Article

Healthy incentive: High-impact loyalty programs still uncommon at QSRs

Technology advances and centralized software may encourage more operators to offer customer benefits.

August 15, 2010 by Alicia Kelso — Editor, QSRWeb.com

Across numerous industries, merchant loyalty programs have shown success both in participation and return-on-investment sales.

According to a new survey by the National Restaurant Association, three-quarters of restaurant operators said guest loyalty programs helped grow business during the economic downturn.

Additionally, 90 percent said loyalty programs give them a competitive edge. So why do so few quick-service establishments embrace the idea?

A 2008 study by First Data Corp., which provides merchant processing services worldwide, showed that only 6 percent of QSRs had a loyalty program in place.

QSR reluctance

According to Kevin Knowles, First Data’s vice president of merchant loyalty product development and author of “High-Impact Loyalty Programs for Franchise Operations” white paper, there are many factors keeping most QSRs out of the game.

Perhaps the biggest factor is the dominance of franchise operations in the industry. He said it's hard to keep marketing messages consistent across the board when there is a heavy prevalence of franchisees.

Such ubiquity may also create fairness issues. Knowles calls it “hamburger math:” If a loyalty program entails buying  five hamburgers to receive the sixth one for free, and a customer buys five hamburgers at franchisee A, but redeems the loyalty reward at franchisee B, there is a profit discrepancy. Franchisee B even loses money for giving away the free hamburger.

Because of this potential scenario, many operators opt out of loyalty programs. However, that can be counterproductive for the umbrella company.

“We encourage companies to implement loyalty programs with brand consistency and therefore a consistent consumer experience. Companies should want to get away from the ‘at participating locations only’ concept because it is confusing and the larger message gets lost. It can even harm the franchiser’s image,” Knowles said.

Another factor is the disparate point of sale environment within the QSR industry. The fast, efficient service expected at these outlets may be compromised by any program that adds complexity to customer interactions.

“These aren’t the only two challenges, they’re just the bigger challenges,” Knowles said.

A centralized solution

Some of these issues can be remedied by emerging and evolving technology that centralizes the loyalty processing system. Centralizing software has existed since about 2002, according to Knowles, and is becoming increasingly available.

A centralized server can connect all franchisees to the same transaction processing network. Data can efficiently be entered regardless of POS system, which eliminates the need for franchisees to add or change equipment.

“We get data from each point of sale which takes their capability out of the picture. They instead become a conduit for data. This technology presents a huge opportunity for companies that may have avoided implementing a loyalty program,” Knowles said.

A central system also enables franchisees to equally share the benefits of program participation. The company and franchise operators receive reports about program activity and settlement reports, so they’re able to gauge what is working and what is not.

“Franchisees can see that it’s fair because the information is available to them and monitoring is done in real-time. They can reconcile how the money was moved into and out of individual accounts,” Knowles said. “And they can tell whether or not a program is working and make changes if necessary.”

Planning a loyalty program

To support a high-impact franchise program, specifically, Knowles suggests seeking a vendor that provides a national network, transaction processing capabilities, implementation processes that can accommodate an incongruent POS environment, real-time program reporting, modification flexibility and data security.

Knowles added that any such system will be worth the initial cost of software implementation, and suggests QSRs adopt a program sooner than later.

“Loyalty programs are becoming so normal to consumers that they almost expect something to be in place. And these technological advances over the past couple of years have enabled QSRs to get into this space without impacting point of sale time,” he said.

Take note, however, consumers are looking for much more than discounts and fancy trips.

First Data's research shows that one of the most desired rewards is free product. By offering product as the reward, the cost of the reward to the merchant is the cost to produce the product while the recognized value of the reward to the consumer is the retail value of the product. In other words, the cost to offer free product as a reward is lower than the high perceived value by consumers.

That means subscribing to a “surprise and delight” mentality, as opposed to a big, “lottery-sized” offer.

“When we look at what makes a good reward, it has to be relevant to the consumer that they want to receive it; that they care. And it has to be attainable, so they think ‘if I go just one more time a month, I can get a free drink,’” Knowles said. “Attainable and relevant – that’s the merchant’s goal because it is more likely to influence consumer behavior.”

Customer and company benefits

Subway is one QSR chain that hasn’t been reluctant to put a loyalty program in place. In fact, Ned Daley, marketing programs specialist at Subway Franchise World Headquarters LLC, said its program has been in place for about 30 years.

Subway started with a paper-based program in which customers would earn a stamp for every sandwich purchase, and eight stamps equaled a free sandwich. The company has since evolved into a points-based electronic program.

“Our customers earn a point for every dollar they spend and once they accumulate a certain amount of points, they can elect to redeem them for their choice of products,” Daley said.

The program is used by about half of Subway’s customers in approximately 5,000 stores throughout the U.S. and Canada. This is about one-quarter of existing locations and, although Subway would like to get every franchisee on board, Daley said the decision is best left to the local market operators.

For the stores that do opt in, Subway’s loyalty program is streamlined through Chockstone, a division of Heartland Payment Systems. The chain has been using this software since 2005 and more franchisees have joined in because of the centralized organization. Daley anticipates even more operators jumping on board moving forward.

“When a franchisee opts out, it could be a timing issue or something else going on in the regional market. But I think we have the right service providers and the right team and more franchisees are getting comfortable and enthusiastic about it,” Daley said.

This, he said, is good news. Although there are inevitably concerns – fairness, proper integration into the POS, etc. – employing a loyalty program should work well as long as a plan is made in advance and the right vendors and service providers are selected. Also, Daley added, it’s important to be patient. The main objectives of incorporating a loyalty program are to get to know your customers and to reduce their attrition. That does not equate to a quick ROI.

“That’s what limited-time only promotions are for. This is different. We want it to be beneficial to the store owner over time, and to be especially beneficial to the customer,” Daley said. “This program allows us to collect data on their purchasing habits and to offer them customized incentives as a token of our appreciation. To me, there is no downside.”

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