Are Your Discounts Leaving Money on the Table?

My local go-to restaurant for a true European-style pizza is a place called Ardivino’s. A few months ago, they started a loyalty scheme where for each large pizza ordered, you receive a magnet in the shape of a pizza slice. Once you have a full circle pizza, or eight magnets, you can redeem your magnet collection for a free meal. Generally, I consider myself someone who purchases food, products and services based on their quality rather than being driven by earning points of some sort aimed at luring my business. Yet, last night I found myself ordering a large instead of a medium pizza to add to my magnet stash.

So, the obvious question on my mind today is: do loyalty programs work? Do rewards programs increase customer loyalty? And do they increase the restaurant’s bottom line?

Defining customer loyalty as continued or increased patronage, research across the studies and articles I reviewed in addition to Buxton’s proprietary and client research, tout the benefits of having a loyalty program. However, details and goals of the program define their level of success.

For example, researchers at Stanford University tested a loyalty program at a golf course to see how it affected usage. They found that frequent golfers didn’t change their behavior. I.e., the loyalty program was providing a discount to gain nothing in return. The program did, however, encourage light users to play an extra round every now and then, especially as they neared their reward level. The research concluded that across-the-board reward programs only work as intended when a company’s heavy users are also the most price-sensitive ones and argue the benefits of customer segmentation.

The only way to avoid a voided net result on discounts given and guarantee increased bottom line results is to tailor your rewards. A few thoughts along these lines:

• Segment costumers by their purchase motivations and tailor incentives for each segment. For example, economic shoppers may be best motivated by saving money, whereas relational shoppers want to benefit from being a privileged client (think frequent flyer mile shoppers).

• Segment customers by important demographics, such as age and income. Wealthy shoppers are likely motivated by very different factors, than those who struggle to make ends meet.

• Ensure rewards are perceived as valuable. Thinking about the Stanford golf research, current frequent golfers did not change their behavior based on a monetary discount, but perhaps could be enticed by hedonistic rewards (points exchanged for a free lesson or spa appointment), social-relational incentives (special privileges like priority scheduling), informational rewards (information about new products or services) or functional incentives (free shipment of golf bag when traveling).

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