Loyalty programs have always been a staple in the hospitality and travel industry, but recently, they have also been gaining popularity in the restaurant space. This trend may be due in part to the rise of mobile apps that make the loyalty process more seamless; T.G.I. Friday’s is a great example of a full-service restaurant chain that entices loyalty members with its mobile app. The trend towards loyalty programs may also be fueled by the growing realization that daily deal coupons often cause only a short-term traffic spike, but are not profitable because they generally fail to build long-term guest loyalty. BJ’s Restaurants recently debuted a guest rewards program that gives diners a point for each dollar spent.

Before you commit to a loyalty program

As more of the industry adds loyalty programs, those chains without a program in place may be considering implementing one. Whether supported by mobile apps or not, these programs have the potential to be extremely profitable due to their ability to drive incremental guest visits both directly (via the program) and indirectly (via smarter customer targeting). It is important to remember, however, that loyalty programs are predicated on the idea that if guests spend a certain amount, they will receive something free or discounted. These programs create an inherent conflict between guest visits and check size. Due to the risk of launching a program that does not drive incremental revenue, restaurants should first introduce a loyalty program in a few representative markets before committing to chain-wide rollout.

An in-market test of a loyalty program would likely show significant impacts to both frequency of guest visits and check profitability. Determining the relative impact of each is critical.

• Incremental guest visits: Imagine a local coffee shop that rewards guests with a free cup of coffee after 9 purchases. This type of program is likely to drive incremental guest visits as many consumers will choose this shop over an alternative in order to earn “free” beverages.

• Average check profitability: The biggest risk with any rewards program is that it will simply subsidize existing guest behavior. To use the previous example, some guests will not change their behavior; they have always come in for a cup of coffee on their way to work and will continue to visit with the same frequency regardless of the program. With these guests, the coffee shop is essentially giving away 10 percent of their sales. On the other hand, rewards programs that entice guests with points per dollar spent, such as those run by T.G.I. Friday's and BJ’s Restaurants, may have a greater ability to actually encourage larger checks as some guests strive to reach rewards levels faster.

For chains considering implementing a loyalty program, a well-designed test in a few representative markets will enable management to determine the extent to which their loyalty programs reduce price for guests who would have purchased anyway at full price versus the level of traffic increase. Comparing the impact of these two outcomes will make it clear whether a national rollout is warranted.

Since loyalty programs aren’t one-size-fits-all, restaurants can also test multiple versions of loyalty programs in different markets. For example, a chain could try changing the spend threshold necessary to receive an award, test different versions of the reward itself (such as awarding a free bagel after 10 cups of coffee), or even try altering the program structure (such as weighing a “points-per-dollar” system against a “points-per-transaction” system).

Once a program is launched nationally

Once a rollout decision has been reached on the most profitable loyalty program, restaurant chains can use the huge amounts of customer data generated through their program to gain a better understanding of their existing guests and then to test promotional offers and other marketing initiatives. This testing process will “de-risk” the chance of launching promotions that destroy margin and enable the refinement of marketing investments. By maintaining and analyzing guest data, restaurants can improve future decisions through the following strategies:

• Understanding existing guest behavior: Using advanced analytic techniques, restaurants are able to combine transaction and guest-level data to answer questions such as:

  • When a first-time guest orders a barbecue chicken sandwich, is that guest likely to return?

  • What is that guest likely to order on their subsequent trip? How often will that guest visit? How large will their checks be?

Finding answers to these types of questions will allow a restaurant chain to better understand the impact of a new product launch and also to refine offers to new guests. For example, if guests ordering the barbecue chicken sandwich are likely to return for the sandwich without buying a beverage, the restaurant can send them a coupon to “buy one soda, get another free.”

• Targeting existing guests: Through data, restaurants can better understand the profiles of guests who respond best to various initiatives. For example, what guests responded best to an email offer? Advanced software can construct profiles of responsive guests based on information such as historic purchase behavior and personal characteristics gathered during the loyalty registration process. Restaurants can then use these “success profiles” to optimize investment on outreach, ensuring that new initiatives target guests who are most likely to bring in truly incremental revenue.

Guest loyalty programs have the potential to hurt margins and destroy shareholder value if they are poorly implemented. They don't have to be, however. By using a “Test and Learn” approach to design the loyalty program as well as to refine initiatives using guest data, restaurants are more likely to avoid these risks and generate millions of dollars in incremental profits.