Customer Retention for Restaurants
Drilling Down Newsletter #104 9/2009
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
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Hi Folks, Jim Novo here.
This month we have a restaurant CEO who wants to know about
industry benchmarks for customer retention. While benchmarks can
be helpful in operations, I'm not convinced they're valuable for
analyzing customers, especially if you're a customer-centric
operation. We then take a walk into Relationship Marketing
and find out what that model may have to offer.
Over on the blog, we're looking at a field test designed to answer
this question: can word-of mouth drive incremental sales? The
study leads us down the path of controlled testing and subsidies to
best customers, where we again cross paths with our CEO from above.
A mind-bending Drillin' awaits...
Awareness versus Persuasion
As part of a WAA program that reviews academic research for WAA members, I was able to take a look at
an academic study - Firm-Created Word-of-Mouth Communication: Evidence from a Field Test.
Paper is about if, how, and why word-of mouth can drive incremental
sales activity. The answer? Yes, but the mechanism is
generally not what most books and gurus tell you it is - the
"opinion leaders" do not drive the incremental
activity. If you are thinking about paying for WOM or
social media programs, you need to read this.
September 23, 2009
I will respond to any comments you leave.
Questions from Fellow Drillers
Customer Retention for Restaurants
Q: I am hoping you can help answer a question for our team.
By way of introduction, I am the CEO of XXXX. We are a specialty
retailer / restaurant of gourmet pizza, salads and sandwiches. We would like to know
restaurant industry averages (pizza industry if possible) for customer retention - What percentage of customers that have ordered once from a particular restaurant order from them a second time?
I am hoping with your years of expertise and harnessing data you may be able to assist us with this question.
I look forward to hearing from you.
A: Unfortunately, in my years of experience, I have found little hard information on customer retention rates in QSR and restaurants in
general. It's just the nature of the business that little hard data, if collected, is stored in such a way that one can aggregate at the customer level.
And of course, the high percentage of cash transactions doesn't help matters
much; there's a lot of data missing.
Over the years, sometimes you see data leak out for tests of
loyalty programs, and of course clients sometimes have anecdotal or
survey data, but it's not much help. More often than not you
discover serious biases in the way the data was collected so at best,
you have a biased view of a narrow segment.
What to do about your predicament?
There are really two issues in your question; the idea of using
industry benchmarks when analyzing customer performance, and the
measurement of retention in restaurants.
As far as industry benchmarking, two things:
1. Annual reports for publicly traded eateries may be of some
help. Customer loyalty info may be disclosed in these documents or on conference calls with Wall
Sometimes you can put snippets of different conversations into an
equation that allows you to guess at repeat purchase rate; hospitality
analysts often want to understand repeat behavior and do this kind of
2. Ignore the industry benchmarks. If you have the capability to track repeat rates, simply establish what they are now and use
them as internal benchmarks to not fall below or create programs to improve
Frankly, I tend to discourage using "industry benchmarks" because the kinds of businesses that can really leverage repeat behavior and retention
(customer-centric model) are usually *different* from the industry, so
using a benchmark (say, from Domino's) is probably low-balling your potential.
Not that Domino's is a "bad" operation, mind you, but
they are what they are, they tend to be more on the operational
excellence side of the game than customer intimacy (that's what
we called the customer-centric approach back in the early
Product leadership, the 3rd value discipline, is pretty much table
stakes for anyone in the restaurant biz, and I assume from your
business description you just might consider this a primary focus
which you then leverage to create power in the intimacy area.
My point is this: without understanding the value discipline and
Strategy of a competitor, you can't know if any benchmark is something
you want to compare to, because the business may have a completely
different focus than yours. Worse, using industry averages
simply hides any real information you might gain that is actionable
for your business.
So on the whole, I would much rather use internal benchmarks that I
can improve on that are aligned with the business drivers and are
controllable through my own execution.
Now lets talk about measuring retention.
"Retention" is a very time-specific concept - over the course of 3 months?
A year? Five years? A 20% retention rate over a 5 year period and a
60% retention rate over a 3 month period might both be stunning achievements, if you know what I mean.
So, if you are able to do the analysis, I would pick some marks - 3 month, 6 month, 1 year, etc. - and see what you
get for repeat buyer or retention rates. The slope of that curve will determine where any danger points are that you might
take action on.
For example, if retention falls dramatically moving from 3 to 6 months, then you know that you should be watching for people who have not transacted in over 3 months, and
for those people you should craft mail or e-mail promotions
designed to bring them back.
As often happens with restaurants, there's probably a good chance that if the person is still living in the
area (more on this below), the reason they are not coming back is
probably controllable - they had a bad experience. A promotion like "We've missed you" or "Give us another chance" that is tightly targeted to known defectors will usually pay back quite handsomely in both the short and long term.
Defected customers not only visit once on the promo but also (hopefully) have a better experience and re-engage as a repeat visitor.
If you see some success with this approach, you could then fine
tune the analysis to find out if the dropout has a peak in month 3, 4,
or 5. This fine tunes timing of your drop; the closer you can
get to the behavior with the message the more effective the campaign
will be. There is likely a "peak profitability"
timing in one of these months.
Then the program can be automated, for example: if we don't see a
transaction from this person for 120 days, drop the message.
This way, you end up mailing every month but the audience is
completely different and very highly targeted each and every
time. You will find this "right message, to the right
person, at the right time" approach is much more profitable than
mailing all customers.
Speaking of mailing all customers, the people who are still active within
this 4 month time frame are probably still loyal and you can improve overall margin by
not sending these special promotions to those people until they "slip" out of the
4 month window. There's no reason to discount to people who are
highly likely to purchase anyway.
In fact, in a relationship
marketing-based scenario, there is no real need to market to these
people at all, you're basically "preaching
to the choir" and doing so is a waste of resources (and often
margin). You will be far better off taking the money you used to
spend marketing to the choir and allocating it to in-store, core value
Many marketing people (especially of the Push variety) find this
difficult to understand, but there no more powerful Marketing tool
than your value proposition (product leadership, customer intimacy,
operational excellence) when communicating to the active customer
base. It's why they are coming back! Why beat them over
the head with messages when they are telling you by continued
transacting that they like what you are doing? Wasteful.
Finally, in a location-based scenario such as restaurants (and
since you are the CEO, not running a single store), you might
consider factoring in local uncontrollable churn into any metrics you
create as internal benchmarks.
Households in different areas have different natural churn (move)
rates. Since you have stores in different states, for example,
one would expect a lower retention rate from stores that have a higher
natural household churn rate. These stores might be doing very
well with controllable churn (product, service) but without the
household churn adjustment, they could be unfairly benchmarked
"bad". Household churn numbers are generally available free from
city / state government or the Census.
Hope that helps!
Have a question on Customer Valuation, Retention, Loyalty, or Defection?
Go ahead and send it to me here.
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
That's it for this month's edition of the Drilling Down newsletter.
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'Til next time, keep Drilling Down!
- Jim Novo
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