What Can Restaurants Learn from Netflix?

The Covid-19 crisis has inspired a lot of creative financial thinking on the part of restaurants and small businesses, particularly when it comes to recurring revenue. That’s not surprising. Recurring revenue is the gift that keeps on giving — it’s money that is contractually obligated to show up, month after month, rain or shine. It smooths out the books and provides stability during these uncertain times.

So how do you encourage people to subscribe to your restaurant? The Panera Bread Company, an American chain store of bakery-café fast-casual restaurants with over 2,000 locations, offers a useful case study. Panera recently launched a subscription program offering unlimited hot coffee, iced coffee, or hot tea at all their restaurants for a monthly fee of $9, or about $108 annually. So far it’s a hit, and Panera is planning on rolling out more subscription programs.

So what’s the difference between a subscription and a traditional loyalty program? A lot, as it turns out. The primary difference is that you’re asking your customers to pay. As Zuora CEO Tien Tzuo recently noted in Retail Touchpoints: “Customers should be paying retailers to join loyalty programs, not the other way around. If you think that sounds nuts, just look at Amazon and Costco.”

Not only do paid programs open up new revenue streams for restaurants — which can be invested in new services — but they offer a way for them to establish online relationships, which is becoming increasingly important for small businesses of all stripes. What’s more, paid services invariably have higher usage rates than free programs. Your customer is (literally) invested.

The food blog Grub Street elaborates: “Traditionally, coffee shops and casual sandwich joints have gone with loyalty programs, from buy-nine-get-one-free punch cards to extremely elaborate digital rewards programs. But these are casual relationships. Panera wants to be exclusive. You go to Panera because you’ve already paid for Panera, and while you’re there, you might also buy a muffin.”

What’s more, subscription models are everywhere these days. Consumers are used to them. It’s not a difficult concept to pitch. As Panera’s chief brand and concept officer Eduardo Luz told Adweek. “You just turn on Netflix and it’s there,” he said. “And what’s our version of that? What kind of services or categories would be of interest? Coffee [is] such a penetrated category with high usage.”

If you’re operating a restaurant, you probably already have regular customers who engage with you on a regular basis. The goal is simply to nudge that relationship towards a formal subscription model. To become “exclusive.” So how do you start?

“What’s more, paid services invariably have higher usage rates than free programs. Your customer is (literally) invested.”

First, unpack your pricing.

The goal is to split your basic cost structure into two parts: a fixed monthly cost, as well as a variable, usage-based cost. In the Panera model, the recurring coffee revenue serves as a “platform” for the usage-based revenue generated from other tasty treats. Come for the subscription coffee, stay for the chipotle chicken breakfast wrap.

Second, set yourself a goal to move a fixed percentage of your income towards recurring revenue within a year.

At first, that’s going to constitute a relatively small percentage, and that’s fine. You’ll immediately start noticing how that fixed future revenue stream enables all sorts of interesting plans and ideas: flexible opening hours, text-based order options, merchandise, branded food options, etc.

Third, remember that you can always experiment.

Panera tested their coffee-subscription model in about 150 restaurants across three states before deciding to roll it out nationwide. While you may not have the resources of a major restaurant chain, you can always trial run an idea for a fixed amount of time, or A/B two options against each other.

Finally, focus on the usage.

Start off with something that’s already attracting a steady amount of “engagement.” Panera started with coffee because it was a steady and dependable menu item. Netflix got its start by running well-known TV reruns. The Dollar Shave Club guy decided to build his business around razors for a reason.

All sorts of businesses are moving towards subscriptions these days. Why should restaurants get left out? “Our hypothesis is that recurring revenue based on subscription makes a lot of sense,” said Panera’s Luz. “I believe part of our future is going to involve recurring revenue or subscription-based revenue, which is new to the restaurant world.”