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The Importance of Customer

Retention
Kabir Satija
Independent Research G/T
May 10, 2019

Advisors: Dana Lawson and Kyle Yancey

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Abstract

Many restaurants and other businesses use expensive customer acquisition techniques to

increase their profits. These strategies are often wasteful and can even lead to decreases in

profits, as costs exceed benefits. A focus on retaining customers is a far more efficient approach

to bolster profits. Restaurants and other businesses can keep their customers through the use of

loyalty programs and excellent customer service. This paper serves to understand and evaluate

the importance of customer retention, along with its relationship with acquisition, specifically in

restaurants. By reducing the money spent on attracting new customers and spending more money

on retaining customers, restaurants can increase profits.

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Introduction

Restaurants have used content advertising and vigorous customer acquisition techniques

to increase profits for many years. Millions of dollars are spent annually by restaurants in an

attempt to bring in more customers. Often times, however, these techniques are incredibly

wasteful and result in no significant increase in profits. Customer retention, the act of focusing

on customer loyalty and customer service to maintain customers, is a far more efficient

alternative. This paper serves to explain the overall importance of customer retention as a

marketing strategy in restaurants.

Literature Review

One of the most significant issues in common marketing techniques used by restaurants is

the immense waste of customer acquisition. Many companies often spend an excessive amount

of money on trying to attract new customers without actually evaluating if their techniques are

working. This results in millions of wasted dollars, as companies continue to try a variety of

methods to attract new customers (Gordon). They try ineffective avenues to reach new potential

customers and waste huge sums of money in the process. In an article published in ​The

Economist,​ the author explains how even one of the largest online retailers in the world wastes

money: “Take Amazon. ‘Their philosophy is not good,’ says one loyalty consultant (who asked

not to be identified). ‘The amount they spend on promotions is insane.’ Rather than offering

across-the-board discounts, he says, Amazon would be much better served by designing and

targeting customised promotions for particular shoppers as part of a loyalty scheme” (“Forsake

all others; Loyalty schemes”). Blatant acquisition techniques can be largely ineffective as they

don’t properly reach out to potential customers.

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Another common concern with acquisition techniques is how the costs can often exceed

the benefits. When a business gains a new customer, this customer may only make one purchase

before never returning again. If acquisition costs more than the return, it is clear how this

common strategy is ineffective. In order to continue with spending to bring in new customers,

companies should reevaluate if their rewards exceed the costs, especially in the digital age. In

fact, data shows that physical retailers sometimes overspend on their marketing budgets,

resulting in an overall loss. On average, brick and mortar stores spend about 31 dollars on

advertising per customer. If the customer spends less than 31 dollars, either in one visit or in an

extended period of time, the company’s marketing attempts are futile (Hamblen). Often times,

companies are unaware of the actual benefits of their marketing and continue to spend money

without significant results.

Customer acquisition techniques also can lead to an exhaustion of potential customers.

After a certain amount of people come to a company, continued advertisements often do more

harm than good. Businesses lose touch with their actual customers and instead spend millions of

dollars on attracting the attention of potential customers. But after an extensive period of

acquisition, there are far fewer customers willing to try the business. Essentially, these

companies attract all potential customers yet continue to market, wasting millions of dollars.

One of the main strategies used by restaurants to retain their customers are loyalty

programs. These programs, generally digital, provide frequent discounts and special

opportunities to recurring customers. These strategies help to develop brand loyalty which keep

customers coming back. In fact, “nearly 75% of consumers surveyed say they are willing to

provide more personal information in exchange for relevant offers and communications”
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(Androich). Loyalty programs offer customers the opportunity to find out relevant information

about the establishment, along with limited time discounts which help to further solidify brand

loyalty.

More than just providing recurring customers with discounts, these programs help to

cement a relationship between a customer and an establishment. This connection encourages the

customer to continue to come back and spend money at the establishment. In fact, research has

found that in times of financial crisis, these customer relationships can save entire businesses.

“Building enduring, profitable, growing brands is all about creating, nurturing, defending and

strengthening loyal brand bonds” (Light). Sustained profits are possible, even when issues arise,

through the development of brand loyalty. During the economic recession in the late 2000s,

many restaurants and other businesses suffered greatly. However, companies that had created

loyalty with their customers continued to do well despite the economic standstill. The

relationships developed prior to the recession were essential in keeping the businesses afloat, as

patrons continued to visit the establishment despite hard times (Birch). Generating loyalty

becomes extraordinarily important during financial crises.

Research has also shown immense profit increases due to loyalty programs. In various

different industries, these programs can account for millions of dollars. In an article published in

The Economist,​ the author reveals that “For airlines, profit margins on frequent-flyer

programmes can be 30-40%, says Pranay Jhunjhunwala of the Boston Consulting Group (BCG),

a consultancy, compared with 10% on flights in general” (“Forsake all others; Loyalty

schemes”). The profits generated because of these loyalty programs increase by two to three

times. Even though this example looks specifically at findings in airlines, there are similar data
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in other industries. In fact, research on grocery stores has also found a correlation between

customers and loyalty programs. “Some 97% of purchases at Kroger, an American grocery firm,

are reported to be made by loyalty-card holders, who receive individual offers based on their

shopping habits” (“Forsake all others; Loyalty schemes”). Once again, an immense portion of the

store’s customer base use loyalty programs and receive specific offers that entice them to return

frequently. These loyalty programs lead to recurring customers and increased profits.

Customer service is also an integral part of maintaining customers. In fact, some critics

argue that most corporations lack proper customer service, resulting in few frequent customers.

“A significant proportion [of surveyed businesses] are failing to fulfill some of the basic tenets of

doing business and marketing - identifying what customers actually want and fulfilling those

needs” (Edwards). By failing to understand the needs of their customers and failing to address

these needs, corporations are wasting their resources on irrelevant things. Good service is

important in almost every industry. “In any competitive market, the winner (or survivor) will be

the organization that best succeeds at endearing itself to its customers and creating brand loyalty”

(Middleton). An increased focus on customer service to keep clients happy is essential to any

healthy business.

Customer service becomes even more important in the restaurant industry. Customers

require a high level of patience and kindness from restaurant employees and managers. There are

certain restaurants that are specifically devoted to providing excellent customer service. They

continue to echo their mantra about the importance of a customer’s needs. One such restaurant is

the Beefeater chain in the UK. This chain not only focuses on providing great food, but also

excellent customer service which simply is not available at other places (Walkley). Some
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proponents of the importance of customer service actually argue that proper service is more

important than the actual quality of food. “Business guru Tom Peters tells us that 70% of

customers 'hit the road' not because of price or product quality issues, but because they didn't like

the human side of doing business with the provider of the product or service” (Walkley). Clearly,

great service is absolutely essential to well-performing restaurants. Another restaurant which is

constantly praised for its unprecedented customer service is Chick Fil A. This American chain

prides itself on its service to customers. Stories about the fantastic nature of employees are

everywhere on the Internet, and the restaurant has been named one of the greatest corporations of

all time in terms of customer service. This unique connection between the restaurant and

customers creates brand loyalty unprecedented by other businesses, resulting in Chick Fil A’s

incredible success (Pignataro). Excellent customer service sets one restaurant apart from the

other and is a critical aspect of ensuring success.

The development of loyalty with customers also has a ripple effect. If restaurants and

other businesses provide great customer service and use loyalty programs, customers are more

likely to refer their friends and family. Although referrals may not seem relevant, they can often

bring new customers to an establishment. Specifically in the finance industry, like banks,

referrals have a 20-40% rate of bringing in new customers (Reichheld). Good customer service

and brand loyalty encourages existing customers to refer their friends, which can greatly bolster

the overall number of customers and profits.

Personalized approaches of contacting customers can also have a significant effect on the

amount of customers who return. Strategies that focus on specific groups of people instead of the

entire population can be greatly effective in bringing in new customers. This personalization
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creates an incredibly important connection with customers. “The biggest message when I read

the survey results was there is no silver bullet but that personalization is key” (“Marketing

Matters”). By personalizing marketing distributions, corporations are able to further solidify their

connection and enhance the brand loyalty.

Analysis
The most effective data collection design was to use a mix of two methods. By using a

mix of qualitative and quantitative data, reasoning behind employing loyalty programs became

more clear, along with how customers felt about these same programs. This mixed-method

design describes the rationale for developing a link of loyalty with customers, and the

questionnaire finds correlations between loyalty programs, customer service, and purchases at a

restaurant. A questionnaire was utilized, along with interviews of store managers. A Google

Form was sent about customer loyalty and customer service to dozens of students, and an

interview was conducted with a manager of Jersey Mike’s, Kyle Yancey. This unique design

allowed me to both see the rationale of managers who utilize customer loyalty programs, along

with how actual customers feel about these programs.

Interviewee and Key Information

Date

Mr. Kyle - Kyle Yancey oversees various Jersey Mike’s in the MD-DC-VA
Yancey, March area
7 2019 - Thousands of customers use the loyalty app
- People with the loyalty program seem to come to the restaurant
more often
- “Flash deals” that are sent out often attract customers
- Track fluctuations in customers by comparing to previous
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years’ data… overall increase since loyalty program began

- Online ordering has had an impact but it is not very significant
- Delivery services (ex UberEats) increase sales but at a
significant cost
- Customer experience is one of the most important aspects of the
brand
- Without proper service, they would seem to lose customers

Question Responses

Have you ever downloaded the app or signed 20/42 (47.6%) have
up for the loyalty program of a restaurant? 22/42 (52.4%) have not

How often do you use this/these loyalty 14/32 almost never

program(s)? 6/32 rarely (every few months)
5/32 about every month
7/32 weekly/multiple times a week

Do you feel compelled to go to a restaurant if 17/38 (44.7%) do not feel compelled

you have their loyalty program? 11/38 (28.9%) said maybe
10/38 (26.3%) feel compelled

How important is customer service in your 0/42 (0%) said 1

opinion? (Scale of 1-5 with 5 being the most 1/42 (2.4%) said 2
important) 3/42 (7.1%) said 3
20/42 (47.6%) said 4
18/42 (42.9%) said 5

Would you go back to a restaurant where you 26/42 (61.9%) said no

have had poor customer service? 16/42 (38.1%) said yes

The only interview revealed that, all in all, loyalty programs have very significant

benefits. Yancey explained that since the Jersey Mike’s app was produced, sales have increased.

There are thousands of customers who use the loyalty app. The most interesting result of the data

collection is that customers feel the same way as managers. Of the people who have loyalty

programs, almost one third of them feel compelled to go to a restaurant. This is extremely

important since it shows that an increased focus on loyalty apps is an effective way for
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restaurants to market their products. The data also revealed how important customer service is.

Customers explained that customer service is extraordinarily important to them and over 60%

explained that they would not go to a restaurant again if they had poor customer service the first

time. This connects directly with Kyle Yancey’s interview, where he explained that customer

experience is one of the biggest focuses for Jersey Mike’s. Once again, this further solidifies the

fact that restaurants that improve their customer service are effectively marketing to, and thus

retaining, their customers.

While these results do strongly suggest that customers who use customer loyalty

programs and receive great customer service are more likely to return to a restaurant, more data

is needed. The questionnaire used was sent out mainly to high school students, so it would be

unwise to generalize the results to the whole population. Another possible issue with the study is

the lack of people who actually download the loyalty app. While the rate of retention is quite

astounding, the number of customers who download the app is quite low, averaging less than

50% of people who filled out the survey. Also, more interviews seem necessary to further

strengthen the claim that all restaurants are focused on customer service and brand loyalty. If

these claims are confirmed with a larger, more encompassing study, however, this is extremely

relevant data that shows the importance of customer retention. Since customer service and brand

loyalty are two of the most significant factors of retention, an increase in both of these factors

would lead to higher retention rates in restaurants.

The results show significant evidence about the effectiveness of customer retention. This

field of marketing is generally overlooked and a variety of businesses tend to focus instead on

acquiring new customers. As of now, most restaurants spend a large majority of their marketing
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budgets on reaching out to new people. Instead, they should allot more of their resources to

improve the service they provide.

Conclusion

Hundreds of millions of dollars are spent annually in America by businesses trying to

attract new customers. But is this really the best approach? Dozens of new studies about the

importance of retaining customers have emerged, showing just how efficient it is to focus on the

customers that already exist. By generating brand loyalty through loyalty programs, along with

providing excellent customer service, these restaurants can bolster profits and avoid wasting

huge sums of money. When considering how to reduce expenses while simultaneously

increasing profits, consider the immense success of customer retention.

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Question Responses

Have you ever downloaded the app or signed 20/42 (47.6%) have
up for the loyalty program of a restaurant? 22/42 (52.4%) have not
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How often do you use restaurant loyalty 14/32 almost never

program(s)? 6/32 rarely
5/32 ~ every month
7/32 weekly

How important is customer service? (Scale of 0/42 said 1

1-5 with 5 being the most important) 1/42 said 2
3/42 said 3
20/42 said 4
18/42 said 5

Would you go back to a restaurant where you 26/42 (61.9%) said no

have had poor customer service? 16/42 (38.1%) said yes