If I had a dollar for every customer loyalty program I’ve been asked to join, I’d spend them and earn half off my next purchase plus a chance to win a free trip to the Bahamas.
Seriously though, loyalty programs are everywhere, from credit cards to airplanes, yoga studios to Amazon. They come in all shapes and sizes, offering different rewards for different customer accomplishments, and might even reward you for signing up a friend.
However, there is one icon of customer loyalty that has unofficially become the definition of “rewards program”:
The coffee shop punch card.
Coffee shops around the world have adopted the punch card rewards system because it is an easy way to get customers to come back for a second, third, and hopefully, an eleventh trip (Buy 10 get 1 free!). Shops have intuitively grasped the importance of repeat customers to their business, and studies show customer retention is more important in the coffee industry than anywhere else.
The rewards system Five Stars says repeat customers make up 84% of total customer visits in the coffee industry, compared to 70% in fine dining and just 50% in retail. This makes loyalty, and the use of loyalty rewards programs, more important for coffee shops than any other business.
The problem is, most coffee shops don't know if they're loyalty programs are actually creating loyalty. Why?
A Measurement Problem
We recently conducted a survey in partnership with Barista Magazine to learn more about the coffee shop experience from both customers and professionals. We asked questions about coffee shop discovery, positive (and negative) experiences, and coffee shop loyalty. Specifically, we asked both customer and professionals about customer loyalty programs.
91% of customers surveyed said they would participate in a coffee shop loyalty program. This was echoed by the 70% of coffee shop professionals who said their business runs a loyalty program for customers. It’s not shocking to find such a broad use of rewards programs given how important we know them to be in the coffee industry. Plus, who doesn’t love free coffee?
What surprised us is how little feedback coffee shops receive on the effectiveness of their rewards programs.
We asked shops if their rewards program had improved sales, and while about 92% of shops said yes, almost 80% of them have no idea how much their rewards program has actually helped.
In other words, coffee shop rewards programs may be working, or it may not be; we just don’t know.
Coffee shops who don’t measure the effectiveness of their rewards program may be wasting money, losing customers, or both. Not measuring a loyalty program is like going on a diet but never stepping on a scale. You may look a little leaner in the mirror, but are you really losing weight? The first signs of success (or the need to change strategies) will show up on the scale, not in the mirror.
The same is true for coffee shops. Setting up a loyalty program does not guarantee more customer loyalty, just like starting a diet does not guarantee weight loss. By measuring the effectiveness of a loyalty program, coffee shops can begin to answer these important questions:
- Are we rewarding customers often enough?
- Are we giving them the right reward?
- Has the loyalty program actually improved sales?
Properly tracking a customer rewards program gives coffee shops the knowledge they need to answer these questions, make adjustments where needed, and ultimately earn more loyal customers.
Coffee shops can start measuring their customer rewards program in three simple steps
Step 1: Track Customer Profiles
The first step to measuring the effectiveness of a loyalty program is to record the number of return customers vs. the new customers. This is the basic metric every loyalty program attempts to improve. Coffee shops need to maintain customer profiles and track the sales of each customer over time. The easiest way to do this is by using a connected point-of-sale system like Square or Intuit.
Unlike an old school register, these point-of-sale systems set up automatic customer profiles and track every time they return. This feature easily sets the table for coffee shops to perform more insightful analysis on the effectiveness of their loyalty programs.
Some types of loyalty rewards programs are also inherently easier to measure than others. For example, online rewards programs offer customer insights to help coffee shops understand if their rewards program is working. They make the process of calculating metrics much easier and therefore make it more likely for a coffee shop to use them.
According to the Barista Magazine survey, about half of coffee shops are using paper punch cards while the other half have switched to an online program. Here are some of the online rewards programs mentioned in survey responses in order of popularity:
Online programs have their downsides, too. The companies often charge fees for their services, which means a shop not using all their features may not get its money’s worth. Still, the added insight may be worthwhile for shops serious about tracking the effectiveness of their loyalty rewards program.
“We once won a region-wide Belly customer signup campaign without even trying or realizing we were participating in the campaign at all. Customers really appreciate the program, use it religiously, and always have," said Ryan Barker of Bourbon Coffee in Washington, DC. "However, with the higher-tech rewards systems are coming increased prices for using what is essentially a futuristic punchcard, which may not be worth it if you're not using all of the new back-end perks that come along with the regular checkin program. We are reconsidering future usage of Belly at this time and may go back to something a little simpler.”
Step 2: Setup Benchmark metrics
Whether a coffee shop uses punch cards or an online rewards program, the next step is calculating benchmark metrics. These metrics are easy to find and will tell a coffee shop whether or not changes in the loyalty program are making an impact.
Here are three metrics for measuring customer loyalty and the effectiveness of rewards programs:
1. Redemption Rate
This is simply the number of people who cash in on a coffee shop’s loyalty rewards program.
If a coffee shop is still using punch cards, an easy (but less accurate) way of measuring redemption rate is to track the number redeemed punch cards and divide it by the total number of cards given out.
Number of redeemed punch cards / Number of total punch cards given out
Coffee shops using an online rewards program can more accurately find their redemption rate by dividing the total points redeemed (i.e. 10 stars or “punches) by the total number of points given out.
Total points redeemed / Total points given out
This number will tell coffee shops the percentage of customers who have redeemed their rewards. Since coffee shops will also know how many customers started a rewards account, they will also know on average how many points each customer has.
This metric can help signal if a coffee shop’s rewards threshold is too high and customers are losing interest.
For example, say a customer needs 10 points to earn a free cup a coffee. After a few months, the coffee shop notices their rewards program has low redemption rate but the average number of points per customer is 7. The coffee shop could lower their rewards threshold to 8, giving many people the chance to cash in their rewards and re-engage with the coffee shop.
2. Loyalty customer rate
The loyalty customer rate tells a coffee shop what percentage of their customers have returned at least an X number of times and are therefore considered loyal. Coffee shops can choose any number of visits they’d like, but a good measurement of loyalty is if a customer returns to a shop at least four times.
Number of repeat customers with at least 4 visits / Total unique customers
This baseline metric can signal to coffee shops whether different loyalty program efforts are resulting in more repeat business and loyalty.
3. Customer Lifetime Value
Measuring customer lifetime value is a little more tricky to measure but can give coffee shops an idea of the long term benefits of a loyalty rewards program.
Customer lifetime value (CLV) is how much money each customer spends over the amount of time they remain a customer. One could say this is the true measure of “loyalty” to a coffee shop.
There are four different calculations that go into finding the CLV for a coffee shop:
1. Average Order Value:
What’s the average ticket price of customers? Calculate this by dividing the total revenue by the total number of orders for a given time period (recommended one year).
Total revenue / Total number of orders = Average Order Value (AOV)
2. Frequency Rate:
This is how often on average customers return to a shop. This is calculated by dividing the total number of orders by the number of unique visitors in given period of time (The period of time should be the same as AOV).
Total number of orders / Number of Unique visitors= Frequency rate (FR)
3. Average Customer Lifespan:
No, we are not predicting how long we think our customers are going to live. Rather, we are looking at the average length of time that customers regularly visit a shop before they move away or stop showing up. This can be difficult because coffee shops need several years of data to know for sure.
Younger shops, or shops who have not been collecting data for very long, can use industry averages for this number, typically between 1-3 years.
Average customer lifespan = 1-3 years
4. Customer Lifetime Value:
Coffee shops can now calculate the customer lifetime value. They simply multiple the Average Order Value times the Frequency times Average Lifespan.
AOV x FR x Lifespan = Customer Lifetime Value
Tracking a shop’s CLV over time will give them an accurate and long-term picture of the health of their loyalty program. If the CLV goes up over time, a shop is doing things right and earning more loyalty from customers. If it goes down, it could signal that customers are spending less money, visiting less frequently, or not showing up anymore at all. All are signs that a coffee shop should dive deeper into the problem to learn more.
Once a coffee shop finds these benchmark metrics, they should track them every month, quarter, and year to see how changes in the loyalty program have made a difference.
After benchmark metrics, the last thing to do is choose the loyalty program that works best.
Step 3: Choosing a Loyalty Rewards Program
Most coffee shops skip straight to this step when setting up a customer loyalty program. However, setting up benchmark metrics beforehand prepares a coffee shop to measure the effectiveness of that program and then make smart changes to it over time.
The coffee shops we surveyed shared their own loyalty reward programs and we collected the best ideas below:
1. By X Drinks Get 1 Free
This classic rewards program is still the most popular among coffee shops and was probably developed alongside the invention of the punch card. The most common program of this form is “Buy 10 drinks get 1 free”, but some shops set the bar as high as 16 drinks and some as low as 6.
Other coffee shops took their creativity and generosity to the next level.
“Customers love to be enjoyed by the business they enjoy! We use our loyalty program to excite our customers for our business by giving them the first drink free. It diffuses any initial anxiety about a new (possibly confusing) environment, and allows the barista an opportunity to guide them through our menu. Research indicates that if a customer has three positive initial experiences, they are 80% more likely to become a regular. We give all first customers a different colored loyalty card that promotes menu exploration through free incentives and allows our baristas to show them extra attention for their first 11 visits. We give a "Loyal-T-Shirt" to each customer who returns 10 times, which serves as a great perk for them and great advertising for us!”
- David Adkins, Arrow Coffee Company, Manhattan, KS, USA
Surprising customers with something other than just another drink is another way to increase loyalty among customers.
2. Spend X dollars and get X dollars free
This is the default program of some online rewards programs like Five Star that claim it even helps to raise Average Order Value (AOV) of customers. Instead of connecting the reward to a certain number of orders, shops who reward customers for money spent can see an increase in spending with every trip.
Coffee shops like Spotted Cow Coffee in Mill Creek, Washington give customers $3 for every $30 spent, or 10% of every dollar they spend.
3. Coffee membership programs
Coffee shops like Booskerdoo Coffee forego the traditional punch card-style program entirely and choose to offer a coffee membership to loyal customers.
“[Our] $100 membership is paid in advance and gets the customer 10% off every purchase,” says Chuck Gianakos of Booskerdoo.
This type of rewards program is easy to sell to hardcore regulars, but the more casual customer may be apprehensive about the upfront cost. Knowing the average customer frequency and the percentage of loyal customers would help a coffee shop decide whether this type of program would be beneficial.
4. The “Good Deeds” Rewards Program
What if a coffee shop decided to reward customers for good deeds instead of just buying coffee? That’s what Kali S., a barista from Puerto Rico, said their coffee shop does to reward their customers.
“For every 5 carriers returned you get a free 8oz latte,” said Kali.
What other good deeds would you want to reward your customers for? Bringing a reusable mug? Donating to a charity or cause? The options are endless.
5. Reward other employees in the neighborhood
Small businesses in the same neighborhood often share customers and recommend they visit other shops in the area.
Some coffee shops like Morsels Espresso + Edibles in Traverse City, Michigan give a permanent discount employees and owners of small businesses in the area. In return, these business regularly send new customers their way.
Using a Loyalty Program to Build Loyalty
Customer loyalty is crucial in the coffee industry, so it’s no wonder why so many coffee shops have implemented loyalty rewards programs.
However, 80% of coffee shops are willing to say their rewards program is working despite not knowing how much it has improved sales. Running a loyalty program without measuring it is the perfect recipe for wasted money, wasted effort, and lost customers.
Coffee shops can easily turn their fortunes around by tracking customer profiles, setting up benchmark metrics, and experimenting with different loyalty perks and systems. Over time, coffee shops will see more regulars, more revenue, and more customer loyalty.
