In school, children are often taught that there’s no such thing as a dumb question; they’re encouraged to speak up any time they need some additional insight or clarity. That’s a lesson that some of us forget as we become older. For example, a lot of businesses—even some truly great ones—base expensive customer campaigns and promotions on weak and in some cases erroneous assumptions. These assumptions could be challenged and perhaps corrected simply through a willingness to ask what might seem like dumb questions.
To demonstrate this point, consider the mighty Tim Hortons—a Canadian institution, a market leader, and a truly great company. But while Tim Hortons is clearly a paragon of branding effectiveness and efficiency, and while it’s obviously run by some very smart people, they’re not impervious to the trap of bad assumptions. Just consider their new loyalty program.
A Dumb Question: Do Loyalty Programs Actually Improve Loyalty?
You may have seen the Tim Hortons loyalty cards; maybe you have one. You can participate in the program for free, anonymously scanning a card each time you make a purchase. Following your seventh purchase, you get a free donut, coffee, or tea. It sounds like a great deal for the customer.
In rolling out this new program, the team at Tim Hortons is likely trying to solve a problem. Let’s make a couple of assumptions, just for fun. Let’s assume that Tim Hortons believes their competition is eating into their sales (no pun intended) and that the solution to this problem is to shore up customer loyalty with a rewards program. We don’t have any inside information, but these are reasonable assumptions for us to make for exercise purposes.
And since this post is all about assumptions, let’s examine which assumptions may have underpinned this strategy:
- That loyalty levels for quick-service coffee restaurants can easily be improved, even for the market share and loyalty leader, Tim Hortons.
- That targeting and rewarding a brand’s most loyal customers will generate the greatest return.
- That the return on investment for the program will be positive after accounting for program admin and food giveaway costs.
To address our first point, let’s ask the obvious question. Do loyalty programs affect loyalty? The answer is yes, but it’s hard to say just how much, and the evidence suggests the effect is weak at best (Ehrenberg-Bass Institute, Sharp & Sharpe). So why do companies continue to invest in these programs? Because they are often operating under false assumptions. This can be partially attributed to the weak evidence surrounding loyalty programs in general.
To begin with, it’s difficult for a company to evaluate the effects of a loyalty program because baseline data from which to make comparisons is difficult to establish. Simply comparing the behaviour of loyalty program members to non-members is insufficient because a brand’s more loyal customers will be the ones to join the program (a selection effect—they have more to gain). Also, looking for changes in customer behaviour from when the loyalty program was implemented is difficult because this requires long periods of data both before and after the program.
It’s also worth noting that, for most quick-service coffee shops, a significant driver of loyalty is proximity. As you stop for your morning coffee before you head to work, you’re likely just going to go to the place that’s closest, or the place that’s on your way into the office. You’re unlikely to go out of your way just so that, somewhere down the line, you get a free donut.
The Damaging Effects of False Assumptions
One of the big risks for any loyalty program is that the program can be simple to implement, but very difficult to stop once it is up and running. They’ve distributed the cards and made promises to their cardholders; Tim Hortons now owes people something, and they have to fulfill that obligation regardless of what kind of results this loyalty program yields.
Specifically, they owe people free coffee, tea, or donuts—and there’s a hard cost associated with that, one they’re going to have to swallow even if they see evidence that this program isn’t actually boosting loyalty or increasing sales.
Something else to mention is that Tim Hortons has made this loyalty program available anonymously (no required sign up) meaning they’re not collecting a significant portion of the valuable data that sign-up required loyalty programs do. Yes, there is an app component, but it is not mandatory. I’m sure this was a very deliberate decision relating to participation levels, and requirements for the competing coffee loyalty programs, yet it’s still worth noting.
There’s also the impact on transaction throughput to consider. A restaurant like Tim Hortons relies on rapid transactions, and adding the small task of asking for a Tim’s Card, and waiting for one to be presented will undoubtedly add precious seconds to each transaction. This can have the effect of slowing down the customer experience for everyone—something that may erode loyalty, not strengthen it.
Finally, Tim Hortons already has major loyalty throughout Canada, and the wildly popular “Roll Up The Rim” campaign that serves a similar purpose. Tim Hortons is a market leader virtually throughout the entire nation. That is to say, there’s not a lot of room for them to grow their loyalty so perhaps they should have left the rewards programs to their competition.
The Value of Asking Dumb Questions
Tim Hortons is a great company—and perhaps their loyalty program will prove to be a winner. But even the smartest companies can make big decisions based on weak assumptions. And that’s something that can be avoided if you’re willing to ask the dumb questions.
Curious about the assumptions that underscore your own campaigns and promotions? Reach out and say hi!