For national coffee chains, Starbucksstill rules the roost with its massively successful rewards program, but Dunkin' Brands(NASDAQ: DNKN) is making strides with its own offering.
Vincent Shen is joined by senior Fool.com contributor Asit Sharma onIndustry Focus: Consumer Goodsas they continue their discussion of loyalty programs. Tune in to learn more about the economics and strategic goals behind DD Perks, which is proving to be an integral part of the company's game plan.
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Vincent Shen: The benefits of that big data and the insight that the companies get on the customers, and how to basically push them to come back, and when they're there, to buy more, or to make that purchase in the first place, is very powerful. Just to give listeners some context into how much this super-trend has grown: At this point, there are over 3 billion loyalty memberships in the United States. The average American is a member of 13 of these different programs, and is usually active on about half of those. If you just look at your keys or in your wallet, I'm sure you can see, between your supermarket, your credit cards, and maybe some other membership cards you have hanging from your keys, there are a lot of these programs, all across every facet of your life.
The two companies that we wanted to focus on today, and what they're doing -- in one case, catching up with the competition; in the second case, using the data and this loyalty program to recover their business. The first is Dunkin' Donuts. I think when it comes to a quick breakfast and coffee, their bigger competitor, Starbucks, has really set a very, very high bar for what a loyalty program can look like, and also how incredibly successful it can be. So, what has Dunkin' Donuts been doing in its approach to this super-trend?
Asit Sharma: Dunkin' Donuts is probably, for a long time, going to be the red-headed stepchild compared to Starbucks. Starbucks has over 12 million customers in its own rewards program. But Dunkin' Brands has over 5 million, and that's actually pretty robust when you look at its smaller footprint globally compared to Starbucks.
The program itself is pretty simple. It's called DD Perks. It combines physical cards with a mobile app, which also has an order ahead feature. You get 5 points for every dollar you spend. Once you accumulate 200 points, you get a free beverage. We want to break down today that type of mathematical interchange of reciprocity that I talked about on both sides. This is a great example. If it takes you about $40 to get that first reward, and you choose a reward of a medium latte, that's going to run you $3 to $4 based on the options. So, about 10% of the purchases that you made leading up to that reward can be seen as a discount. So, Dunkin' Donuts is offering about a 10% discount on its products by having you come back. But what they've gotten out of you, the customer is nine repeat visits after that first one.
Vince, this goes back to a larger stat that I also found doing research. On average, retailers, if they have a loyalty program, will get, over the lifetime of a customer, about 10 times the initial purchase. So, some customers aren't going to use their loyalty cards. As you pointed out, they just stay in the wallet and are never used. But some of us are really loyal to the brands we love. So, the economics work out on both sides of that equation.
Shen: Yeah. I think that the 10% you mentioned is probably something that a lot of people are used to. I think back to a lot of the bodegas, when I was living in New York, a lot of these sandwich shops, you go there, you go for lunch, you spend a certain amount, call it $10, and they stamp a very simple card for you. After 10 of those, I would get a free $10 meal. It comes out to around 10% off. I know that Starbucks recently, for example, changed the way that their program works. You built up and accumulated rewards. And there were some complaints from that, but overall, basing it in terms of dollars spent instead of visits is something that allows the company to control that a little bit more carefully.
Sharma: Right. There's a step beyond the basic economics, once you get your program rolling and have an appreciable membership, which is: How does it relate to the overall strategy for your company? Dunkin' Brands has been excellent in the way they have implemented their DD Perks program. They now see it as part of their overall strategy. In fact, I think it's one of their four pillars. I want to quote from CEO Nigel Travis from earlier this year. He said, "Our goal is to provide our guests with targeted offers through our perks loyalty program that are relevant to them to drive visits and tickets."
This is step No. 2: Once you incentivize the visits, then you want to drive the traffic further, and you want to target the customer. I talked earlier about the customer-relationship-management dashboard that a company like Dunkin' Brands can use. They want to extend this concept a little further. They have a concept they call one-to-one marketing, which you'll come across if you're into the retail business. This means they want to have that personal relationship with you, and be able to activate you when sales, let's say in the morning rush hour, are lagging during the quarter. They want to activate an army of loyal customers to bring those numbers up. So, you can imagine, thousands of points of one-to-one marketing is how they achieve this.
Now, some of our listeners, readers of Wired and other information magazines, remember that a couple years ago, it was in vogue to say that email was going away. But anyone who participates in a loyalty program knows that email is going to be here for a long time, because you get a ton of emails from these companies. It's a very effective way for them to, through text messaging, through emails, to activate you toward a certain behavior. So, strategically, again, get the program rolling, and then see how you can architect mass behavior almost at will. That's the end goal for DD Perks, and that's why I think Dunkin' Donuts has one of the best programs out there in the marketplace, because they really think of it, they have this overarching view of mass customer behavior, and how that can affect their revenue and profits.
Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.