3 Myths About Loyalty Programs

You’ve heard the myths about loyalty programs. Maybe you heard that they’re old-fashioned, or that they’re just handing out discounts and cannibalizing sales.  Join this webinar and we’ll share why what you heard may not be the truth.

Here are a few of the insights you'll take away from this presentation:

  • The three top myths we’ve heard about loyalty programs
  • The truth behind the myths
  • How to set up a loyalty program for success

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Read the Webinar Transcript

Hello, everyone, and welcome to today's webinar, three Myths About Loyalty Programs.

My name is Jessica and I work on the Content Marketing Team here at Paytronix specializing in the restaurant industry.

So we'll go through three myths about loyalty programs, and then talk about the truth behind them because you know where there's smoke, there's fire. So there's a reason these myths are created, but we're going to dig through them and actually get to the facts behind them. And then we're going to end up with how to set up a successful loyalty program, and just three quick tips on that as well.

So, like I said, behind every myth, there's a reason people think that. So, as we go along, we’ll separate out some of the truth from the lies because there's always pieces of truth. So while a creature with a horn may be a myth, if you're thinking about unicorns, there's also rhinos that are fact. So for some of these myths, they are true for some brands at least. But in many cases, they might not be necessarily the most effective use of resources. And that's what really starts to cause some of that skepticism that you see.

So the first myth we're going to talk about is that loyalty programs just give things away. That's the first myth. A lot of people think that you're just cannibalizing sales and losing profit. Because you're giving free food away to people who would have bought it anyway.

And so when we start to think about, you know, what is the truth behind that myth? Yes, some loyalty programs might be cannibalizing their sales, and sometimes you do just give things away. But the difference between the programs that do that and a good or even a great loyalty program is that the good ones are rewarding positive behaviors. And the best ones are actually driving increases in visits and spend, and turning out the positive ROI, regardless of what they are giving away. So let's look at these a little bit more closely, as well.

So sometimes loyalty programs do give things away. So, whether it's a registration reward or a birthday reward, there's still value in doing so. Offering a registration reward can be very effective in driving enrollment and increasing membership in your program. But it also needs to be done with caution as well.

And I'll talk a little bit about more about that when we go onto the next slide, but also birthday offers or something that loyal members look forward to. You can also have a tiered birthday offer if you are worried about giving things away. So if you think people are maybe signing up to your program to get a free birthday reward, but not visiting throughout the year, you could require at least one visit in the previous year in order to get a modest birthday offer. And maybe five or more. Or you can set that amount depending on what might be appropriate for your concept. But a set of visits in order to get maybe a better birthday reward. And this might make you feel a little bit better about giving away some of these unearned offers that you aren't actually earning by making a set number of visits or purchases.

But you also want to reward positive behavior. So, one of our customers, JP Licks was recently on a webinar this summer. And they talked about relaunching their program. And so something they had done when they originally launched their program is they gave away a free coffee at registration. This coffee was something that they wanted to promote at the time. And they thought that it would boost enrollment.

And it did, but it also left them open to rewarding dishonest behavior. They found people registering multiple accounts in order to get the free coffee reward. And then that skewed a lot of their numbers and resulted in them giving away just too much free coffee. So while you may want to include a registration reward, and it's definitely not a bad thing to do so, you want to make sure that you don't encourage fake accounts. And you have a layer in there that protects you from giving away too many discounts.

Sometimes when you hear the criticism that loyalty programs give too much away it also might be because they actually are giving too much away. We find that when we work with customers, the ideal level for a reward is between 4% to 5%, but also up to 8% of the spend required.

So about $4 to $8 for every hundred dollars spent, whatever it might make sense for your menu and your customer. So if you think about maybe getting a free coffee after spending about $75, that's about what Starbucks does. Or if you want to give your guests some flexibility, if you have maybe a wide variety of options on your menu. A $5 off after spending $75, that would be about a 6.6% reward. That's ideal. 

If you start to give away more than that, and sometimes you see it, brands are out there that have rewards at 15%. That's when you start to wonder if you're giving too much away. So rewarding guests for their visits is rewarding good behavior, and if you want to make it easy and valuable for them to do so. But if you give away too much, you start to lose the benefit of driving more visits as well.

Then one of the key things in order to drive visitors is not only segmenting your guests so that you reduce any cannibalization, but even interacting with them on a 1 to 1 level to increase sales.

So if you take this graph, as an example of guests to visit in a month, you have a lot of members who maybe aren't visiting in a given month, a good amount that visit once a month, and then it decreases down the line. So if you wanted to run a visit challenge in order to drive incremental visits, where would you set the threshold?

If you set a visit challenge at five visits you can reach these accounts that are slightly below the level required for a reward, but still would find making five visits achievable. So, these are those people who are already making 2 to 4 visits a month. But you can't send this challenge to everybody who's making more visits, because they're already visiting that frequently.

So then if you bump the visit challenge up to eight, you can reach these guests, but now you're missing out on all the people with a lower frequency who are actually a large portion of your member base.

So, if you think about, when you can offer a 1 to 1 visit challenge, you're now able to set the right challenge level for all these guests and reach everybody. Currently from customers who have used our 1 to 1 visit challenges, we've seen a 117% increase in reach, and nearly five times sales lift. So they are super effective when you're able to really tailor those promotions that you can reach everyone and get everyone to at least make 1 or 2 more incremental visits.

So, if you can reach each person and push each visit to be incremental, you're really going to drive those increases and you can modify the promotion, so the best promotion is going to go out to each guest. So, maybe for some gas, the best promo is to visit five times during July and receive 100 points. But maybe for others, it might be to visit six times, and maybe two weeks and get a free coffee. So machine learning and AI can be really helpful here in figuring out which combination of these variables is going to result in the highest ROI.

Our second myth is that you need to have an app to have loyalty. And this is definitely one we hear a lot.

And the reason is because some brands do require an app to participate. But that doesn't mean it's best, and some brands use an app as one of many options to engage with their guests.

So, when we look at this a little bit closely, here's the thing about apps. They're very easy to add and remove. So, while it might seem like a good idea to have people identify by app, it's not a great idea to have it be the only way. And here are a few reasons why.

So according to a survey by the Harris poll, 58% of respondents were less likely to join a customer loyalty program that required them to download an app, and 26% said they would be much less likely. So customers aren't really on board with having that be the only way they like to have options.

Also, when you think about it, social media apps are the most frequently used apps. According to one survey, 39%. That social media was the most common type of app that used. Gaming and communication and messaging apps tied for second place, and retail apps followed at just 7%.

And the top three reasons why people delete their apps is if the app wasn't used, it didn't fulfill needs, or what 25% of people said was that the reason was that they have a lack of storage space.

So if you kind of combine those things and think about that, the social media apps are most used, gaming and communication apps are second. And those retail apps are all the way down at 7%.

So the likelihood that your loyalty program app might be the one that doesn't make the cut are pretty high. People are going to choose to keep pictures or other things on their phone over an app that isn't providing them immediate value, especially if it's somewhere they only visit once a month.

You'll also want to keep in mind that 18% of adults in the U.S. do not use a smartphone, which is actually a pretty sizable chunk. That's about one in every 5 to 6 people. So do you really want to just straight off the bat make it so that these people are people that you're unable to reach and unable to interact with through year program?

But it is a great way to use as one of many different ways to engage guests, and you definitely want to try and include features that enhance convenience. So, being able to place orders through your app and order ahead is a feature that really resonates well with guests who are frequently getting orders, delivered, or to-go.

And you should absolutely allow your guests to sign up through a mobile app as one of a couple of different enrollment methods. And another growing area is enrollment through NFC, or you can couple it with enrollment at the POS or by text message, and let them identify when they come back by different methods as well like by providing an e-mail address or phone number at the POS in order to lift them up. And so definitely you can have a code on the phone because some people will like to scan their phone to engage, but that won't be everybody. So the more options that you give guests to engage with your program, the more likely that they will.

Our third myth is that Gen Z doesn't care about loyalty. Gen Z is on the minds of everyone, as this young generation really starts to mature, and their spending power continues to increase.

So 1 myth we hear is that Gen Z doesn't care. And that's not entirely true. Gen Z does like to use third party apps and aggregators to place their orders. Their buying behaviors are not fully established, and they show an interest in loyalty, but a lack of awareness. The ages of Gen Z ranges from 9 to 24 years old. So they are still very young and their behavior, as teens won't necessarily translate to their behavior as adults. And they do show an interest in loyalty. We found that they're very interested in saving money.

And they're very interested in ways that they can earn rewards, get discounts, and offers. And some of this stems from the fact that they're much more likely than millennials to have taken financial literacy courses. So if there's a way for them to get something back for purchases they're making that is something that very much appeals to them.

So we worked on a study to find out how this generation likes to order. And 58% of Gen Z orders food using a third-party app or website. Only 23% use either a restaurant branded app or website. So this does show a strong preference among Gen Z customers ordering food from a third party, rather than directly from a restaurant. 

We also wanted to find out why they felt this way. So the qualities that they like best about third party apps. On the top three most common responses were the convenience of having a variety of restaurants on one platform, being able to discover new foods, and the browsing selection and checkout process.

But also, some of the results did show not being fully informed. So, 11% said that high delivery fees were a reason not to use restaurant apps, which is confusing because the fees are often, if not less, at least the same as third party fees. But 52% did say that they don't order enough to justify using a restaurant branded app. So it also shows an opportunity to create apps as this generation begins to order more, and becomes responsible for more of their own meals, that they know what the app should provide, and they get used to them.

We also talked to Gen Z about those delivery fees, especially as it was a commonly cited barrier to more frequent food ordering, and this is what one respondent said: She always considers delivery fees. Like on Uber eats, even if she was originally going to order a smoothie, if a different restaurant is having free delivery at that time, she almost always ends up ordering from that different restaurant because she feels like she's getting a better deal.

So, they tend to focus their attention on added fees instead of the meal itself. So, again, they're very value focused, and that's what's going to drive their purchases. So there is an opportunity to show the value of loyalty programs, as well. And also, their buying behaviors are not fully established.

Going back to the slide before, about how we said 52% said they don't order food regularly enough to justify using a restaurant branded app.

This is an opportunity because they will start providing more of their meals in the future. This generation is age 9 to 24. So they are still very reliant on their parents for both food and money, or they might be on a campus meal plan. So most of them aren't ordering very frequently, or even purchasing food very frequently yet. And we find that when you compare them to millennials, millennials do order through restaurant branded apps much more frequently, which could also be just because they've ordered enough to establish a firm favorite, and maybe are members of those loyalty programs, where they are earning rewards. So there's an opportunity to really appeal to Gen Z and get them on that track. But the Millennials have also followed.

And like I said, the reason they're not using the apps isn't necessarily a distaste for them. It's a lack of awareness. 

And we asked what would make them more likely to use brand specific apps. And 60% of respondents said rewards programs would make them consider using restaurant branded apps over the third parties.

So there seems to be an overall lack of understanding what restaurant branded apps offer. Because, as we know, many are integrated with a loyalty program. They also mentioned that they would like to have offers available on the app. And again, that is also available in many restaurant apps.

So, if you can have an app, you need to make sure it's valuable in order for Gen Z to download it. It's kind of tie back a little bit to the previous myth about not needing an app for a loyalty program. If you do choose to have an app that is associated with your program, make sure it's valuable, and that it provides those offers right in there, so that if they do make the investment in their phone space to download it, that it's super worthwhile for them.

Right now, Gen Z does show an interest and willingness to earn rewards and got special offers. So getting them into your program now will help you reach them later. It's too soon to say that their behavior will be drastically different from millennials. So, focused on enrolling the guests now so that you can keep them active and really track how their behavior does shift as they start to mature. And maybe if you do need to approach a different way. So, the best way to do that is if you are seeing how they purchased now and really tracking them as they grow.

So overall, while there's a reason that these three myths exist, they rarely are telling the whole story. And in many cases they exist because some people are doing these things and saying poor results, which then unfortunately creates a bad reputation for loyalty programs overall. But they can be really effective when done correctly.

So hopefully debunking those myths have made you now not a skeptic, which is awesome. And now you want to know how to create a great program. So we have a whole list of best practices to follow, and these are just three of them that can give you a good head start. 

The first one is to have a core program value between 4% and 5%, or up to 8%. The second is to design your program for silver members, and then also to reward good behavior, which we mentioned a few of these briefly earlier.

So, starting with core program value. This is probably the most important element of your program. This is the value of the loyalty program for members relative to the amount they have to spend in order to earn a reward.

So, you want to make sure that you don't give too much away. So, basically, that 4% to 5% is the best case scenario. If you have a points based program you need to set the point earning threshold and redemption options, so that customers receive the appropriate level of rewards for the purchases.

If your program gives back less than this, your rewards don't seem worth the effort. And if you give back more, it's when you get to that point of giving too much away.

The next question to ask is whether your program is designed for what we would refer to as your silver customers. So, even if you don't use this term, you do have silver customers. If you were to sort your customers by how often they visit and how much they spend, you could create tiers for segmentation. So your first 4% to 5% of customers who have visited the most are your Platinum members. And they probably account for 20 to 30% of your of spending.

The next 5% to 10% are your Gold members. And you likely already have a good share of wallet for gold and platinum members. So, the loyalty program is primarily a retention vehicle.

The next 40%, after that are silver members. They typically will visit maybe about twice every month.

And silver members are the loyalty program sweet spot, because they have indicated some preference for your brand, but you might be just one of several in their consideration set. So a well designed loyalty program can act as a tiebreaker and drive them into your locations. So the more you learn about your silver customers and the more insights you have regarding your program's ability to cater to them, the better. So if your program is not built for silvers, it might be time for a change.

Finally, consider customer behavior. Are you encouraging good behavior and discouraging bad? So the definitions of good and bad behavior will vary for each concept, but good behavior likely involves visiting more often and buying more on each visit.

Your program should definitely reward this, and your best customers should be rewarded the best.

So, a loyalty program isn't going to compel people to buy more than their standard purchase if they're not incentivized to do so.

So if members do buy more and know that they can receive additional visit credits for paying for their items in separate transaction, they may do just that. And that's an example of some bad behavior.

So think about maybe a coffee shop that rewards customers by visit. Somebody comes in to order three coffees. And if they do it on one transaction, that would count as one visit. Or the savvy customer will order one coffee at a time and place three separate orders, so that they get credit for three visits.

Now, your lines are slowing down and customers are waiting to pay for their purchases. Getting increasingly angry and making your program actually a detriment to the customer experience. And nobody wants that. While your cashiers can try to discourage the practice, they also don't want to anger customers. So you end up giving in. And so in this scenario, this format might just be the wrong one for your business. And, that hypothetical brand should probably consider a different format that wouldn't encourage that type of behavior because that's definitely not what you want to reward.

So, to quickly summarize, some main points are: don't give away too much in your loyalty program. That's why you begin to feel like you just give things away. The best practices is between 4% and 8%.

You want to segment your guests appropriately so you avoid cannibalization. Your apps are a valuable way to interact with your guests, but don't just force them into one mode of interaction.

The more different ways you have to interact with your members the better, and Gen Z may not currently enroll in many rewards programs. But that doesn't mean that they won't later. And so if you educate them on your program now about benefits and what's possible in interacting with them in different ways, you can really study their behavior as it starts to shift, and they become more responsible for their meals in the future.

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