What's a little e coli among friends? That's the question US fast-casual dining chain Chipotle will soon be asking its best customers. After publicly eschewing the idea of launching a customer loyalty programme last year, Chipotle executives said on an earnings call last week that they aim to stem the flood of frequent diners abandoning the chain with - wait for it - a loyalty programme. Though the programme is likely to be temporary, Chipotle hopes it will reignite customer passion for bowls and burritos. The problem: Chipotle executives still seem to display a fundamental misunderstanding of the purpose of loyalty programmes.
The announcement was one of the only positives in an earnings call that can only be described as apocalyptic: same store sales fell nearly 30% in the first quarter of 2016 and the company posted a net loss of $26.4 million. The company has tried everything to pull out of the free fall: giving away millions of free burritos, BOGO offers, national advertising campaigns; nothing has worked. Money quote from reporter Virginia Chamlee over at eater.com:
"The aim is to target the most loyal Chipotle consumer � i.e. the one who visits 25 or more times per year. The company saw the largest declines among its top loyal (25+ visits a year) and its 'light' consumers (those that visit two to five times per year). Noting the decline in visits amongst its once most-loyal customers, [Chief Marketing and Development Officer Mark] Crumpacker said the company would love to get that 'habit' back up. "We do believe it's beneficial to us to get people back in the habit of visiting Chipotle [as often as they used to]."
Interestingly, Crumpacker has trashed loyalty programmes when times were good. On an analysts call last year, Crumpacker said: �We don�t believe the general supposition that loyalty will make less-frequent customers more frequent.� Crumpacker told analysts that the goal of loyalty programmes was to take "infrequent or lapsed customers and make them come to your restaurant just one more time, [which would then] pay for the programme... [but] there are virtually no loyalty programmes that actually achieve that. What they do is reward your most loyal customers.�
Due respect to Mr. Crumpacker, who is attempting to bail out a ship that collided with an iceberg the size of which he could never have anticipated, but his comments betray a misunderstanding of the purpose of effective loyalty programmes. He seems to think their purpose is merely short-term and transactional: give away rewards to encourage frequency. Increased frequency is certainly a benefit of a loyalty programme - but short-term behavior change is not the goal of a loyalty programme. The goals are increased relationship equity and lifetime customer value. It's a long-term commitment to your best customers that results in a lifetime of loyalty.
Consider, for example, what might have happened if Chipotle already had an effective reward programme in place: When the e coli crisis broke, Chipotle could have used the programme to communicate with its best customers and reassure them of their commitment to food safety. It could have proactively rewarded those top loyal customers for their continued patronage. It could have deployed bonus offers to reward specific behaviors or segments. And all of those customers with points in their accounts would perhaps have been more willing to return to the stores to earn and redeem for those free, newly-safe burritos. The best reward programmes act as brand insulators that can ease the impact of a public relations crisis.
Instead, the company was forced to give away millions of dollars in free food, most of which went to reward opportunists with no history of loving the brand. Even now, as Crumpaker sees the wisdom in offering a programme, he views it only as a short-term promotional tool to lure customers back in for a visit or two. The behavior change encouraged by such an effort is also likely to be short term. Instead of launching a programme designed to rebuild long-term loyalty among its best customers, Chipotle's plan will most likely reward opportunists who take advantage of the promotion and then move on.
Still, hope springs eternal. "There's always the possibility of a permanent programme [down the line]," Crumpacker told analysts.
We're not saying that a rewards programme is a magic wand that will immediately transform the troubled chain's fortunes. What we are saying is that a reward programme provides a powerful set of tools to rebuild trust and foster long-term relationship value. Of course loyalty programmes reward your most loyal customers - Crumpacker is right about that. But he's wrong on the value of doing so. Demonstrating loyalty to your best customers isn't a bug of reward programmes - it's a feature.
-Rick Ferguson
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