Loyalty Rewards Case Study – New Starbucks Rewards Program
Starbucks Rewards, a loyalty program launched by Starbucks has been one of the most successful implementations of a loyalty and customer retention strategy. It has been instrumental in propelling Starbucks to .16 billion in revenue and a market cap that exceeds $80 billion.
The new Starbucks Rewards program was launched on April 12, 2016 and it replaced the previous loyalty rewards program named My Starbucks Rewards. The main differences in the two programs are highlighted below.
The simple reason for the change was that the older program gave the customers a star for each visit regardless of the spend level. This resulted in high incentives for low spenders. By moving to the new loyalty program, Starbucks aligned the customer benefits with their spending levels. In the new program, customers who are high spenders ($5 or more per visit) will earn rewards faster than before.
How does the new Starbucks Rewards Work?
The new rewards program is a classic example of how a company realigns its loyalty rewards program with customer spending levels.
1. Reward: 2 stars for every $1
Customers are rewarded 2 stars for every dollar spent on any drink, food, or other item at Starbucks. The more money they spend, the more stars they earn.
2. New Tiers: Green, Gold
Customers are enrolled into the Green tier upon sign-up. They will then need to earn at least one star per year in order to maintain Green status. Once a customer earns 300 stars, the customer is upgraded to the Gold tier. Gold customers must earn 300 stars every 12 months to maintain their status. Starbucks is therefore encouraging customers to spend at least $150 per year in order to maintain Gold status.
Becoming a Green member comes with the benefits of a free drink on the customer’s birthday, free drink refills in-store, and the ability to pay by phone and order in advance so the customer can avoid waiting in line. The downside is that, while they are earning stars with each dollar spent, the stars are worth nothing until they reach Gold status.
Once members reach Gold status (300 stars), they earn a free drink for every additional 125 stars. If spending $62.50 is required to earn 125 stars and a free drink is worth $5, then the approximate payback percentage for Gold members is 8%. However, considering that a customer must reach 425 stars (or spend $212.50) each year to earn their first free drink, this 8% payback percentage can be a little misleading.
Why do customers like the Starbucks Rewards program?
Starbucks is making it easy for customers to earn rewards! Customers load up pre-paid balances on their Starbucks app, making it quick and simple to make in-store purchases. Their reward summary is shown on the app.
1. Getting something for FREE
Customers who were going to drink coffee anyway are now receiving something for FREE! Customers appreciate goodies like free drink refills, a free birthday drink, and the ability to pay using the phone app. Getting 2 stars for every dollar spent (while it doesn’t mean much until Gold status is achieved) creates a feeling of appreciation and anticipation.
2. Elite Gold Status for High Spenders
High spenders love this program. Once they earn 300 points to reach Gold status, they are rewarded with a free drink for every 125 points earned. Customers will often pay for their friends just to earn the stars needed to get to Gold status.
On the other hand, some customers are unimpressed by the new program because it requires them to spend more to earn rewards. The payback for low spenders is negligible.
3. User Experience
Starbucks has created a fun and engaging user experience in their mobile app.
Why does Starbucks love the new program?
Starbucks loves the new program because it is aligned with user spending. It encourages higher spending and collects copious amounts of valuable user data.
1. The More You Spend, The More You Earn
The new program is directly aligned with high spenders. For Green members, there is very little payback in terms of free drinks. For Gold members, the payback percentage is close to 8%.
The video below presents an interesting comparison of the payback percentages between the new program and the old program.
2. Getting More Users to Download the App
The new loyalty rewards program is getting users to download the Starbucks app. Customers are pre-loading the app with dollars to facilitate in-store purchases. When customers visit the store,an in-app balance encourages greater spending compared to when payments are made in cash or credit card.
Additionally, the app is collecting data on user behavior, spending patterns, and locations. This is giving Starbucks a wealth of new information on customer behavior, enabling them to better target their customers.
How could the Starbucks Rewards program be improved?
The perceived payback for Green members is very low. The benefits are rather unsubstantial. Therefore, unless Green members feel they have a shot at getting to Gold status, they have very little incentive to spend $150 per year.More people will stagnate in the Green tier and may experience some dissatisfaction.
Here are a few tweaks that would improve the Starbucks Rewards program significantly.
1. Give Green Members Free Drinks
In addition to the current benefits, give Green members a free drink for every 200 stars, rather than having their stars count only for the Gold level. This will have the following benefits:
a) No one will feel left out. They will all feel that they have a shot at earning a free drink.
b) Most Starbucks customers will get to 100-150 stars easily. By creating an achievable goal of 200 stars, these customers will now become higher spenders.
c) Once users reach the 200 stars level, they will naturally try to get to 300 so they can become a Gold member and earn drinks more frequently!Thus the program will gradually convert casual, low spending customers into regular, high spending customers.
2. Award Surprise Bonus Stars to Gold Members
Gold members should be made to feel special and appreciated. Occasionally granting extra, unexpected stars will create excitement and anticipation. It will also create plenty of viral social media mentions from excited users! Zappos does this very effectively – they surprise customers by randomly upgrading them to one-day shipping. It creates customer happiness and boosts loyalty.
3. Award Stars for Referrals
Starbucks should award stars for activities other than purchases, such as referrals, for example. If Starbucks awarded 125 stars for referring a friend to download the app and make their first purchase, customers would be encouraged to spread the word and get their friends to sign up and make purchases. It would cost Starbucks merely a free drink to get a customer’s friend onboard, which is a small price to pay for acquiring a new loyal customer.
4. Allow Family Accounts
It is common for every family to have multiple Starbucks lovers. By allowing them to create a family account and pool their points, they will all be encouraged to spend more. The bar for numbers of points needed to earn free drinks can be raised slightly with every new family member added.
The Starbucks Rewards Program Rocks !
The new Starbucks Rewards program is one of the top loyalty rewards programs in the world. It significantly reduces the probability that customers will buy coffee at another store. I give the Starbucks Rewards program top marks for creating an amazingly engaging user experience. With a few minor tweaks, the Starbucks Rewards program could create a rush of Green members striving to achieve Gold status. The suggested improvements will encourage greater user spending to achieve accelerated reward levels.