Customer Retention for Restaurants 
Drilling Down Newsletter #104  9/2009

Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
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Have a question on Customer Valuation, Retention, Loyalty, or Defection?  Go ahead and send it to me here.

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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...

Sample Marketing Productivity Blog Posts
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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.

Awareness versus Persuasion
September 23, 2009

I will respond to any comments you leave.

Questions from Fellow Drillers
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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 Street.

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 forecasting.

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 against them.  

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 90's).  

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 proposition ideas.

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 and 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".  HH churn numbers are generally available free from city / state government or the Census.

Hope that helps!

Jim

Have a question on Customer Valuation, Retention, Loyalty, or Defection?  Go ahead and send it to me here.

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That's it for this month's edition of the Drilling Down newsletter.  If you like the newsletter, please forward it to a friend!  Subscription instructions are top and bottom of this page.

Any comments on the newsletter (it's too long, too short, topic suggestions, etc.) please send them right along to me, along with any other questions on customer Valuation, Retention, Loyalty, and Defection here.

'Til next time, keep Drilling Down!

- Jim Novo

Copyright 2009, The Drilling Down Project by Jim Novo.  All rights reserved.  You are free to use material from this newsletter in whole or in part as long as you include complete credits, including live web site link and e-mail link.  Please tell me where the material will appear.