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Why did Starbucks change its loyalty program?

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Why did Starbucks change its loyalty program?
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What you need to know about the changes to My Starbucks Rewards

Earlier this week, Starbucks announced changes to its My Starbucks Rewards program that will take effect in April 2016. The changes were made public in a conference call featuring Starbucks executives Scott Maw, CFO and Matt Ryan, Chief Global Strategy Officer.

The fundamental shift in program structure was to begin rewarding program members for every dollar spent in a Starbucks, whether on drinks, food, merchandise, or other items. Today’s program rewards a single Star for each visit regardless of the total check, while the new program will reward 2 Stars for each dollar on the check.

The move is significant as it shifts emphasis from visit frequency to customer value, a trend that loosely follows the moves made by frequent flyer programs last year, in particular the changes Delta Airlines made to Skymiles.

Starbucks stated that the program had been plagued by members splitting transactions to earn more stars. For example, if you’re the chosen one picking up 4 coffees for the office, why not ring them up separately and collect 4 Stars, rather than earn 1 Star for the same amount of money spent? This transaction splitting caused check out lines to slow down and resulted in frustration for both customers in line and the Baristas serving the counter.

Awarding Stars based on transaction totals removes the need for customers to engage in “Star Hunting” through this work-around and is intended, in the words of Matt Ryan, to “increase customer satisfaction and encourage more customers to join the loyalty program”. That all sounds great, but what do you really need to know about the changes to Starbucks Rewards?

  1. Starbucks has made a conscious decision to allocate more program value to higher value customers. Sorry to crush the moans of all the people posting about how “Starbucks Sucks”, but it is not only within the company’s right to make this change, it is one that I fully support in order to align the objectives of the program with the long term financial health of Starbucks.
  2. In making the change, Starbucks has also made a statement to “Pure Coffee Customers”, that is “you had better stop in more often, start buying fancier drinks, food, mugs and other stuff, or you are not going anywhere with this program”.

I define a Pure Coffee Customer as one who orders a brewed coffee drink only, no food and no upgraded items are purchased. The impact of the just announced structure for these customers is this:

  1. For the customer whose average check is $2 based on purchase of a Grande Brewed Coffee, it will take 75 visits to reach Gold level, up from 30 at present. I’m pretty sure that equates to 2.5 times the number of visits!
  2. To redeem a reward, a member must spend $62.50, up from $24, another whopping increase.
  3. Maybe the most burdensome impact on the Pure Coffee Customer is that it will now take between 15 – 16 months to earn a reward (based on the illustration), up from about 6 months in today’s program. With the trend in loyalty programs towards faster earning, liquidity and availability of rewards, 15-16 months is too long for most members to wait and remain engaged with the program.

Starbucks is well within its rights to make these changes, but there is risk in the strategy, and possibly a slight contradiction to companion goals that were announced.

  1. The risk is that Pure Coffee Customers will just fade away, opting for a $2 large coffee at McDonalds rather than paying $2 for a Grande (medium) coffee at Starbucks. It is just an illustration with the point being that Starbucks Rewards will cease to be a motivating factor for this segment of customers. Starbucks hopes that many among this group will increase their visit frequency and average purchase amount, but there has to be a large segment of program members who will not budge.
  2. The contradiction is this: Mr. Ryan stated that “the REAL benefit will be to increase customer satisfaction and to encourage more customers to join the loyalty program”. The elimination of tier structure (Welcome Tier was eliminated) was also meant to add simplicity and make it easier for new customers to enjoy the program benefits. The challenge will be to onboard customers who may be Pure Coffee Customers today but have potential to grow into something more valuable. How many in that group will give the program a try if they realize that they won’t be rewarded strongly based on their natural coffee preference?

Despite all the focus on the changes to Starbucks Rewards, I haven’t even mentioned the most important part of the announcement this week. I’ll share that in a follow up post later this week.

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