Back to the basics

Editor’s note: Joe Cardador is the chief research officer for Service Management Group, a Kansas City, Mo.-based research firm. Mark Hunter is the firm’s chief client officer.

These are tough times for restaurant industry executives and managers. Everywhere they turn it seems they are inundated with bad news. Traffic for the industry as a whole is down as people look for more cost-effective ways to eat. Commodity prices had a roller-coaster year which made everybody nervous about the long-term cost of doing business. The “get big” strategy of the last decade, which was driven by low interest rates and commodity costs, is collapsing under these new pressures.

So what’s the new winning strategy? Many feel that it’s time for restaurants to get back to basics and focus on the customer. With marketing budgets getting tighter and competition for the consumer’s time increasing, it’s becoming more and more difficult to attract new customers through mass media. It makes sense to build an unpaid army of loyal followers who will come back more frequently and tell others about their great experience. The only way for restaurants to do this is to provide a consistently exceptional experience for their customers wherever and whenever they walk through the door.

In a story in the October 2007 customer satisfaction issue of Quirk’s we shared the idea that providing a great experience can drive transaction value and customer loyalty in retail settings (see link at end of this article). We showed that executing prescribed service behaviors can more than double the value of a customer transaction compared to a self-shopping experience. In addition, we showed that customers who had a great experience also exhibited stronger loyalty behaviors - that is, they returned more often and were more likely to recommend the store to their friends and family.

Less opportunity

In retail environments, creating positive customer experiences can make any customer more valuable to the business, sometimes increasing average transaction amount up to 50 percent. However, in a restaurant environment, because customers are rarely in a position to order and eat twice as much as they planned, there is less opportunity to increase the transaction amount by providing a great experience. Still, creating a positive experience for the customer and executing service standards has shown to effect at least some increase in average ticket amounts.

Although the results are not as dramatic as retail, customers who have a highly satisfying experience in a restaurant spend slightly more money as those who were just satisfied (Figure 1). Part of this increase can be attributed to up-sell effects when a server mentions a particular appetizer or menu item (Figure 2). However, higher average ticket amounts are not merely the result of suggestive selling; restaurant staff can increase average check amounts by creating a great dining experience that customers want to enhance and make longer by sampling additional menu items. The immediate effect on sales from providing a great customer experience may be small but it makes a big impact on the business when multiplied over thousands of transactions for an individual restaurant or restaurant chain.

Pretty intuitive

Customers who have a highly satisfying experience tell us time and again that they are going to return to that restaurant more often than those who don’t have a highly satisfying experience. That’s pretty intuitive, right? What may not be as intuitive is the difference between a good experience and a great experience. When the restaurant is working well - the server is friendly and knowledgeable, the food tastes great and the atmosphere is humming - that’s when you create a loyal guest. On average, results show that when comparing those who say they had an exceptional dining experience to those who were merely satisfied, twice as many who had the exceptional experience are likely to return and three times as many are likely to recommend that restaurant to their friends and family (Figure 3). This pattern is true for restaurants at all ends of the service spectrum, from quick-service to white-tablecloth. Simply put, creating a great customer experience creates loyal customers.

But we all know that just because someone says they are going to do something, they may not necessarily follow through. When someone tells us they are loyal to a restaurant, does that mean they really are? Maybe they say they are going to come back more often, but will they really do it when the reality of a tightened home budget hits? We can test this by tying customer satisfaction results to credit-card or loyalty-club data. In fact, for one casual-dining concept, customers who said they were highly likely to come back in the next 30 days did so at almost twice the rate of customers who said they were likely to return in the next 30 days (Figure 4). Imagine the impact on traffic and revenue if restaurants could provide the kind of experience that would convert just 5 or 10 percent of their guests from having good experiences to having the kind of experience that would engender this kind of loyalty.

Spend more money

One interesting side effect we’ve seen is that when customers visit a restaurant because of a recommendation or a previous positive experience, they actually spend more money. This is in sharp contrast to the people who visited primarily because of a promotion or advertisement. Those people actually spent less than people who visited for any other reason. In one quick-service restaurant (QSR) example we found that customers who visited because of a positive recommendation from a trusted friend or family member spent approximately 14 percent more than those who visited because of a promotion or advertisement. Customers who received recommendations still spent 5 percent more on average after controlling for coupon use by customers responding to a promotion or advertisement. This finding is consistent with other research indicating that customers acquired through positive word-of-mouth referrals generate more lifetime value to the firm than those acquired through marketing (Villanueva, Yoo and Hanssens, 2008).

These findings suggest that the healthiest way to grow in the restaurant business is to create loyal customers. Marketing and promotions can be addictive tactics to boost sales. When a restaurant company runs a new advertising campaign or discounts certain menu items there may be an immediate boost in traffic and sales. This gets executives excited and they want to do it again. They run promotions more often and at deeper discounts until they realize that the marketing budget and the price cuts have significantly reduced their margins while they were pursuing the goal of increasing traffic and sales. What’s worse is that these new customers are extremely price-sensitive, less loyal to the brand and are likely to migrate to the competition for a hot new promotion. Maintaining a healthy base of highly satisfied, loyal customers adds stability to the long-term growth plan.

Servers are the key

How do restaurants build those positive experiences that customers want to repeat and recommend to others? It starts at the front line. Servers are the key to converting a customer from merely satisfied to loyal. Frontline workers in the restaurant industry tend to be a transient group - moving from one restaurant to the next for a variety of different reasons. Interestingly, we have found that executing a simple set of service standards can have a big impact on driving guest satisfaction with their experience. Figure 5 illustrates that by simply greeting guests, checking back with them regularly, thanking them for their business and ensuring that a manager is visible in the dining room restaurants can nearly quadruple guest satisfaction compared to a guest who receives zero or just one of those behaviors. So although retaining your best servers is the most effective way to drive satisfaction and loyalty, ensuring that simple service behaviors are consistently executed may be the most attainable way to improve the guest experience in the real world.

One way managers and executives can create buy-in from servers is to go back to the data and show them the kind of impact their actions can have on their own income. By again tying guest feedback to transaction information, we see that guests who experienced all of the prescribed service behaviors are not only more loyal to the restaurant but they really do tip their servers better. In fact, for one casual dining concept we saw a marked increase in tip value when guests experienced all of the service behaviors instead of just one (Figure 6). Everybody in the restaurant wins when service becomes the focus.

This is all great information, but none of it really matters if it doesn’t drive overall financial performance at the restaurant. Fortunately, it does. We see it in a variety of restaurant chains from quick-service to casual-dining to white-tablecloth. When customers have great experiences the restaurant has higher traffic, higher sales and higher comp sales than other locations in the chain. In tough economic environments with declining comp sales, customer loyalty matters more than ever. Take a look at the quick-serve chain shown in Figure 7. We see that the quartile of restaurants with the highest percentage of customers who said they would be highly likely to recommend saw comp sales decline at less than half the rate of the group of restaurants with the least-loyal customers.

One place to turn

In these tough days of pressure from all sides, restaurant executives and managers have one place to turn for hope: their loyal customers. By creating an atmosphere in their restaurants that is entirely focused on the guest experience they can create a legion of loyal supporters that drive the business forward through word of mouth. The days of low interest rates and rapidly growing profit margins may be on h  old for now, but loyal customers continue to be the cornerstone of sustained financial success. There will still be winners in the restaurant industry even in this difficult environment and those winners will be the ones who focus on the experience of their customers.  | Q

References

Villanueva, J., Yoo, S., and Hanssens, D. (2008). “The Impact of Marketing-Induced Versus Word-Of-Mouth Customer Acquisition on Customer Equity Growth.” Journal of Marketing Research , 48, 1, 48-58.