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Why Chipotle is wrong about loyalty

 

Sept. 24, 2015 | by Jitendra Gupta

In the past month, Chipotle’s Chief Creative and Development Officer, Mark Crumpacker, was asked by Wall Street analysts if the company had any plans to launch any type of loyalty program in the near future. He said it was a difficult question to answer but offered,

“We don’t believe the general supposition that loyalty will make less-frequent customers more frequent.”

He’s said previously that “if you can take an infrequent or lapsed customer and make them come to your restaurant just one more time, you would pay for the program….[However], there are virtually no loyalty programs that actually achieve that. What they do is reward your most loyal customers.”

If Chipotle is like any other brick-an- mortar business, it has a breakdown of guests that looks something like the following:

Guest type Group % of guests
Infrequent Once a year 50
Every few months 25
Once a month 11
Loyal guests Two-to-three times a month 9
Every week 3.5
Several times a week 1.5

 

Chipotle’s Chief Financial Officer, Jack Hartung, acknowledges as much and said Chipotle estimates that 35-40 percent of people have never been to a location. Among those customers who have visited, 55 percent come only a couple times per year.

Here is how Chipotle is calculating the ROI:

  • Loyal guests are already coming as often as they ever will. I quote, “The problem is that Chipotle’s customers are already so darn loyal” — Jack Hartung.
  • Chipotle then looks at the infrequent guests and sees that traditional programs are not able to drive extra visits from this group.
  • They look at a traditional earn and burn program, see the costs associated with redemptions for loyal customers and the extra visits from the infrequent guests and conclude that the costs don’t justify the benefits they will receive.

Or

ROI    =

Revenue from Increased visits  –  Cost of redemptions for all guests  = Negative ROI

While the folks at Chipotle are really smart, they are missing four important ideas in their analysis:

Mobile changes the game

With mobile programs the brands are getting higher engagement and improved visit frequency for all guests — including the loyal guests. Why is mobile so much more effective in driving additional visits? It is because guests always have their mobile phones with them and can have a bi-directional communication with the brands. The key thing to keep in mind is that mobile is a unique channel and it requires mobile-first thinking and user experience. If your mobile program is as an extension of card based programs, it’s destined to fail. Net-net, with mobile optimized user experience it’s possible to drive and measure 25 percent additional visits across the board.

Below is the data for over 100,000 infrequent users across different concepts; you can see the frequency increasing dramatically as the customers start engaging with the mobile program – massive change after 2nd visit. Similar changes in frequency can even be seen for the most frequent users.

Social, Buzz, Referrals

Loyal guests are valuable not only because they visit often, but also because they drive word-of-mouth and referrals. People pay twice as much attention to recommendations from friends than other sources. Take Etsy for example, the company’s VP of Values and Impact has said that “90 percent of our company’s growth is from word of mouth.” A pretty powerful statement for a company valued at over $3 billion.

With the latest technology in this area, it is now possible to drive and measure the value of these referrals in terms of the new guests and their subsequent purchase behavior. We see about a third of increase in revenue coming from thousands of referrals that our brands see every month. Below is an example of a real referral chain, which shows the people who are referring their friends and driving new customers to brands.

Gamify to Satisfy

Brands need to realize that their brand is an important part of loyal guest’s life and that there are better ways to engage such customers than classic earn and burn programs.

With mobile technologies it is now possible to engage customers in games that increase their commitment. These games could be related to award frequent customers badges for visiting every day of the week, every week of the month, before every football game for the local team etc. These games drive a huge increase in frequency with minor or no financial incentives.  Below is an example of the kind of challenges and rewards a business can offer to engage frequent customers.

Another way to reduce costs related to engaging the loyal guests is by incentivizing them to use pre-paid gift cards to earn more rewards or badges. Driving this behavior can reduce transaction costs associated with credit card transactions and help reduce the costs of rewarding loyal customers.

Action, not data

Chipotle seems to realize the value of data that engagement programs can generate, as Crumpacker has said that it’s clear that loyalty programs are a tremendous resource for data collection and that the company is looking at mobile payment as a pathway to that, but nothing is solidified as of yet.

The thing that Chipotle seems to be missing here is that not all data is equal. Getting payment data that is not tied to the customer (ApplePay) or to the transaction details does not build a 360-degree profile for customers and does very little to drive personalized interactions that drive incremental visits. In addition, data and insights without a direct channel of communication to the customer are not effective. Chipotle needs to think about action-oriented insights that drive campaigns and repeat visits rather than just data.

The right equation for ROI that Chipotle is as follows:

ROI   =

Revenue from Increased visits from frequent & infrequent users   +   Revenues from games and  referrals    +   Revenue from insights-based campaigns   –  Cost of redemptions and program

= Huge positive ROI

Mobile technology is changing the way guests engage with restaurants. One thing is for sure, mobile technology is on its way to becoming an indispensable source of competitive advantage for brands.