When business is slow, many businesses turn to discounts and coupons in order to get more people through the door. However, while discounting your product may get your business more customers in the short term, it is rarely an effective strategy for developing regular customers. Worse, it can even end up hurting your business.
Luckily, there’s an alternative to getting and retaining customers: loyalty programs. Loyalty programs can help your business build a customer base without majorly discounting your own products or services.
We spoke to Donald Burns (aka The Restaurant Coach™) to learn why loyalty programs are a much wiser path to success than giving away your product and here’s what we learned.
Why Do Loyalty Programs Work Better than Coupons?
Coupons and other discount programs provide the customer with a deal intended to “entice” the consumer to visit your business. For certain consumers, coupons are very motivating, and they may pay a visit to your business. However, these customers may be more loyal to the coupon than to your business. According to Donald Burns, discounting your product can actually end up devaluing your brand.
Loyalty programs, on the other hand, incentivize customers to build loyalty to your brand rather than the latest deal. To benefit from the loyalty program, customers have to stay the course and become a regular customer.
The reason that loyalty programs often work better for attracting loyal customers and increasing customer retention has to do with the psychographics behind the consumer. Consumers who utilize coupons are typically bouncing from best deal to best deal rather than looking to make a brand connection. These consumers are more attached to finding the deal than to your brand. However, the types of customers that are motivated by loyalty programs are more attached to your brand and are less likely to jump ship for the first good deal. Loyalty programs attract the people who connect with your brand.
Types of Loyalty Programs
There are many types of loyalty programs and the best loyalty program for your small business depends on your customers and products. The key is to remember that it is more important to create a better customer experience than it is to make your product cheaper.
Loyalty points programs are widely used, mostly because of their simplicity. This rewards program concept is easy: you buy a certain number of a product and you get one free or you get a discount. Restaurants, hotels, retailers and more all use points programs to entice customers to use or buy their product enough times to get the “freebies.”
The key with this program is to offer free rewards often enough that customers don’t get discouraged waiting for their reward, but without offering free rewards so often that you dramatically discount your product. Burns cautions against these types of loyalty programs, preferring options that don’t discount your product at all, such as tiered programs.
With tiered programs, customers gradually work their way up tiers, gaining extra perks or status symbols as they move up the ladder. Tiered programs are effective because certain VIP members end up getting preferential treatment, which makes those members feel included in the brand, and it motivates other members to work their way up to those extra perks.
According to Burns, tiered programs, such as restaurant programs that offer the best seating to preferred loyalty members, set the stage for engaging conversations with other customers about how to become a preferred guest. Customer information, like preferences and names, can be documented and used to make preferred customers feel special, enhancing the overall experience for your best customers.
Paid programs ask customers to pay a fee upfront for a list of perks, like discounts, special events, etc. Paid programs can be difficult to get people to buy into, unless your business is frequented often enough that people feel they can get their money back in discounts. Again, this can end up discounting your product and should be used with some caution to avoid damaging profitability.
Community programs enhance the customer experience by providing preferred members with a group social experience. Members might get access to a community board or social events. This creates a community identity and places your business at the core. However, you will likely need a very engaged customer base for this to be an effective loyalty program.
Combination Rewards Program
Some loyalty programs combine a few of these loyalty program types. For example, airlines often have points towards flight tickets, access to first class lounges and extra perks like free baggage for preferred members. These combination loyalty programs have a little bit of something for everyone, appealing to a variety of customer interests. The best type of program for your small business depends on your business and customers.
How to Build a Loyalty Program
There are a few rules of thumb for building an effective loyalty program. Here’s what to consider.
Focus on Customer Experience
While it is tempting to focus on lowering the price of your product to tempt customers, your customer experience is more valuable for retaining customers for the long haul. If your customers feel valued by your business, feel included in your brand and want to identify with the brand, that’s a stepping stone to securing customers for life. The key is building an emotional connection between customers and your brand.
Burns identified convenience as a key to a successful customer loyalty program. Customer loyalty programs should make life easier and more fun, not more difficult. Loyalty programs that require you to carry and present a punch card can be a real hassle for the majority of customers. Mobile apps, phone number linked accounts and other systems make it easy for customers to participate in your programs.
Using tools designed for loyalty programs can help make your program a success. For example, there are customer relationship management (CRM) tools that allow you to document and easily access customer data for a seamless experience. Using tools can save you time, help you to customize each customer experience and build customer loyalty.
You can also use point of sale tools to evaluate customer retention rate, churn, number of reward customers and other metrics that can help you understand customer behavior and see if your loyalty program is working. After all, loyalty programs are only as good as their results.
Integrate with Your Marketing Strategy
The best type of loyalty program doubles as a marketing strategy. It is the type of thing that people want to talk about with their family and friends, or share on social media, leading to referrals and word-of-mouth marketing.
Implementing a customer loyalty program can be costly at first, but repeat customers and brand loyalty dramatically increases the lifetime value of a new customer, making loyalty programs cost-effective in the long run. Fund your loyalty program with a small business loan from Credibly.
For more, read the full interview with Donald Burns below:
CREDIBLY: What’s the main problem with a restaurant using coupons to attract customers?
DONALD BURNS: I find that people who use coupons are loyal only to the coupon. They’re not loyal to the restaurant or the brand, they’re only loyal to the deal they can get. I use this example a lot: Have you ever gone to Apple and gotten a steal on iPhones? Never. Why is that? They think their product is so good that it’s worth every penny. Their price is tied to their reputation. When you discount your product you devalue your brand.
Is there any scenario for a restaurant owner when using a deal service like Groupon or LivingSocial makes sense? I see a lot of newer businesses do it just to spread the word about themselves.
I don’t think there’s any situation where a discount for a restaurant is a good idea. The margins in restaurants are so slim as they are. I mean, what’s the national average? Five percent profit? That’s five cents on a dollar. So if I’m discounting my stuff, there goes my profit right away. I always say, “Lest we forget, we’re in business to make profit.”
I’m reminded of something Shawn Rafferty told me about coupons: “You’re fighting over a group of people that don’t actually want to spend money.” Would you say that coupon users are a separate category of consumer altogether?
Yes, and it’s a big thing in marketing that we often talk about: psychographics vs. demographics. Demographics refer to your age, if you’re classified as a millennial because of your birth date or something like that. Psychographics relate to your identity.
There’s a certain segment of the market that likes to shop at Whole Foods, or out here we have Sprouts. The people who go to Sprouts are loyal to Sprouts because they identify with that place, and it resonates with them. It’s the same thing with restaurants. We go to certain restaurants because of psychographics. We identify with the brand.
The thing with discounts is that’s a certain psychographic. Those are people looking for deals. They don’t really care about the quality insomuch as they want a good price. Chains always have those deals, and that’s fine. Let those places fight over that psychographic and that segment of the market, because those customers aren’t loyal to anybody. One week you’ll see them at Applebee’s, and then next week you’ll see them at Chili’s. They bounce around. They’re almost like — I hate to say it — they’re like transients.
How do loyalty programs work, and what kind of incentives do they offer customers?
There are all kinds of loyalty programs. The old classic one was you buy nine drinks or sandwiches and you get one free. That’s kind of a loyalty program, but I like to design them where it’s not about discounting my product.
I prefer what we call a preferred status program, or the kind of loyalty program that a hotel or an airline would do. You know how you accumulate mileage points for flying and things like that? A preferred status program might have a three-tier program — silver, gold, and platinum — and every time a customer comes and checks in they start accumulating points. Then, you build up your status.
That could lead to incentives like priority seating on a Friday night, or an extended happy hour. Maybe we run our happy hour from 4:00 to 5:00 p.m., but if you’re a platinum member on a preferred status program at my restaurant, your happy hour actually goes until 7:00 p.m. Or, maybe it’s special tasting menus, or exclusive notification of special events like a wine dinner or a guest chef. You’re creating items that I can’t get on your regular menu because they’re actually status symbols.
So it’s more about creating a better experience for the customer rather than making the product cheaper.
Exactly. As another example, most restaurants have good seating areas and bad seating areas. On a Friday night, everyone wants the primo seating. But if you reserve those seats and say, “I’m sorry. Those are for our preferred members.” Well, how do I become a preferred member? Now we’ve got a conversation.
What’s the most important key to creating a successful restaurant loyalty program?
The biggest thing about loyalty programs is you have to make them convenient. I think in today’s market, that means it’s got to be mobile. You have to have some kind of app, some kind of system where I don’t have to carry a card with me in my wallet. Do we need another damn card in our wallet? No. It’s like, “Where are we going tonight? Okay, let me find that loyalty card.”
Apps are so much easier because almost everybody has a phone. I can easily pull it up and say, “Okay, I’m here checking in.” You have to make it a seamless experience where it’s easy for people to do business with you.
I opened my restaurants back in the ’90s. The Internet was very new back then, it was the old dial-up stuff, and we did it old school. We had a card on everyone that came into our restaurant, especially if we saw them multiple times, and we kept track of information like their names, their spouse’s names, what they liked to drink, what they liked to eat, anniversaries, birthdays. And we used to review those cards.
Nowadays with technology, all that stuff is integrated and it’s basically a CRM — a customer relationship management tool — and there are great tools out there that restaurants need to take advantage of that can really enhance the guest experience.
Are there any tools in particular that you recommend?
There’s a really great app called Wisely. They put beacons in the front door of your place just like a location service. If I’m signed up on their program and I walk into your restaurant, as soon as I hit the door, the beacons notify the management team that Donald Burns, platinum member, just walked in the door. Now, you have a chance to create a real custom experience. I like it because there’s no card to carry. I sign up online, I have an app, and when I get to your place, it automatically notifies you. The app keeps track of my points for me, and lets you know where I’m at as far as my status.
Most restaurants I go to, I sign in and get my points, and at the end of the meal, no one really mentions that I’m a member of their loyalty program, except for the email I get that says, “You’ve accumulated so many points for your next thing.” It’s not necessarily tailored to me.
Wouldn’t it be so great if you had a loyalty program or a preferred status program where, at the end of the meal, someone actually came by and thanked you for being a preferred member — they really appreciate you coming in and knew you by name? The manager or owner walks up to my table and says, “Hey Mr. Burns, I just want to check on how everything was tonight.” Wow! That would just blow me away. That’s how you get loyalty — not by giving me a deal, but by making me feel like I’m a part of your brand.