Why Investing in New Customers Is Better Than Customer Loyalty Programs

Finding new customers is more lucrative than a loyalty program. via suvodeb

Are you wondering how effective restaurant loyalty programs are?

In previous posts we’ve written about expanding your mailing list and increasing traffic to your site. With this post we want to look more closely at the types of customers you’re attracting to your restaurant.

If you have to choose, is it better to invest in new customers or maintain existing customers using loyalty programs?

Invest in New Customers First

New customers are a better investment.

New customers are a better marketing focus than loyalty programs. Tweet This

Wait! Before you close the window, let’s clarify something. Each new customer isn’t necessarily worth more than a loyal customer. That would be absurd. A good customer is a good customer.

However, marketing investments are better spent on reaching out to potential new customers.

You can only squeeze so much out of each customer.

Most of your current customers are already committed to your restaurant.

You might make a small dent by getting a current customer to visit your restaurant one more time this year. They might take advantage of a loyalty promotion one time and then they’ll be back to their normal habits.

On the other hand, you could spend that same time and money trying to get a new customer that will visit once a month for the long-term.

Restaurant loyalty is based on good food and good service. New customers are attracted through marketing efforts. When you have a restaurant with genuinely amazing food and excellent staff you’ll get people that keep coming back for more.

However, you’ll never get the chance to impress new customers unless they know about your restaurant first.

The Exception: High Frequency Customers

If you have a high frequency restaurant, like a coffee shop, a loyalty program can make financial sense. Via Coffee Shop Business Plan

There is one assumption in the point that new customers are better than restaurant loyalty programs.

This is true for restaurants that have relatively low purchase frequency.

For example, if you have a restaurant where the typical customer comes in once every six months they have an annual frequency rate of two. Let’s say that happens with 75% of your customers. The rest are customers that try your restaurant once and never come back.

That’s 0.75 * 2 = 1.5 purchases per year.

If you implement a loyalty program that increases re-purchase rates by 10% you’re going to get incremental sales of 1.5 * 0.10 = .15 orders per customer.

Hoever, if you have the type of restaurant with high frequency customers (coffee shop, sandwich shop, etc.) a loyalty program might make sense.

This restaurant has the same 75% of customers coming back for more purchases, but they come back 20 times each year.

That’s 0.75 * 20 = 15 purchases per year.

The loyalty program that increases sales by 10% will get incremental sales of 15 * 0.10 = 1.5 purchases per customer per year.

There could be something there.

Hat tip to Mine That Data on Loyalty Programs for the calculation.

Restaurant Loyalty Programs…for Free

Maintaining existing customer relationships is crucial to your business.

Most loyalty will depend, however, on the nature of your business (purchase frequency) and the quality of your product and service.

Since this is the case it can make sense to focus on free community building tools that are available to all restaurants today. The options for building a network around your brand make it possible to reach out to existing customers.

Some first steps?

Here’s a great article on promoting your restaurant with a Pinterest account.

The holy grail of free promotion is the email list. This is the best cost-free way to build a relationship with existing customers. Make sure there’s a sign-up option as soon as customers visit your site, and find that perfect balance between regular emails and coming on too strong.

Start with one email each month in newsletter format and expand from there.

These are all free and relatively low-maintenance strategies that let your satisfied customers connect to you in the long-term. The low cost leaves you with a nice, healthy marketing budget that can be invested entirely in new customer acquisition.

New Customer Acquisition

Without new customers your business isn’t able to grow. Even with a high frequency restaurant business and a great loyalty program you’ll only get so much extra revenue from your existing customers.

Here are some articles to get you started with strategies for new restaurant customers: