Important Strategies for Reducing Loyalty Program Liability at Restaurants
Customers love the rewards and incentives provided by customer loyalty programs. Often, these programs give them useful kickbacks for purchases they would have made regardless, and demonstrate a palpable appreciation for the customer on the company's behalf. Loyalty rewards programs increase the number of customer smiles — and company sales. Consequently, they should to be at the top of every restaurant's menu of marketing strategies.
From a dining establishment’s perspective, customer loyalty programs increase customer engagement, calcify loyalty, and drive up revenue. In fact, findings by LoyaltyPulse Consumer Research demonstrate that the presence of a loyalty program makes customers patronize an eatery 1.3 times more frequently within a given interval of time. On top of increasing attendance, they also bolster revenue, with industry data showing customer spending surging by 46% on average at restaurants with loyalty rewards programs.
Superficially, it may seem that there are no drawbacks to these mutually beneficial initiatives. Yet, if carried out incorrectly, these programs can create harmful financial by-products that leave a bad taste in owners’ (and shareholders’) mouths. These potentially detrimental costs are known collectively as loyalty program liability, and its impact on a company can be debilitating. This article from KYROS Insights will discuss ways restaurants can anticipate and mitigate the consequences.
What exactly is loyalty program liability?
In the simplest of terms, loyalty program liability is the aggregate of what it will cost a company (or restaurant) to redeem all of the outstanding loyalty points held by customers. Loyalty points are, essentially, a form of currency, and the onus is upon the issuing party (the company) to impart that currency with value by dispensing whatever the promised reward is at the time of redemption.
In order for this newly-minted currency to have value, the company must provide something of worth in exchange for it. Whether this is a free pizza for simply downloading the company's app, or a branded sweater for long time, loyal restaurant goers, the principle is the same: restaurants incur costs procuring the items that inject value into their rewards points.
Yet, despite being a form of financial liability, loyalty program liability needn’t be damaging for a business. In fact, loyalty rewards points can be correctly accounted for — and used as a tool to garner even more business. However, if revenue isn't correctly deferred and proper allocations aren't made, the cost of redemptions can be devastating.
Strategies for minimizing the toll of loyalty program liability
Like all liabilities, loyalty program liability should be scaled-down as much as possible for the sustained financial health of the business. There are several avenues for reining in loyalty program liability.
One of the primary strategies for reducing the overall burden of loyalty program liability is to focus on ensuring accurate breakage estimates. Breakage refers to the percentage of points that customers pay for but don’t use.
The more accurate a company's breakage estimates are, the more easily it will be able to pinpoint the exact scope of liability and establish adequate reservoirs of revenue to mitigate it.
Companies can gain greater insight into their liability by discovering the cost of each outstanding point (known as the cost per point, or CPP) and multiplying it by the percentage of points that get redeemed, or the ultimate redemption rate (URR). The more accurately the URR is assessed, the greater the chance that the company will set aside the correct amount to minimize its liability, without creating “stuck” revenue in the process.
One simple way for restaurants to leverage the benefits of loyalty programs while gaining insights into consumer behavior is to build accurate predictive models. In fact, the burrito chain Boloco is doing just that.
Based out of Massachusetts, this Bay State upstart gives its customers a card that tracks purchasing patterns and rewards them with a free meal of their choosing every time they spend $50. In this way, Boloco is able to drive up sales and gain the crucial customer information necessary to make accurate breakage and URR estimates.
A second strategy that companies should exercise in concert with accurate URR forecasts is driving down the CPP. The lower the CPP, the smaller the breadth of the liability, and the less revenue that will have to be deferred.
Though there are many ways to reduce CPP, an innovative strategy is to give customers an experience in place of a more costly physical product. Events and experiences are relatively inexpensive to put together, and help you create a community of people united by a common love of your restaurant’s food!
The bottom line
While loyalty programs can increase customer engagement levels, it's critical that businesses adequately anticipate loyalty program liability. Predictive analytics is making it easier than ever for companies to extract useful predictive insights from massive amounts of customer data, allowing companies to more accurately predict breakage.
Moreover, companies should work to unlock new ways of reducing the cost per point of redemption, thereby allowing them to continue engaging with customers at ideal levels — without incurring debilitating costs. One simple way for restaurants to unlock the breakage rates of patrons is to establish a simple, card-based loyalty program that gives diners the ability to select the rewards they want.
Loyalty program liability can be successfully navigated and, with the right strategies, your restaurant can continue to extract the greatest value from its rewards programs, ensuring a more rewarding experience for both your patrons and your business.