What is your loyalty program actually costing you?

Introducing Thanx’s “Effective Discount Rate” Reporting – an industry-first capability to instantly measure the cost of driving engagement, activation, and retention, through your loyalty program.

Restaurants have long been aware of the benefits that loyalty programs offer when implemented effectively; increased customer engagement, data capture, and higher lifetime value for customers. However, the traditional approach of offering discounts to incentivize loyal customers can be a costly endeavor, with P&L line items far outpacing the cost of technology and personnel required to manage a loyalty program. Despite this drawback, it is clear that loyalty programs are acutely beneficial; they allow restaurants to identify their top 20% of guests driving 80% of revenue and focusing investment into them, greatly increasing revenue in the long term.

In recent years, with so many brands launching loyalty programs, many companies tout the revenue growth of their programs, however, it’s rare that those benefits are rooted in an understanding of the underlying costs associated with influencing customer behaviors and driving incremental revenue from members.

Thanx is committed to helping our customers understand, measure, and improve the reach and impact of their program. That is why we’ve recently launched new reports for our restaurants including our Capture Rate report, showing the amount of revenue that can be attributed to known and reachable customers, as well as activation and retention, or Impact reporting.

But reach and impact reporting is not enough. It is critical to understand how much it actually costs to drive changes in impact metrics like activation, retention, and engagement. Brands must know if the cost of improving these metrics is supported by the financial outcomes. Understanding and benchmarking your effective discount rate — essentially how much it costs to generate loyalty member revenue is essential to understand. It’s an equation based on menu price, cost of goods sold, and “redemption lift” (a change in behavior that occurs only when a consumer is redeeming a reward) — that is crucial to ensuring overall program ROI and improving it. 

Here is an example:

Let’s say your loyalty program offers a simple buy 10 get 1 free burger reward. You charge the customer $15 for the burger but it costs you $7.50. The computed effective discount rate of your loyalty program would be 5%. That is because guests have to spend $150 in order to get a $7.50 reward. $7.50 divided by $150 = 5%. 

ProgramGuest cost per itemYour cost for
the item
Revenue generated to earn a rewardComputed EDR
Buy 10 burgers,
get one free
A guest pays $15 for 1 burgerYou pay $7.50 to provide the 1 burgerThe guest buys 10 burgers$150 in revenue in exchange for $7.50 in food costs

But it is important to take the redemption rate into consideration. The true cost is only the cost of the rewards that are actually redeemed. In the example above, if only 50% of those rewards were redeemed during the redemption window, now the cost to you is split in half and your effective discount rate is 2.5%. 

ProgramGuest cost per itemYour cost for the itemRevenue generated to earn rewardComputed EDRRedemption RateActual EDR
Buy 10 burgers,
get one free
A guest pays $15 for 1 burgerYou pay $7.50 to provide the 1 burgerThe guest buys 10 burgers$150 in revenue in exchange for $7.50 in food costsOnly half of the rewards were usedOnly $3.25 in costs against $150 in revenue.

With increased competition in the restaurant industry stemming from digital growth, 3PD, and continued brand innovation, restaurant loyalty in 2023 must embrace more vibrant and dynamic programs. Companies now offer more sophisticated loyalty programs to compete and win customers. For example, McDonald’s, Chipotle, and Starbucks have developed complex systems that reward customers with points and bonus points, challenges, gamification elements, and rewards that are experiences-based or not related to discounts. These have become so popular that businesses of all sizes have adopted similar tactics such as providing access to exclusive menus or offering increased point multipliers as incentives for desired behavior. Such strategies give customers greater rewards choices while keeping them engaged and loyal.

This is why Thanx offers points and a self-service Loyalty Designer and Rewards Marketplace.  These features, only offered by Thanx,  help brands remain agile in their loyalty marketing while controlling costs. 

Below is an example of a points program with three different rewards available through the Rewards Marketplace. Each reward has an associated points value, a menu price, and an associated cost of the item on the menu. Effective Discount Rate reporting helps measure how many points were used to redeem rewards and then how much those redemptions “cost” the brand. The program effective rate is the revenue generated to earn the rewards divided by the actual cost to the brand based on the total redemptions. In this case, the program cost $137.50 but $5k was generated which is effectively a 2.75% discount rate. 

Marketplace rewardPoints necessary to redeemPrice of item on menuActual cost of item itselfComputed EDRNumber of redemptionsPoints usedCost of all redemptions
Free burger150$15$7.505.00%101,500$75.00
Free fries50$8$24.00%251,250$50
Free drink25$2$0.251.00%501,250$12.50
Program metrics
Total revenue generated$5,000
Points generated5,000
Points used4,000
Unused points1,000
Total cost of rewards$137.50
EDR of program2.75%

So what is the right way to manage your effective discount rate (EDR)? 

  • It’s not always about reducing costs, but it can be. If your program is too generous, you may want to lower your costs, but do so with consideration for reach and impact goals.
  • Ensure your loyalty platform is dynamic, not fixed. This breaks the sense that consumers are owed a discount. For example, you could make your Rewards Marketplace seasonal with new perks each quarter. This allows you to adjust and lower your effective discount rate over time, without pulling the rug out from under and potentially upsetting your customers.
  • Drive down effective discount rate (EDR) by incorporating non-discount rewards. In many cases, these rewards will end up earning higher engagement and reducing costs; sometimes it’s only one or the other and that’s ok too depending on your goals.

To learn more about all the “Metrics that Matter” including category-specific benchmarks, check out our recent webinar, “How to Measure the Health and Effectiveness of your loyalty program” with QSR. 

Want to learn how to calculate your brand’s effective discount rate and see how your program measures up? Schedule a demo with our loyalty experts.