The Value of Keeping the Relationship

Twenty years ago, Bain & Company conducted a study analyzing the costs and revenues generated from serving customers over their entire purchasing life cycle. Their conclusions are still being cited today stating that a 5% increase in the customer retention rate “increases profits by 25% to 95%.” Doubling that retention rate, they say, “yields a 30 percent increase in the value of the company.”

Today, a former Bain consultant continually puts this to the test by using the power of retention to disrupt traditionally offline businesses. We sat down with Zach Goldstein, CEO and founder of Thanx, to discuss this often overlooked but crucial component of revenue growth. Keep reading to learn why prioritizing lasting engagement with customers over short-term sales drivers can lead to more than 20x higher returns.

TBD: From industry white papers to podcasts, what’s been the most interesting thing you’ve learned from the relationships you’ve built with Thanx?

ZG: Well, at a high-level, Thanx is a customer engagement platform custom-built for real-world businesses. We work with businesses with physical footprints from restaurants, retailers, services, businesses, to even malls to help them A) identify who their customers are, and B) build deeper data-driven personalized relationships with those customers.

As part of that, I think the biggest trend that we’re seeing is the digitization of offline. There have been real-world businesses that got disrupted by e-commerce. Around the early days of Amazon, there was a question of whether e-commerce would destroy brick and mortar altogether. The answer is for the most part no. E-commerce has represented a nice addition to brick and mortar, but 90% of spending still happens in the real world. While that’s changing and e-commerce is taking more and more, I think disproportionally we’re going to see real-world stores continue to be the majority of the economy.

What has changed is that real-world stores are having to take some of the lessons from e-commerce. They are digitizing. For restaurants, this category has historically been governed by questions like: Do you have great food?; Did you choose a good location?; Are your service levels adequate? Now, the category is grappling with whether the technology is stackable to compete in a modern digital era. That’s a completely new challenge for these businesses and one that some are really doing well. For those way behind, it may prove to be a real challenge.

TBD: Let’s quickly touch on the white paper that you wrote last year entitled “The Four Horsemen of the Restaurant Apocalypse?”. There’s a lot to digest in that, one critical highlight is the example you made with the travel industry. Timely advice, given the COVID restrictions. What novel shifts are you seeing the restaurant industry take?

ZG: The rapid increase in off-premise, which is how restaurants describe dining occasions that happen outside of the restaurant dining room. Interestingly, off-premise has been a thing for a long time, but if you went back two decades the only way people really did it was through drive-thrus. Now, there’s pickup, there’s curbside service, and of course, there’s delivery. The major disruption that draws the parallel to the travel industry is the third-party delivery aggregators, which have been pouring hundreds of millions of dollars into consumer acquisition for ordering delivery. As a result, these brands are becoming the channel through which consumers increasingly engage with restaurants. That represents both an opportunity for new types of dining occasions, but also a major risk for the restaurants themselves who are being disaggregated from their customers.

One of the themes we’re hearing consistently is that disaggregation is scary to the restaurants. Do they become just a food provider losing the relationship with their customer which has been core to their business for such a long time? Can they sustain the margins that have already been challenging in the restaurant industry while giving away an additional 20 to 30% of their profit to the delivery company? These are big, existential threats for the industry and they’re not going away. Even before the COVID crisis, people were increasingly looking to get food delivered for convenience. That’s obviously just accelerating now, in spite of the fact that the economics remain very uncertain for most restaurants.

Restaurants feel undeniably compelled to be listed on third-party marketplaces because if they’re not, they’re missing out on a major place where consumers are participating. If you don’t participate, you are on the outside looking in. If you do participate, you are giving away huge portions of your margin and control over your customers. While you may be able to make a short-term profit, long-term it’s going to become harder and harder because not having a direct relationship with your customer becomes more and more expensive over time. Restaurants are stuck between a rock and a hard place in this digital disruption and the ones that are figuring out how to adapt are the ones who are making digital a strength as opposed to just waiting for the disruption to happen to them.

TBD: Clearly, there is a need for off-premise now and more digitization. What’s the barrier for these restaurants that prevent them from making the obvious adjustments in your opinion? Why are they relying on third-party services instead of making their own?

ZG: These are largely businesses that have not had to embrace technology in order to thrive. Traditionally speaking, if you opened up a restaurant at the right location and you sold phenomenal food, then you were up and running. The only tech-related issue you had to figure out was a way to accept payment and that’s not real advanced technology. That’s why technology has long been a kind of commodity in the restaurant world and not a driver of revenue. It’s been a backend cost-saving tool. That’s now changing.

Now, your revenue depends on technology and you have to invest. When you think of Starbucks, Chipotle, Domino’s, or Panera, these are brands that have spent tens of millions of dollars building out their technology stacks. The payoff is well worth it too. Amid the current crisis, Chipotle recently announced that its digital sales are up 87% year-over-year. That’s the difference between thriving and struggling, but they’ve done so with huge technology investment. The problem that we come across often is that restaurants are averse to spending money and energy upgrading their technology. That’s a short-term margin optimization strategy, but a long-term problem for their business model.

I think sympathetically about what it means to be a restaurant. You’re not working with a lot of profitability and while it’s true that adding technology will hurt that even more in the short-term, the long-term looks much different. The right digital technology platform allows you access to a huge amount of new revenue streams that can be acquired cost-effectively. This increases lifetime value and ultimately, that technology becomes a small rounding error on the revenue that’s coming through digital channels. You can’t get there unless you make the investment upfront and that’s a mental switch that we see a lot of restaurants struggling to flip.

TBD: In a “normal” setting (pre-COVID), why is having a great product, service, and/or experience not enough to build the type of customer loyalty and retention Thanx aims to produce?

ZG: Customers are more connected than they’ve ever been. They have more access to information. That’s both an opportunity and a challenge. You see brands today that are savvy with their targeting on Facebook and Instagram able to grow from nothing to sizable, even outside of the restaurant and retail world. These direct-to-consumer eCommerce brands – think Glossier or Casper – whose products are probably good, have most importantly figured out distribution. They figured out how to tell their story and acquire customers cost-effectively. As a result, they grew rapidly. The availability of data and the direct relationship to customers that are possible through digital channels makes for a far more competitive environment than what’s previously existed.

As a restaurant, the challenge is how to stand out from the digital crowd where the consideration set used to be what someone would drive by between home and work. That offline competitive dynamic was much more limited. Now, the consumer has a whole world of restaurants that they could think to order from and can deliver from anywhere. Even if they wouldn’t have driven by that place, now it’s part of their decision set and made easier through sophisticated targeting with digital advertising. In order to stand out from that crowd, you have to be much savvier with a message that resonates, that’s personal, and that’s unique. You can’t just do “spray and pray” marketing anymore and expect that customers will pay attention.

Core to what we do at Thanx is a recognition of the 80/20 rule which states that a small number of your customers drive the vast majority of your revenue. Building your business is all about lifetime value. It’s about understanding who are those valuable customers and ensuring that you retain them. That’s more and more problematic. Everyone else is trying to target those exact same high-value customers and that’s where personalization and data come in on determining winners and losers. It’s not really about who most effectively can get a single visit out of a customer. It’s far more about who can most effectively identify and retain who their highest value customers are. That’s the best bang for your buck by far.

TBD: Let’s pull on that thread. Sometimes an ideal customer persona doesn’t match a company’s most valuable customer. How do you identify and define a “best customer” and what’s the measurable impact (LTV) that can be created once identified?

ZG: There’s a lot of what I would consider speculative forms of marketing or aspirational forms of branding. Historically, there was a lot of trial and error that went into that form of brand building. It’s a lot harder to rely on that these days because there’s access to data, which is gold. The answer to “what is my brand, who is my target customer” is available to you. It’s no longer guess and check. You can go figure out the answer. You can talk to those customers.

A decade or two ago, the only way you would have figured that out is if you had an eagle-eye manager who recognized someone who comes in daily and would physically walk up to engage with them. That’s no longer the only way to do this. On a massive scale, you can identify where your revenue is coming from, talk to those customers, and make them feel special. If you’re not taking advantage of that, whether it’s a loyalty program or CRM or multi-channel targeted marketing, you better bet some other brand is doing it with the same person.

You can see why this matters when comparing a customer with a high LTV vs. a new customer. What we see consistently is the difference between a once or twice a year customer and someone who comes in weekly. That’s a 25x greater revenue contribution annually. It sounds insane except it happens with almost every brand we work with. The difference between their average customer and their VIPs is 10-20x, sometimes much more. Those are multiples that matter.

It plays out in terms of the marketing strategy. For instance, eight different messages across the same hundred people based on their previous relationship with the brand has an 8x to 10x higher engagement rate than sending them all the same generic message which gets less than 1% response rate. Yes, it’s a bit more effort with a little bit higher data requirement in order to pull it off successfully, but provides a way bigger bang for your buck. Certainly bigger than screaming out to a faceless crowd with a billboard or a radio ad while crossing your fingers and hoping those people show up.

TBD: Though even if you get it right, retention is naturally limited. People will only eat or shop at a place so many times. What are some innovative ways you’ve seen push that limit? For instance, when we spoke with Chef Rivera of Addo, he described how they push both the menu and experience to become a nearly different restaurant with each visit.

ZG: You’re right, churn is inevitable. People move or grow tired. You’re never going to get it to 100%. The challenge is knowing how and when to engage customers who are at risk of churning. We’ve found that by reaching out to people with a targeted message when they’re at risk of leaving but haven’t yet changed their behavior, provides a much higher chance of re-engaging them than if you came after them many months after they’d already churned out. That’s one type of strategy that we deploy using a kind of data science and machine learning to figure out the predictors of churn and how to intercept people before they’re long gone. Because once they’re gone, it’s a heck of a lot harder to get them back.

Part A of that process is determining what’s their likelihood to be at risk of churning. Then Part B is finding the right message that has the highest likelihood of getting them to come back. That can be done through iterative A/B testing to determine if people like this person are more likely to respond to a “we miss you” message, or incentive, or whatever. I’ve even seen brands have their manager send handwritten notes because that’s still on brand and testing that proved to be more effective at driving back high-value customers than any form of email that they could ever send.

When you think about the what, it varies by your type of customer and your brand. The best way to get there is to test your way through it. Our win-back model helps determine the when and the who to reach out to, which greatly improves the efficiency of the process.

TBD: Have you noticed any universal truth to what works and what doesn’t in those situations?

ZG: The more personalized, the better. That sounds obvious, but it’s remarkable how often people ignore it. If someone can read or engage with your outreach – whether it’s an advertisement or an email or a handwritten note – and feel like it was custom-tailored to them, even if it wasn’t, they are more likely to respond.

Simple things go far. For instance, recognizing the general time I, the customer, visit a business is at lunch on weekdays could mean that it’s close to my office and why I go there often. That’s different from a place which might be open for lunch on weekdays, but I only go there with my family on Fridays and Saturdays. Realizing this should inform the messaging. The relevance has a lot to do with the likelihood of responding. Most brands have this information to craft a more personal message. They are just not spending the time to do it and that’s a missed opportunity.

It doesn’t have to feel like someone targeted this just at you either. That’s not the bar actually. It does have to feel that this is uniquely relevant to me. That’s where we try to focus our customers. How can you ensure that all of your outreach feels uniquely relevant to someone as opposed to painting everyone with the same brush?

TBD: To that point, when talking to existing customers, it’s a fine line between being thoughtful and being a nuisance. How do you navigate customer fatigue with brand and promotional messaging especially within an omnichannel approach?

ZG: That is a good question and I don’t know if there’s a one-size-fits-all approach, honestly. The short answer is it starts with having customer data. Then it’s a matter of mining that data. One of the advantages that Amazon has is its’ information about every single customer and why up to a third of their revenue comes from personalized suggestions that they make about what other stuff you should buy. They know what you’re likely to buy. They couldn’t do that if they didn’t have a complete data record of every customer.

As I think about restaurants, one of my favorite stories is Chipotle. It wasn’t that long ago that Chipotle was in the middle of a massive food scare and their traffic dropped off a cliff. Their stock price did as well. At the time, they had no customer data, no loyalty program, no CRM to speak of, and very few tools at their disposal to get customers back in the door. They didn’t even know who their high-value customers were. As they started recovering from that crisis, Chipotle spent tens of millions of dollars investing in a digital solution, and even during the current crisis, they’ve been successful at driving digital orders. This is a brand that learned its lesson big time and adapted. Now it’s paying off. That’s the story that we’re going to see from every brand, quite frankly, if they’re going to survive.

TBD: How long does it take for a brand that’s not collecting data today to get to a point where they have enough to implement?

ZG: That’s the amazing thing, within 12 months you start having a valuable data asset that you can build around. This is not something that takes a decade-long investment while crossing your fingers. Will a brand starting from scratch within 12 months have Chipotle level data? No. But Chipotle launched its loyalty program and they got 4 or 5 million people in the program within the first six to nine months. That’s critical mass, right? That’s a lot of information that you can work with. You can test messaging, timing, and frequency to find what works and be able to make really concise and decisive moves.

Consider this, there are no restaurants out there who just come up with a new menu item, throw it out there, and capture no feedback about it. That would be insane. You might get a hit and get lucky, but you’re likely to fall on your face. To me, it’s the same thing. You don’t capture the data and then just do the first thing that comes to mind. It’s an iterative process and you have to learn over time. You’re going to be far better in year two than you were in year one at personalization.

TBD: The idea of retention implies a prior purchase, but what about early-stage companies? At what stage do you think a company should be building a retention strategy?

ZG: Day one. Without a doubt, it is now a mission-critical part of building a brand from scratch. Yes, that adds complexity to what it means to launch a brand. Yes, it means you now need to be good at something very different than just making pizzas, but that’s the reality. And this type of thinking goes beyond retention actually. One of the most exciting things that we see brands using our platform for is building look-alike targeting on Facebook and Instagram to acquire brand new customers who share a lot of attributes with the people that are already in their database and love their brand.

One salad shop that we work with gave an analogy that I really like. They’re in a big city and sell pretty expensive salads. Their CEO half-jokingly said, “I really want to know what makes my best customers unique relative to everyone else? In my mind, I envision them to be people who make over $300,000, but they still drive a Prius.” That idea always stood out to me. If you could be that targeted with “who is my highest value customers,” then you can go out there and find every single person that looks like that and tell them that they should be eating with, or shopping with you. That’s far more efficient than trying to scream to a whole world to please come try your business.

TBD: Typically, acquiring a new customer is far more expensive than retaining an existing customer, but you’re describing the idea of applying the data that you’re pulling to retain customers to appeal to new customers. Does doing it in this way level the cost structure between the two?

ZG: Yeah. You’re effectively using your inside knowledge of customers who are likely to become high lifetime value to allow yourself to spend more money on acquisition. Think of it this way, if you’re only acquiring good customers, then it pays off much more quickly. One of the challenges with why acquisition is so much more expensive is because the vast majority of people who you beg, borrow, and steal your way into getting them to try you the first time will not come back. When you add up all the cost of acquiring that one visit, it didn’t get you that much lifetime value. Whereas, if you focus on people who are all highly likely to come back after their first visit, you spend a lot less money to get a lot more revenue.

TBD: With so much data across several success stories, clearly what Thanx is doing is working. What’s kept businesses from utilizing this type of service?

ZG: I think one is absolutely what I highlighted before. There’s a mentality shift from this is “nice to have” to this is “mission-critical to my success.” Yes, it’s going to cost money up front and that’s scary. It’s scary for small, medium, or even large business operators to make an investment that takes time to pay off. It has to be long-term thinkers in order to justify it. That’s probably the number one. What we don’t promise anywhere is, snap your fingers and your revenue goes up tomorrow the day after you implement. That’s not realistic. That’s not how this technology works and not something we can promise.

In many ways that ties back to why these third-party delivery companies have been so successful in getting restaurants on board. They can indeed, snap their fingers, and tomorrow you’ll see more revenue than you saw the day before. That feels good, confirming that it’s a “good decision.” The problem is those relationships are at risk of being bad for your business long-term. Whereas investing in your own direct relationship with customers has negligible near term impact, but long-term it’s your only way to thrive in a digital-enabled world. That’s a tough dichotomy that, historically, sees only the most long-term focused brands thinking about this as a good investment.

TBD: If you were to start a new retail business/restaurant today, what would you do to survive and stand out?

ZG: Interesting. For starters, I actually think now is a great time to be starting a new business in this category. It’s sad to say, but we’re going to see some businesses that are way behind on this forward-looking approach that are not going to make it. Overall, that will create opportunity. There will be real estate availability that hasn’t existed in decades. There will be consumers looking for new innovative brands.

We will see a return to what I would call experiential dining in the restaurant space and more broadly, experiences. I think what we’re going to find are businesses that can actually do both and have really unique reasons for you to go on site. Whether those are games or a special bar or an Instagram experience or whatever it is. A strong, easy enough to use digital platform that people can engage with the brand even when they’re not present will be critical. Historically, that’s been hard to pull off. Brands have gone one way or another. They’ve gone white tablecloth restaurant or drive-thru. I think we’re going to start seeing more hybrids of those types of business models.

That truly is what the modern customer wants. When they go out, they want to have something unique about that experience. Otherwise, it’s not worth it. They’d rather be in the comfort of their home. And when they don’t want to go out, they need the clothes or the food or whatever delivered to them as conveniently as possible. The measure of what’s going to stick post-COVID is very clearly whatever ends up being easiest for consumers, but that doesn’t mean that there’ll be an elimination of special occasions or the unique experiences that people who have been cooped up in their houses are going to be really desperate for.

To keep up with Zach, you can follow him on twitter or visit the company website to learn more about Thanx. For those interested in digging deeper into how the restaurant industry is evolving, check out the insightful interviews on the company’s podcast Food Fighters.

We'd love to hear your thoughts and perspectives @tobedisrupted