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Chipotle's Rewards Program Is so Flawed They Don't Know Who Is Eating Their Free Burritos You can't just throw free burritos at the problem, Chipotle. The reactive marketing plan is too little, too late.

By Zach Goldstein Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Bloomberg | Getty Images

Chipotle, I love you, but you've screwed up big this time.

After over a year of food safety turmoil (and now wage theft allegations), Chipotle has been working hard to woo back customers: they've tried free burritos for all, a short-lived rewards programs and promises that they'll "do better next time".

As Chipotle's stock continues to struggle and forecasts become increasingly bleak for the once-unstoppable burrito chain, it's clear that whatever they're doing isn't working. Grand gestures such as free burrito giveaways are falling flat (while gnawing away at margin) and while everybody loves free stuff, giving away food to anonymous people doesn't drive long-term business -- it encourages deal-seeking, opportunistic behavior by consumers. The increase in volume is temporary, a band-aid on a wound that goes much deeper than temporary revenue can address.

The glaring issue here is that Chipotle took its frequent customer base for granted while times were hot. Former CMO Mark Crumpacker was firmly against investing in loyalty, stating "We don't believe the general supposition that loyalty will make less-frequent customers more frequent." They happily spent their marketing dollars on new customer acquisition, including billboards, radio and even food festivals and iPad games. But now, times have changed for Chipotle, and they're really missing those once-frequent customers: According to Eater, Chipotle has taken the largest hit in sales from what it would consider its loyalty customers, or those who visited more than 25x/year.

Related: Chipotle's E. coli Outbreak Brings Company Down to Earth

Customer retention isn't just a "nice to have" initiative, it's a no-brainer: a 5 percent increase in customer retention equates to an 80-100 percent increase in profitability. Companies like Starbucks and Chick-fil-A know this well, and as a result they've crafted highly successful loyalty programs based on strengthening relationships with their frequent customers. Chipotle is missing out on the customer data that could have helped them pull out of this nosedive, because they never bothered to collect it while things were going well.

Deliberately gathering customer data empowers restaurants to make smart decisions about how to interact with their customers. More importantly, it allows brands like Chipotle to identify which customers to interact with. In the restaurant industry, 25 percent of customers account for more than 66 percent of revenue. If it were my marketing dollars on the line, I'd be pulling out all the stops for these customers. Industries, like travel, that have been studying loyalty for decades, are doing a great job treating their highest tier customers like royalty. They use the information they have on these VIPs to ensure their loyalty and increase their customer lifetime value. Without customer data, Chipotle is essentially flying blind, sending mailers to the entire country and hoping for a return on investment. It takes 7x more money to get a new customer than it does to reactivate an existing customer, however this option is only available to companies who actually know who their existing customers are.

True customer loyalty is the foundation of any business. Chipotle failed to engage their loyalists in a meaningful way, which is why their revenue so quickly eroded after facing hard times as a company. Proactive customer retention is an insurance policy against hard times. By identifying your loyal customers and keeping them happy, you protect yourself against the fickle market. Instead of temporary rewards programs and indiscriminately throwing free product at random people, Chipotle should be throwing their resources towards building a platform that identifies and engages their best customers.

Related: Chipotle Is Spending an Astronomical Amount of Money on Free Burritos

There's a cautionary tale here for restaurants who want to learn from Chipotle's mistakes: don't neglect your loyal customers. Prioritize collecting customer data, communicate with customers in a way that's meaningful to them, and identify your VIP customers. Make them feel special, encourage increased spend and repeat visits. Had Chipotle invested in engaging and retaining their frequent customers while times were good, their loyal customers might still be around, keeping them afloat during this disastrous time for the company.

Zach Goldstein

Founder and CEO of Sequoia-backed Thanx

Zach Goldstein is the CEO and Founder of Sequoia-backed Thanx, a customer loyalty and retention platform for multi-location businesses, which equips restaurants and retailers with the ability to capture customer data and deliver personalized customer experiences. Goldstein’s experience in the loyalty space goes back to 2005 at Bain & Company, where he helped companies perfect their retention and reward strategies for five-plus years. He founded Thanx in 2011.

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