Loyalty has been top of mind for the restaurant industry as of late. Restaurants of all sizes—from emerging concepts to global enterprise brands—are launching and relaunching programs in unprecedented numbers. In a post-pandemic world, as digital purchasing channels became table stakes, loyalty, too, has become critical. Loyalty is no longer a “nice to have” for restaurants. Unlike digital ordering, however, loyalty programs are not a new or novel concept. They have evolved over time, from business cards in the fishbowl and physical punch cards to the ultra-sophisticated tech-powered options that exist today. Although most loyalty programs have gone digital, many platforms are still stuck in the legacy “spend X get Y” mindset.

Holistically, loyalty programs were a way for restaurants to enhance the customer experience and help businesses grow by creating a bond between the customer and the brand. A focus on the guest is more important than ever in today’s digital, post-COVID world where there is increased competition across the board whether through category incumbents or third-party delivery aggregators.

Restaurants must find ways to capture more data—to gain a better understanding of their customers and their buying habits, in order to compete. However, with margin pressures and a looming economic downturn, brands cannot rely solely on discounts to encourage enrollment or adoption of programs. At the end of the day, loyalty needs to be about driving customer lifetime value and it’s imperative that loyalty programs can demonstrate that value explicitly.

Traditional legacy loyalty presents challenges to those core components of loyalty, specifically in three areas.

No. 1. Friction Fraught

The punch cards or plastic loyalty cards of the past presented challenges in the form of friction. And while those types of loyalty engagement have been phased out to make way for digital programs, similar friction still remains for legacy programs.

The burden of remembering to carry and present your loyalty card has been replaced in many cases with the need to download an app or scan a code with every transaction to earn loyalty progress. While it’s true your super fans might not balk at the idea of using an app to engage, for the majority of casual customers, the prospect of adding another app on their phone is quite inconvenient. Requiring an app just to participate in loyalty can be a factor that discourages a large swath of customers from ever enrolling in the first place. What’s worse is if digital purchasing is only available through an app, which means your brand is missing out on revenue as well as loyalty engagement. App fatigue is a real phenomenon. In fact, studies show that nearly 78 percent of consumers prefer to keep only five or fewer merchant apps on their mobile phones at any given time.

And unfortunately, even if your brand is able to earn an app download, the friction doesn’t end there. Most legacy loyalty programs require customers to “check in” on their app or identify themselves at the register either by giving a phone number or scanning a code from their phone just to earn loyalty progress or redeem an award. These interactions are awkward in the full-service restaurant environment while adding additional layers of burden not only for customers, but for staff as well. These cumbersome processes present a challenge in today’s understaffed restaurant industry—servers, hosts, and bartenders are often having to juggle multiple responsibilities on top of their core duties. Valuable time is lost when staff have to ask every customer if they are a member of the loyalty program or convince guests to enroll. This means less productivity while negatively impacting table turnover.

Legacy loyalty places too much responsibility on the customer, whom brands need to focus on making engagement a convenient and fun experience. Less friction means improved customer satisfaction and loyalty growth. Modern loyalty programs should be frictionless, so restaurants can foster an environment where people enjoy participating in the program and can do so with minimal effort. This is especially true in the wake of third-party delivery aggregators. DoorDash, GrubHub, and Uber Eats all spend countless time and money investing in their digital experiences and loyalty programs to make them effortless for customers to use and order from. Every order with a 3PD competitor is revenue lost from steep commissions, missed opportunities for data capture, and increased risk of disaggregation from the customer.

No. 2. Over-Reliance on Discounts

Historically, restaurants have relied on discounts to acquire customers and drive traffic. As loyalty programs gained traction, offering discounts has also been the key way restaurants incentivize customers to overcome the traditional friction associated with enrolling and engaging with loyalty programs. The greater the friction, whether from app requirements or check in procedures, the greater the discount needed to drive adoption all together.

The approach is problematic given the recent exponential increases in operating costs. With labor skyrocketing and cost of goods higher than ever, restaurants need to protect margins and discounts only whittle away at critical profits. Add in the existential threat of third-party delivery platforms siphoning cash via commissions while offering deals on your very same menu items, discounting becomes a race to the bottom for restaurant brands.

Airlines and hotels faced this reality when online platforms such as Priceline, Kayak and Hotels.com became the default entry point for bookings, then charging hefty commissions from companies like Marriott or Delta while monopolizing their customer base. In response, the airlines and hotels were forced to transform their approach to customer acquisition and retention. They began offering rewards that the online travel agencies could not to encourage “booking direct”. These businesses implemented perks focused on status, exclusivity, and access, for example, complimentary Wi-Fi, access to a members-only lounges, automatic upgrades to better seats and nicer rooms. Through these programs, travelers were enticed to book a reservation directly rather than going through the bookings site

Rather than a focus on discounts, similar to the travel industry, restaurants must look to enhance the customer experience and incentivize direct ordering through access, exclusivity and personalization. At a restaurant, a loyal member might gain access to an exclusive menu or exclusive merchandise. Special VIP events are another way to cultivate loyalty without offering coupons or freebies.

An example of a successful use of non-discount rewards in the restaurant space can be found in Thanx’s partnership with Eureka! Eureka! Restaurant Group recently announced their new loyalty program and mobile app to enhance the personalized connections with its guests, both in restaurants and in the digital space. Eureka!’s use of non-discount rewards comes in the form of their “Friends with Benefits” program in which loyalty members receive complementary truffle cheese fries, $10 for every $200 spent, early access to new menu items, birthday perks, and surprise rewards. With the enhanced loyalty program and app, Eureka! gains actionable insights into guests’ purchasing behaviors, allowing for more personal communication and sophisticated targeted marketing to encourage repeat visits and direct orders. This means it’s easier for Eureka! to deliver their unique brand of hospitality.

No. 3. Difficulty Driving True ROI

Like any marketing effort, loyalty programs must create a return on investment. A restaurant wants to get more money out of the program than it spends to operate the program.

That is often not the case with traditional loyalty programs. Too often, the metrics are hard to measure due to overly complex dashboards or overwhelming reporting. Or a restaurant might be focusing on the wrong metrics all together. Inaccurate and incomplete data also make it nearly impossible to calculate the cost and return on investment on loyalty.

And lack of data is a key problem—most customers are only active in a traditional loyalty program at the beginning. Over time, they forget or grow disinterested, and that means many restaurants have a huge database of loyalty members but only a small number of active users. When users fail to engage with the program, their purchase data isn’t captured. A restaurant is paying to maintain the loyalty program but is blind to true customer behaviors, creating a huge challenge when calculating return on investment (and expense when discounts are handed out to customers who should not receive them).

Traditional loyalty programs often point to metrics like the check averages of loyalty program members versus regular customers or the frequency of loyalty members versus regular customers. Yet these metrics don’t tell the entire story because loyalty members are typically already fans of the brand. These metrics introduce selection bias because these customers are already inclined to spend more money with you.

These are often “feel good” metrics. They make a restaurant feel good about the loyalty program but do nothing to drive action to improve performance. A restaurant needs to understand the true impact and opportunities created by the loyalty program to drive incremental revenue and every stage of the customer journey. For example, your loyalty program should show who your first-time customers are and their preferences so that marketers can offer tailored messaging, guiding them to a second purchase. Similarly, knowing what customers are at risk of churn or who may be motivated by a challenge to visit multiple times a week is how loyalty can deliver meaningful, incremental revenue.

The insights uncovered from data from a brand’s loyalty program help uncover opportunities for growth. Sophisticated loyalty engines with marketing automation technology makes it easy for any sized restaurant brand to take action on data and show a measurable return on investment.

Eliminating friction from loyalty is the key to capturing better data to drive more incremental revenue. Non-discount reward strategies improve margins while generating a personalized experience for your customers that builds lasting loyalty and furthers your programs ROI.

Zach Goldstein is the CEO and Founder of Thanx. Founded in 2011, Thanx is a guest engagement and retention platform helping restaurants and retailers become more digitally agile to maximize customer lifetime value. Prior to earning his MBA from Stanford, Goldstein honed his experience in the customer loyalty space at Bain & Company, helping companies perfect their retention and reward strategies as early as 2005.