Latest / Restaurant Business with Fexingo: Food Service, Hospitality, and Independent Operators / Why Restaurant Loyalty Programs Beat Discounts
Transcript
- Lucas: So there's a regional pizza chain in the Midwest — I'm not going to name them, but they've got about forty locations — and a few years back they made a switch that most people would've called a no-brainer. They took their paper punch cards, the ones that gave you a free pizza after ten purchases, and they replaced them with a digital points app. Luna: And I'm guessing it didn't go exactly as planned? Lucas: Right. The punch card was simple: buy ten pizzas, get one free. The app was more sophisticated — points per dollar, bonus offers, birthday rewards. They expected sales to jump. Instead, same-store sales dipped for two straight quarters. And the reason wasn't the app's fault. It was the rewards math. They'd accidentally made the program worse for their most loyal customers. Luna: How so? The punch card sounds like it was more generous — ten pizzas and you get one free. The app should've been at least as good, right? Lucas: You'd think. But the punch card was based on visits, not dollars. So a customer who bought one pizza every week got a free pizza every ten weeks. The app gave points per dollar, which sounds fair. But they set the redemption threshold so high that the average customer needed about fourteen purchases before they earned a free pizza. So the loyal regular — the one who came every week — suddenly felt like their reward got pushed further away. And they reacted by coming less often. Luna: So they basically trained their best customers to wait longer for a reward. That's a classic loyalty program fail. Lucas: Exactly. And this is the thing — most restaurant owners think about loyalty programs as a cost. But the real question is: what behavior are you rewarding? The punch card rewarded frequency. The app rewarded spending. Those aren't the same thing, and the switch made that painfully clear. Luna: So how did they fix it? Did they just go back to punch cards? Lucas: No, and that's the interesting part. They went deeper into the data. They realized that their most profitable customers weren't necessarily the ones who came most often — they were the ones who ordered a pizza plus a salad or a dessert, or who ordered for a family instead of just for themselves. So they redesigned the program to give double points on higher-margin items like appetizers and desserts, and they added a 'visit streak' bonus. It was a completely different mechanic. Luna: Right, because rewarding the extra items is what actually drives average check size up. That's the lever. Lucas: Bingo. And after they rebalanced the program, same-store sales not only recovered — they grew about 6 percent over the next year. But here's the kicker: their food cost as a percentage of revenue actually went down a little, because the mix shifted toward higher-margin add-ons. So it wasn't just more sales — it was better sales. Luna: That's a great example. But I want to step back — because every restaurant I talk to says they have a loyalty program now, but most of them are just doing the same thing: points per dollar, maybe a birthday reward, and that's it. They're not thinking about the behavior they're trying to drive. Lucas: Right, and that's the core issue. A loyalty program is not a loyalty program if it doesn't change behavior. And I'd argue there are three distinct things you can reward: frequency, spend, and margin. Most programs only reward spend. But the smart operators are rewarding the behaviors that actually move their P&L. Luna: And what does that look like in practice? Give me a concrete example beyond the pizza chain. Lucas: Sure. There's a fast-casual burrito spot in Denver — they've got four locations — and they realized that their lunch rush was packed but their dinner business was dead. So they built a loyalty program that gave double points for any order placed after 5 PM. They didn't discount the food — they just made it more rewarding to come at a slow time. Dinner sales went up 18 percent in three months, and they didn't have to add a single table. Luna: That's smart — they used loyalty to shift demand, not just to reward it. And that's a whole different thing than just giving a discount for a visit. Lucas: Exactly. And that's the thing that separates a good loyalty program from a bad one. A bad program is just a discount in disguise — you give everyone 10 percent back and call it loyalty, but you've just trained people to only come when they get a deal. A good program uses rewards to shape behavior in a way that improves your economics. Luna: And that reminds me of something I read recently — a study that showed that restaurants with effective loyalty programs see a 20 to 30 percent increase in visit frequency from their members. But the key word is 'effective.' Because the same study showed that poorly designed programs actually decrease frequency — because customers feel like they're being nickel and dimed. Lucas: Right, and that's the trap. If you make the reward too hard to earn, you're just adding friction. If you make it too easy, you're giving away margin for nothing. The sweet spot is usually somewhere around 5 to 8 percent of sales that you're 'giving back' in rewards — but it has to be targeted at the behaviors you want to encourage, not just spread evenly across everything. Luna: And how do you measure whether it's working? I mean, beyond just looking at same-store sales. Lucas: The most important metric is what I call 'return on rewards.' You divide the incremental profit you get from the program by the cost of the rewards you give out. If that ratio is above one — meaning the program is actually making you money — you're doing something right. If it's below one, you're just buying sales at a loss. And the thing is, most operators don't even track that number. Luna: So what's a realistic benchmark? How much should a restaurant be willing to spend on loyalty? Lucas: Industry benchmarks vary, but a good target is that loyalty program members should generate at least 20 percent more revenue per year than non-members. And if you're not seeing that, you need to look at whether your rewards are actually driving the behavior you want. I've seen too many operators just copy a competitor's program without thinking about their own customer base. Luna: And that's the thing about the pizza chain — they had to learn that their customer base wasn't just 'people who like pizza.' It was 'families who order for the group' and 'singles who grab a quick lunch.' The loyalty program had to speak to both. Lucas: Exactly. And that's why the best programs are often segmented. You give different rewards to different customer groups based on their behavior. The lunch crowd gets a free side after five visits. The dinner family gets a discounted family meal after three family-sized orders. It's more work to set up, but the payoff is much bigger. Luna: So what's the one thing you'd tell an independent operator listening right now? If they're thinking about starting a loyalty program, or maybe they already have one and it's not working — what's the first thing to do? Lucas: I'd say stop thinking about the app or the card and start thinking about what behavior you want to reward. Is it frequency? Is it off-peak visits? Is it adding a side or dessert? And then design the program around that. If you're just doing points per dollar because that's what the software does, you're leaving money on the table. Luna: And honestly, that's a conversation worth having over coffee. And speaking of coffee — if today's episode gave you one idea that might help your own restaurant or business, that's the kind of thing we love to hear about. If you want to support the ad-free work we do, the easiest way is a small token at buy me a coffee dot com slash fexingo. It's completely optional, but it helps us keep going. Lucas: Yeah, and we really do appreciate that. But back to the numbers — because there's one more subtlety I think is worth getting into. It's the accounting treatment of points liability. When you issue points, you have to record a liability on your books, and that can hit your financial statements in ways you might not expect. Luna: Oh, that's a good point — because points are a promise to provide goods or services in the future. So they're not just a marketing cost, they're a real liability. Lucas: Right. Under accrual accounting, you have to estimate the value of all outstanding points and record that as a liability. And as customers redeem them, you recognize that revenue. But the tricky part is estimating breakage — the percentage of points that never get redeemed. If you overestimate breakage, you'll have to take a hit later. If you underestimate, you're carrying too much liability. It's a really delicate balance. Luna: And I've seen restaurants that didn't account for this properly and suddenly had to adjust their earnings because their breakage assumptions were off. It can be a real surprise on the income statement. Lucas: Yeah, and that's why it's worth talking to your accountant before you launch a points-based program. But the good news is, there are simpler alternatives. You could do a tiered membership that gives benefits based on visits, not points. Or even a punch card, if you do it right. The point is, you don't need a complicated app to drive loyalty — you need to be intentional about what you're rewarding. Luna: So, bottom line: a loyalty program should be a tool to shape behavior, not just a way to give discounts. And if you're not seeing the behavior change you want, it's time to rethink the program. Lucas: Exactly. And I think that's a good note to end on. Because whether you're running a pizza chain or a fine-dining spot, the same principles apply: know your customer, decide what behavior you want to encourage, and design your rewards around that. That's how you turn a loyalty program from a cost center into a profit driver. Luna: And maybe we'll come back in a future episode and look at specific software platforms that make this easier. But for now, I think we've given everyone a lot to think about. Lucas: Absolutely. Thanks for listening, and we'll be back tomorrow with another fresh angle on the business of food.