Am I Giving Away Enough Or Too Much In Loyalty Rewards? Calculating Loyalty ATR.
“Am I giving away too much (or not enough?)” is a common question among restaurant loyalty marketers, usually asked a few months after the program is launched. Of course, a serious level of debate goes into the initial structure of the program, prior to launch. The vendor software allows pretty much anything your heart desires: rewards based on % of sales, points per visits, higher rewards with paid membership, bankable rewards, immediately redeemable rewards, tiered rewards… or any combination thereof, dynamically linked to the weather forecast (ok, almost kidding about the last one) … so many options! And it’s your call how much to give away and how!
Unfortunately, many restaurant marketers don’t understand how critically important it is to get it right (or at least not very wrong) on the first try. In this app-based business you really only get to make the first impression once. This applies not only to the app user experience from the tech perspective (Does it crash? Is it easy to claim a reward? Does it remember my password on restart?), but also from the program experience perspective. The user will diligently open the app and scan those receipts for a while. But how long until they get tired of that activity, see no results and delete the app?
Enter my favorite metric, Average Time to Redemption (ATR). It’s the first metric I look at when evaluating a program. Here is how it is calculated: For an average user, how much time passes between their first loyalty transaction (in a given redemption cycle) and their redemption?
A practical example. A sushi restaurant gives 1 point reward for each $1 spent. Once you have 300 points accumulated you can get a free bento lunchbox of your choice (priced at $16.99). This restaurant has a check average of $34.6, average 2.3 guests per check, and a typical frequency of once every 2 months. Let’s calculate our ATR.
Average reward per visit is 35 pts; it takes 8.5 visits to accumulate 300 points and claim the reward. With the average frequency of every 8 weeks it would take my customer a whooping 66 weeks, or well over a year to get a reward. Seriously??! What’s the likelihood that this guest will abandon the app long before getting to their first reward? 66 weeks ATR is not what I like to see.
Now let’s look at the monetary value of that reward. The customer spent $300 and got $16 back. It’s about 5% return, not too stingy… is there a smarter way to do this?
How about this approach instead: same 1 point for $1 spent; get 100 points, claim your reward – a free dessert or a premium beverage (price range of $4.99-$6.99)? The customer spends $100, in approximately 3 visits – 22 weeks ATR, or just over 5 months. The reward is in sight after the first visit: she is already 30% to the goal! Better yet, this reward is designed to be incremental: it’s a beverage or dessert, so the customer claiming the reward is highly likely to order a main course during their redemption visit. Compare this with the main course as a reward where incremental spending is much less likely.
Note that while the return to the customer on a cash basis has increased a little ($5-7 on $100 spent, or about 6%), the food cost % associated with the reward is likely unchanged (it’s normally lower for beverages and desserts).
High ATR on the base program has a strong correlation with high churn rates, particularly with your less frequent customers. Keep sight of this important metric; it may be the reason your users are abandoning the program.
Have you ever stopped using a loyalty program because it took too long to get your reward? What’s a reasonable ATR for your business? What other things do you consider when deciding on the program redemption structure? Let me know in the comments!