Loyalty Points Kind of Suck: The Case for Cash Back and Making Rewards Simple Again

Over the past decade, restaurant loyalty has become ubiquitous – the majority of restaurants I order from have some sort of points system, and third-party marketplaces like DoorDash are driving further adoption through restaurant-funded rewards programs. However, ask 100 restaurants if their loyalty program drives meaningful results, and it’s unlikely you’ll hear a resounding yes from any of them. After spending years evaluating different loyalty programs and providers, talking to hundreds of restaurateurs, and surveying tens of thousands of customers, here’s why I feel like today’s restaurant loyalty systems are broken, and how we can fix it.

We’re overcomplicating it…

I was first exposed to different loyalty programs during an RFP for Applebee’s and IHOP in 2019 as we were looking to onboard our first loyalty provider. I sat through hours of meetings evaluating platforms like Punchh and Paytronix, learning about all of the different ways you could give customers rewards for purchasing, from points and birthday offers to sign up bonuses and tiered-based systems. Everything felt unnecessarily complicated, but it was the status-quo so there wasn’t much questioning.

Now, 6 years later, after launching a points-based loyalty system myself at Open, I started questioning why we use points as the default loyalty currency, how it got started, and where things are trending. The further I dug, the more I realized there didn’t seem to be a definitive reason for points (everyone was just copying everyone else). I started meeting with public company restaurant CEOs who made the mistake of following the pack, complicating loyalty structures only later to revert them back to something simpler (after significant resources were already wasted). Later, I started looking at where the “thought leaders” in restaurant loyalty were headed. The more I read, the more I thought I was being pranked. One of the most popular loyalty solutions for restaurants, Thanx, was promoting NFT-like access passes for non-discount rewards. Their site allowed you to download a 47 page book of ideas on how to use these access passes. Here’s a snippet of use-cases from their site below:

If you’re a restaurant owner or marketer, please don’t be swayed to think that prime parking spots or invites to “influence mixers” (not quite sure what that is) is going to meaningfully generate loyalty and drive frequency. Here’s a good heuristic to use: if your loyalty program can’t be easily explained in a single sentence (like get 10% in cash towards your next order when you order direct) then it’s probably too complicated. Some restaurants have told me they’re building dedicated pages and blog posts to explain their loyalty program and tiers — this is also not the answer. Just simplify.

I’ll walk through a proposed system later in this article that will 1) be much more effective at driving the business outcomes you want and 2) be much simpler for you to communicate and execute. But first, let’s quickly review how we got here.

The history of restaurant loyalty

Before we dive into our broken loyalty system and how we fix it, it’s helpful to think through the history of restaurant loyalty, which started out as refreshingly simple and somehow evolved to overly complex.

Punch cards (mid 1900s - early 2000s)

The earliest restaurant loyalty programs were incredibly simple, executed with physical punch or stamp cards. Customers received a card, which was either stamped or hole punched at every visit. After acquiring a certain number of stamps, customers got a free item (like Subway’s Sub Club where you buy 8 subs and get the 9th free). In the early 2000s, Subway and many other restaurants shut down their stamp programs because of advancements in high quality printers that enabled customers to create counterfeit stamps (hole punching was even easier for fraudsters).

Airlines introduce miles (1970s - 1980s), hotels introduce points (1980s - 1990s), credit cards institutionalize points (1990s - 2000s)

In the 1970s and 1980s airlines started to launch miles programs to reward frequent flyers. Major carriers looked to gain loyalty in exchange for giving the customer something with no marginal cost (an empty seat on an existing flight). As airlines drove more and more adoption, they eventually announced different membership tiers to further reward their most loyal guests and incentivize more flying with a single airline. Hotels quickly followed suit trying to solve for the same problems, realizing the marginal cost of filling an empty room was negligible. Miles didn’t make sense for hotels, so they invented points as a substitute – an abstraction that later spread to credit cards, which cemented points as the default loyalty currency across industries.

Starbucks and the restaurant points era

While restaurants didn’t quite have negligible cost of supply, they did face the same frequency and loyalty challenges as airlines, hotels, and credit cards. In 2008, Starbucks launched its rewards program and its stars/points-based system has served as the gold standard of restaurant loyalty programs ever since. Many other restaurant chains and loyalty providers mirrored their offerings after the Starbucks program, which is part of how we got here today.

To be clear, this post isn’t to advocate for eliminating loyalty programs altogether, so let’s dive into why I’m bullish on restaurant loyalty (if done right).

Why loyalty programs are important

In today’s digital-first landscape, loyalty programs are more important than ever. Yelp, Google, and food delivery marketplaces have given consumers access to vast selection. This vast selection creates more competition, and loyalty is a clear benefit when choosing where to dine. Perhaps more importantly, loyalty can serve as a primary driver for customers to order direct instead of from a third-party marketplace.

Here are some stats from National Restaurant Association’s (NRA) State of the Restaurant Industry Report highlighting loyalty’s importance for acquisition and retention:

• 48% of loyalty program members say that they’re less likely to try new competitive restaurants because they prefer to go where they can earn loyalty

• 78% of respondents say they’re more likely to visit a restaurant that offers loyalty

Despite customer excitement about loyalty, most rewards programs aren’t driving the definitive results that restaurants are hoping for.

Why today’s loyalty point programs fall short

Most loyalty providers obsess over vanity metrics (things like total members enrolled or monthly loyalty sign ups). This gives restaurants a false sense of program performance, which further fuels restaurant’s adoption and retention of these loyalty providers. These vanity metrics are easy for companies to obsess over and report on because they look good — total members enrolled always goes up. However, the goal for loyalty is simple (drive new visits and increase customer lifetime value) and so they key metric measured for loyalty efficacy should also be simple (new visits and increased customer lifetime value).

Unfortunately, most providers aren’t able to confidently report on how their loyalty program drives new visits and increases lifetime value. Most of this lies in how these programs are executed and communicated.

The problem with the current structure (points and, sometimes, tiers)

The problem with loyalty points today is that points aren’t a form of currency, and so they’re definitionally ambiguous. Some restaurants offer 1 point per dollar, others 5 points per dollar, some 10. Points can be worth $0.01, $0.05, $0.10, or whatever the restaurant defines as the exchange rate. Because there is no universal definition of the value of a point, a point is somewhat meaningless. If I have 50 loyalty points in my account, what does that mean?

The problem with different loyalty tiers — like silver, gold, platinum — is that they further overcomplicate your loyalty system. When tiers are introduced, you now have to educate your customers on the benefits of each tier and requirements to get there. This makes communicating (and therefore, understanding) the program much more challenging. If you don’t believe me that points and tiered systems are challenging, just take a look at The Points Guy, an online blog solely dedicated to explaining airline and hotel points with more than 10 million monthly viewers. It’s unlikely anyone will be educating your customers with this much content about how your loyalty points and tiers work.

Fortunately, there’s a better option that makes both explaining and executing your rewards program a whole lot easier…

The case for cash back loyalty programs

There is a simple and much more effective path forward for loyalty, and we’re already starting to see this work well in other industries: give people cash back towards their next purchase. Paradoxically, this is essentially what loyalty points systems already do — converting the points to cash just does the math for the customer so they can better understand, and perceive, the value of your loyalty program. Recently, I was watching a video on Ramp (a credit card startup that has scaled to more than $1B in revenue in just 5 years), where their CEO said that he interviewed tons of CFOs when starting the company and heard the same thing from all of them “We just want cash back, we don’t care about these complicated points structures and non-cash rewards.” Even Shopify — one of the world’s largest e-commerce platforms — launched a cash-back system with Shop Cash when they introduced loyalty two years ago. The clarity beats complexity playbook is clearly working (and working very well) across other industries. It’s time we bring it to restaurants.

The other nice thing about cash back systems is they provide great opportunities to introduce branding to the loyalty experience. Instead of simply framing this as “cash” you can brand your program like “LOQUI Cash” or “Poached Bucks” which reinforces the brand name throughout your communications and marketing. Imagine if, instead of saying “you’ll earn 35 points on this order,” you instead say “you’ll get $3.50 LOQUI Cash on this order.” The $3.50 has immediate and understandable value to the customer whereas 35 points does not.

One of the key benefits of a cash based program is not needing to communicate the value of a point to your customers. If I have $25 in my loyalty account, I clearly know that I can redeem that for something that’s $25 or less. However, if I have 100 points, I need to know how those points are converted in value and if all items redeem for the same amount of points to know what I can use the points for. This complicates the digital and in-store experience because, in order to maximize the program’s effectiveness, the restaurant must convey what can be purchased for what amount of points.

In addition to the benefits of communicating and understanding cash back loyalty systems, it also instantly gives you a digital currency that can be used across support, operations, growth, and marketing. Imagine if a customer complains online about long wait times — you can apologize and send them $10 loyalty cash for the inconvenience instead of 100 loyalty points. Or if you want to use loyalty as a marketing mechanism, sending a text saying “Get double cash back today only” feels a lot more tangible and exciting than “Get double loyalty points today.” The downstream effects on the brand, loyalty adoption, and engagement are large.

Concluding thoughts

It appears we’ve ended up following a simple copy-paste format for loyalty that might not apply to the restaurant industry, and today’s loyalty providers seem to be wanting to complicate things further. I’m advocating that we all get back to simplifying, and am confident this will drive more meaningful results for businesses and happier, more loyal customers.

I put my money where my mouth is and spent significant engineering resources to make it extremely easy for restaurants to launch cash back programs, even though I had previously built a points system at Open. It feels like the right thing to do for both restaurants and customers.

If you’re interested in learning more or implementing this at your restaurant, send me a message or set up time to talk here.