The Ten-Minute Manager�s Guide to ... Restaurant Loyalty Programs

To lure them, restaurant chains must actively build and maintain guest loyalty, because it won�t always develop on its own.

By Kate Leahy, Associate Editor -- Restaurants & Institutions, 7/1/2007

Man’s best friend is loyal. But customers are more like cats, seeking out the softest lap in the room—when it suits their needs. To lure them, restaurant chains must actively build and maintain guest loyalty, because it won’t always develop on its own.

Foodservice has lagged other business sectors in building successful loyalty programs. Colloquy, a marketing consultancy based in Milford, Ohio, reports that restaurant loyalty programs have 27.2 million members, well below the 254.4 million members enjoyed by airlines. But success is possible. Washington, D.C.-based Palm Restaurants has run its loyalty program for nearly 10 years and has seen 5% annual growth in membership. And the cost of entry for loyalty programs is becoming lower, with new companies offering point-of-sale tracking devices and loyalty tracking services. Just remember: Even cats come around in time.

Brand Awareness

One problem with any successful initiative is that if one company gets a great idea, four more firms create variations on the theme. To avoid copycats, it’s important to tie loyalty programs closely to a brand’s identity.

"If it’s a casual-dining or fine-dining restaurant, you want to design a program that reflects who you are," notes Rick Ferguson, editorial director for Milford, Ohio-based consultancy Colloquy. His experience is that loyalty programs that fail "are the ones that aren’t differentiated enough."

Nashville, Tenn.-based O’Charley’s furthers its position as a family dining spot by adding a kids’ frequency-dining program that rewards guests ages 5 to 10 who eat at O’Charley’s this summer. After six meals, kids can choose from a selection of children’s books. While the chain promotes the importance of playing tribute to the younger set, it also earns points with parents while differentiating the brand.

For Orlando-based Hard Rock Cafe, loyalty programs range from broad initiatives to targeted loyalty programs such as the Pin Club, which is designed for fans of Hard Rock’s collectible pins. But more important than the membership clubs is the number of fans that register on the Web site to receive updates.

"Hardrock.com is critical for engaging guests," says Patrick Colbert, director of customer-relation management and loyalty.

Guests can sign up for e-mail updates on special events and product launches. Meanwhile, a Web team ensures that the site is never static. The relationship promotes Hard Rock’s brand message, keeps locations top of mind with fans and prompts them to return by tempting them with event previews.

Human Resources

Last September, Chicago-based consultancy Technomic indicated that while 8% of diners currently participate in frequent-diner programs, two-thirds of customers surveyed said they would likely increase their visits to a favorite restaurant if it offered a reward program. Still, restaurant companies often are reluctant to roll out loyalty programs, especially when previous attempts have underperformed.

One reason restaurant loyalty programs fail to capture consumer interest is that operators frequently don’t dedicate enough resources to the effort. That’s not the case at Palm Restaurant, where Kathy Turley’s full-time job as senior manager of loyalty marketing is overseeing the company’s diner-rewards program.

"Creating and maintaining customer loyalty is not a part-time business," Turley explains. It’s not inexpensive, either. "There’s a hard cost associated with it. In terms of overall marketing, the loyalty program makes up 25% to 30% of the budget."

The benefits come from marketing efforts that are much more quantifiable. Plus, there’s the significant bonus of in-house market research that comes with a program that effectively tracks consumer spending at restaurants. "It’s also a way to capture data on the habits of our overall customer base," Turley says.

Card Carriers

Being carded isn’t always about checking age. It’s also a way that customers are asked to indicate store loyalty.

But with wallet space limited to only a few loyalty cards, it’s a good idea to target card programs to consumers who already have indicated brand preference. It also doesn’t hurt to make that card a bit more personal to the holder.

Canton, Mass.-based Dunkin’ Donuts promotes prepaid debit or gift cards as a way to make it easy for customers to purchase a beverage or a snack without worrying about having cash on hand.

The company wanted to make its card something that customers would want to carry for the long-term, and reloading as the card’s balance diminishes. It launched a program that enables customers to personalize their card by uploading a photo via the Dunkin’ Donuts Web site and then ordering a card with the image printed on it. Dunkin’ Donuts hopes that the cards, which also are marketed as gifts, will encourage brand loyalty.

"Every brand strives to create a personal relationship with their customers. This is one way we can do that very effectively," says David Tryder, the company’s interactive and relationship marketing manager.

Buying In

Though it might sound counterintuitive, operators find success when they ask customers to pony up cash to join loyalty programs.

"There is a commitment on both ends of the relationship," says Bruce Bozzi Jr., executive vice president for Palm Restaurant, which runs the 837 Club, a proprietary loyalty program.

Joining costs $25; in return, 837 members receive a $25 gift certificate as well as a card used to accumulate points redeemable not only for meals but for hotel stays, theater tickets, even hang-gliding.

"The feel, the look, the experiential rewards—the program has generated a lot of sales," Bozzi says. Forty percent of sales, to be precise.

Likewise, at San Diego-based Pat & Oscar’s, customers pay $5 for a family rewards card that comes with 50 points (worth $5) and a free bottle of salad dressing. After feedback indicated that customers would be interested in adding value to their dining experience, the company worked with a third party to craft the loyalty program, rolled out this spring.

"Purchasing the card means that they’re committed to our brand," says John Wright, chairman and CEO.

Quick Takeaways

Loyalty pointers from Rick Ferguson, editorial director of Milford, Ohio-based Colloquy, a loyalty and marketing consultancy:

Offer an attractive value proposition to entice guests to participate. Also, commit enough resources to allow it to operate effectively.
If internal resources won’t allow for a robust loyalty program, look to outsource the program.
Differentiate the loyalty program by aligning it closely with your brand. This prevents companies from copying your ideas outright.
Loyalty marketing is about building lasting relationships with guests, and the retention effect is where operators really see a return on investments of money and people.
If running a proprietary loyalty program isn’t financially feasible, become a player in regional loyalty coalitions.