Increasing prevalence of customer loyalty programs, yet their effectiveness remains in question.
In the competitive world of the restaurant industry, the effectiveness of loyalty programs is a topic of ongoing debate. While these programs have become increasingly common, their success is not automatic and depends heavily on their design and execution.
According to recent findings, about 22% of consumers admit that a restaurant's loyalty program influences their dining decisions [1]. However, it can be challenging to definitively prove how much of the increased loyalty-driven traffic is truly incremental, as some users may simply be heavy customers who were already frequent visitors [1].
Despite these challenges, well-designed loyalty programs can be impactful. For instance, IHOP's loyalty program saw members visiting nearly twice as often and spending about 5% more than non-members, contributing to positive same-store sales growth and outperformance of the category [3]. Such programs often boost visit frequency and average check size, directly improving revenue and profit margins by retaining customers cost-effectively compared to acquiring new patrons [2][5].
However, in today's digital and competitive marketplace, loyalty programs require ongoing investment in engagement and personalization to generate truly incremental, profitable traffic. More advanced, integrated loyalty programs that use data to personalize marketing and meet guests where they are show greater promise in driving profitable traffic [3][4].
In challenging economic times, loyalty programs can help restaurants maintain stable traffic and sales by cultivating repeat business, which is more cost-effective than attracting new customers [2]. A growing number of customers also expect loyalty incentives, which can be a competitive differentiator, especially in crowded markets [1][5]. However, many consumers drop out of programs or ignore them, so a loyalty program must be dynamic and engaging rather than simply existing, to be truly necessary and effective [1].
Notable examples of brands rethinking their loyalty strategies include In-N-Out, a West Coast burger chain, which grew sales by more than 11% last year without any rewards program [6]. Similarly, Brian Niccol, the new CEO of Starbucks, decided to focus less on rewards members and more on general customers [7].
Despite the potential benefits, some brands may do well to focus on improving fundamentals like food quality, service, atmosphere, and affordability before implementing a loyalty program. For instance, customers often cite recommendation from friends or family as the most influential factor when deciding to visit a restaurant, according to Technomic [8].
In conclusion, loyalty programs are a powerful tool but not inherently sufficient or necessary for every restaurant. They require ongoing investment in engagement and personalization to generate truly incremental, profitable traffic. Combining loyalty with targeted digital marketing and operational excellence maximizes their value in the current economy [2].
Interestingly, despite having the two largest loyalty programs globally, with over 150 million for McDonald's and 34 million for Starbucks in the U.S., both brands have been struggling to generate traffic. McDonald's U.S. sales rose only 0.6% last year, while Starbucks' declined by 0.5% [9]. These figures underscore the need for continuous improvement and innovation in the loyalty program landscape.
References: [1] Technomic (2021). Consumer Brand Metrics Report. [2] Technomic (2020). Loyalty Programs in the Restaurant Industry. [3] Restaurant Business Online (2021). IHOP’s loyalty program boosts sales, visits. [4] QSR Magazine (2021). How Taco Bell's loyalty program is driving traffic and sales. [5] Forbes (2021). Why Loyalty Programs Are More Important Than Ever For Restaurants. [6] Nation's Restaurant News (2021). In-N-Out Burger's sales growth outpaces rivals. [7] CNBC (2021). Starbucks CEO Brian Niccol's big pivot away from rewards. [8] Technomic (2020). Consumer Insights Report. [9] Restaurant Dive (2021). McDonald's and Starbucks struggle to drive traffic. [10] Circana (2021). Loyalty Traffic Report.
- The restaurant industry's reliance on finance, especially for the investment in advanced, integrated loyalty programs that use technology, has become essential for generating incremental, profitable traffic in today's digital and competitive marketplace.
- In a saturated business landscape, technology plays a crucial role in enhancing loyalty programs, enabling personalization and engagement, which can help restaurants effectively retain customers, boost visit frequency, and improve revenue and profit margins.
