Building a loyalty program without sacrificing margin
A loyalty program is a discount you have promised in advance. Designed carelessly, it rewards guests who would have come anyway. Designed with your costs in mind, it can change behaviour for a fraction of the price.
Many restaurants launch a points scheme because competitors have one, then struggle to say whether it made money. Before choosing the mechanics, decide what behaviour you want to change: more visits per month, a higher average order, ordering direct instead of through a delivery app, or visiting on quiet days. Each goal leads to a different design.
What the research says about loyal customers
It is tempting to assume that regular guests are automatically the most profitable. In a 2002 Harvard Business Review article, Werner Reinartz and V. Kumar reported that the link between how long customers stayed and how profitable they were was weaker than commonly claimed, with correlations between 0.20 and 0.45 across the four companies they studied. Long-term customers were not consistently cheaper to serve, did not reliably pay more and were often more price-sensitive. They also found that loyal customers recommended the business more only when their loyalty showed in both behaviour and attitude. Their advice was to manage loyalty and profitability together rather than assume one produces the other.
For a restaurant, the practical lesson is to measure what a member is worth after rewards, and not to treat frequent visits as profit by themselves.
Design rewards around cost, not menu price
A free item costs you its ingredients and packaging if the guest would not otherwise have bought it, but it costs the full menu price if it replaces something they would have paid for. Choose rewards that guests value highly, that are cheap to make, and that are likely to be added to an order rather than substituted.
- Good candidates: drinks, desserts, sides, extra toppings, an upgrade to a larger size.
- Avoid: a percentage off the whole bill, which grows with the order and is usually the most expensive reward per point.
- Consider rewards that can only be redeemed with a paid main item, so the reward is an add-on.
- Use quiet-day or quiet-hour bonuses to move demand rather than discounting peak times that are already full.
| Earning rule | 1 point per 1 currency unit spent |
|---|---|
| Reward | 150 points = 1 free drink |
| Menu price of the drink | 15 |
| Ingredient and cup cost of the drink | 3.75 |
| Value the guest sees | 15 / 150 = 10% back |
| Your cost if the drink is an extra purchase | 3.75 per 150 spent = 2.5% of member sales |
| Your cost if it replaces a paid drink | 15 per 150 spent = 10% of member sales |
| Comparison: 10% off every bill | 10% of member sales, every time |
The same reward costs between 2.5% and 10% of member sales depending on how it is used. Rules that push it towards the lower end, such as redeeming the drink with a pastry or main, make a large difference to margin.
Set the rules before launch
- Calculate the cost of every reward at ingredient cost and at menu price, as in the example above.
- Decide the maximum reward cost you accept as a share of member sales, and set the earning rate and reward threshold to stay under it.
- Set an expiry for points so the liability does not build up indefinitely, and tell members clearly.
- Decide which channels earn points. Orders through third-party delivery apps already carry commission, so many operators limit points to dine-in, takeaway and direct online orders.
- Decide whether points can combine with other offers. Stacking a promo code, a happy-hour price and a loyalty reward on one order is a common way to sell below cost.
- If you use tiers, base them on visits or spend over a set period, and give higher tiers benefits that cost little: priority booking, early access to new dishes, a birthday dessert.
- Require manager approval for manual point adjustments and keep a record of who made them.
Measure whether it pays
Review the program monthly with the same few numbers. If possible, compare members with similar guests who are not members, or compare members' behaviour in the three months before and after joining.
- Visits per member per month, before and after joining.
- Average order value for members versus non-members.
- Reward cost as a share of member sales, using the actual mix of redemptions.
- Share of redemptions made together with a paid item.
- Contribution per member visit after reward cost.
- Share of members who have not visited in 60 or 90 days.
Keep it simple for staff and guests
A guest should be able to understand how to earn and what they can get in one sentence. Cashiers should be able to explain it in the same sentence. Complicated rules lead to disputes at the counter, manual adjustments and rewards given without the conditions you designed.
Zad. Plus supports loyalty points and tiers as well as timed offers and promo codes with their results, so reward costs and redemptions can be reviewed in one place.