How Loyalty Programs Can Attract New Customers

This article was featured on AmEx OPENforum on February 26, 2015. Belly's suite of marketing tools including Campaigns and Belly Bites drove customer growth and increased customer visits for an Austin coffee shop. Read the full article here.

Restaurants have more than doubled their loyalty program membership over the last two years, according to the 2015 Colloquy Loyalty Census. Small-business owner Mehul Patel joined the trend by experimenting with program options for his Austin, Texas-based coffee shop, Dominican Joe. Patel opened the shop in 2006 with his business partner Sharla Megilligan, who also runs a nonprofit initiative in the Dominican Republic (Dominican Joe sells coffee from the nonprofit’s farmers).

Today the shop has 15 employees and is nearing $1 million in annual revenues. It's Patel’s second startup—he started an Internet gaming company in college that he ran for 12 years before selling it. In retail, Patel could see that the key to success was attracting and then retaining new customers. But what is the most effective way for small businesses to use a loyalty program?

The Challenge

Patel knew that low customer turnover is more cost-effective than constantly investing in attracting new ones. “The problem with [daily deal website] programs is that people come in once, but there’s no way for us to know if they ever come in again,” he says. “For us, that’s useless. We needed to be able to track if they come back.”

Dominican Joe tried paper punch cards, a common small-business loyalty plan to encourage repeat visits. “Customers liked them,” he says. “But they didn’t get a lot of usage and it was a hassle for employees.” Patel had no objective way to track repeat business. The punch cards also limited Dominican Joe to offering a single reward—10 punches for a free drink, for example. Patel wanted more options and personalization.  

Next, he experimented with a custom loyalty app designed by a local entrepreneur. “Customers had zero interest in that,” Patel says. “We even offered a free drink on the first try. Maybe apps just hadn’t taken off at that point, or maybe people didn’t want to download a specific app for one coffee shop, where with Starbucks there are thousands [of locations].”  

Ideally, Patel wanted a program to attract new customers and convert them into steady clientele. “If we have the choice of getting one new customer who comes every week, we would rather have that than 20 new customers who only come once,” he says. 

The Solution

In the summer of 2012, Patel was approached by Belly, which specializes in small-business digital loyalty initiatives. Patel planned to use the free trial period, but he found that Belly answered most of his needs.   

To use it, customers tap their phones on a Belly-provided iPad in-store to sign up and earn credits for visiting the store. If a customer has earned a reward, it appears on the iPad for customers to select and redeem.

“It’s a good combination of things we liked and things customers liked,” he says. Customers were already familiar with Belly, and adoption rates were higher than with the coffee shop’s app. The iPad also attracts customer attention in the shop and automates the signup and participation process. “Our staff didn’t need to punch a card or do anything,” Patel says. “So the lines moved quicker.”

The 12 to 15 percent of his Belly-using customers earn points per visit, and can redeem them for a free drink with 60 points. Patel is able to personalize these offers for repeat customers, such as giving away a free drink for 12 visits and a gift card for 20, for example.

Over the past year, Patel has sent three email promotions targeting customers who haven’t been in the shop for a few months. The email offers a free drink or other incentive to pull them into the store. “We’re reminding them we’re still here,” he says. 

To attract new customers, Patel uses regular “Belly Bites” promotions—free offers for Belly users—sent to consumers who have shopped near the coffee shop but have never visited. “That’s been great because we only pay for the people who redeem and we can track how often they come in again,” he says.

“We aim to target 30 new customers per month,” Patel says. “We're pretty packed as is, so we're just trying to do a slow but steady approach.”

The Results

Patel estimates he pays about $50 per month (a promotional rate that Belly has since raised to $99), then additional per-redemption fees for Belly Bites promotions. “That makes it manageable,” he says. “So in slower months we target more customers, and in busier months we do less.”

Over the past two and a half years, Belly Bites promotions have earned Dominican Joe 56,000 “impressions” from people viewing the offers, with 1,062 of those marking an offer for later redemption. Of those, 138 actually redeemed the Bites promotions_,_ and those new customers returned for a total of 165 more visits.

Last summer Patel sent a typical buy-one-get-one-free email designed to re-engage former customers. Of the 3,400 sent, 1,000 people opened the email, 192 visited the store and 31 actually redeemed the offer (Belly does not link to Dominican Joe’s point-of-sale system, so it can’t track non-Belly customer visits).

“Every 12 visits is a free drink for a repeat customer,” Patel says. “So it comes to 8 percent off for our regulars. That’s not a major expense if it’s actually bringing people back and keeping them engaged, keeping us top of mind.”