a business can employ to drive customer behavior.

— Birthday triggers: auto-send a text or email to a customer that wishes then a happy birthday and invites them to the business with an incentive.

— Bring back lost customers: auto-send a text or email to a customer that has not returned in the past 30 days. Get him or her back with an incentive.

— Notify customers in real-time: if, for example, a restaurant bakes fresh bread in the morning, the restaurant can send a message to all customers that have bought bread in the past 30 days notifying them their favorite bread is fresh and out of the oven.

— Fill empty seats: if a business has a slow day, the business can text customers that are nearby with an incentive to come in straightaway.

Make the experience more personal
Customers absolutely love recognition. A cashier that calls a customer by name and has his or her favorite cup of coffee ready before they even order gives the customer a very special reason to stay loyal to the business. An obstacle to this is the high turnover rate of employees at local businesses. How can a business offer a personalized experience to its best customers if the employees don’t stick around long enough to get to know them?

The solution is to equip a cashier, waiter, or salesperson with the customer’s information:

— Name
— Favorite items
— Previous purchases
— Available rewards (for the customer loyalty program)

Equipped with this information, even a new employee can give a loyal customer the personal treatment that they deserve.

Customer loyalty startups need to innovate
The customer loyalty vertical is red-hot. Startups from Silicon Valley to Chicago are working hard to innovate in this area, and, in so doing, are revolutionizing the way brick-and-mortar businesses do business. But startups need to look beyond the simple punch-card model and expand their loyalty products to include features that will effectively influence customer behavior.

Data collection, customer recognition, value-based incentives and intelligent marketing need to be the focus — not frequency-based coupons and discounts.

Jun Loayza is a co-founder of RewardMe a digital rewards program for restaurants and retailers. In his entrepreneurial experience, Jun has sold two internet companies and led social media technology campaigns for Sephora, Whole Foods Market, Levi’s, LG, and Activision.