Can Starbucks earn your loyalty with new card?

Published 5:00 am Thursday, June 19, 2008

In 1981, when American Airlines was struggling to differentiate itself in a newly deregulated industry, it invented the frequent flier mile. Ten years later, American Express responded to its own competitive crisis by introducing what we now know as Membership Rewards.

So it shouldn’t come as any big surprise that Starbucks, facing its own troubled times, would also turn to a loyalty program.

Earlier this month, the company flipped the switch on the final piece of its new Starbucks Card Rewards program: two hours of free wireless Internet service a day. The other freebies include syrup and soy milk additions to its drinks, refills of drip coffee and a tall beverage of any sort for people who buy a pound of whole bean coffee.

On a pure dollar basis, all of this doesn’t add up to much. It’s no free ticket to Maui, after all. Starbucks is well aware of this and says that it is just getting started with the program.

So for now, Starbucks Rewards gets a grade of incomplete. But the Starbucks program also serves as a useful example. It demonstrates just how hard it is, in any industry, to build a program that inspires allegiance to a particular brand.

The point of a loyalty program is, first and foremost, to grab a bigger share of customers’ spending. Companies often do this by giving away currency of some sort, like miles or points, that people can trade for free trips or merchandise. Then, the goal is to keep buyers from straying, by offering, say, an elite status with special perks that they must qualify for each year.

Tracking customers through loyalty program account numbers offers companies an additional advantage. “If you don’t have a lot of information on your target audience and you need to get it, then you want to try to encourage people to enroll in as large a number as possible,” said Rick Ferguson, the editorial director at Colloquy, a loyalty marketing firm. Once a company has more data, it can tailor the program further and aim at the most profitable customers with special offers.

Reigniting connections

That’s what Starbucks will try to do now. Sales at stores open more than a year are falling, which has never happened to the chain before. The company blames the economy in part, and worries about consumers trading down from Frappuccinos to black coffee or simply caffeinating at home.

At the same time, it is facing new competition. Having trained us all to appreciate the bolder brews, Starbucks now sees boutique, roast-on-the-premises cafes trying to pick off its more discerning customers. And at lower prices, McDonald’s is adding its own baristas.

So after getting so many of us addicted to the good stuff, Starbucks finds that it isn’t alone in peddling a fix. “We need to reignite the emotional connection between our customers and the brand,” said Brad Stevens, the vice president for customer relationship management at Starbucks.

Can a loyalty program help do that for Starbucks? After all, the average purchase there is 1 percent or 2 percent of the price of an airline ticket. How emotional can anyone really get over a few dollars?

Loyalty experts note that Starbucks has little choice than to try to crack the code, given the sheer number of transactions at stake. “The average American adult makes over 200 restaurant decisions in a single year, versus a few plane tickets,” said Jeffrey Lipp, the president and chief executive of Chockstone. His company helps customers, including some Starbucks competitors, build and run their own loyalty programs.

What he has found is that it doesn’t take a lot to get diners, for example, to do what restaurants want. One Chockstone gambit involves using the customer’s receipt to make an offer. Return within 10 days, perhaps, and you can get a free dessert, the slip says.

“It’s amazing this stuff works so well,” Lipp said. “What we’ve found is that people can be bought for a cookie.”

Card complaints

Perhaps the same will be true for free refills and three pumps of cinnamon syrup at Starbucks. To get the goodies, however, customers must use the Starbucks card.

This card, a run-of-the-mill gift card that many customers choose to reload regularly with money, has become a juggernaut. Already, it is the payment vehicle for one in seven Starbucks transactions, and consumers loaded and redeemed more than $1 billion on the cards in the company’s most recent fiscal year. Starbucks figures it will activate 50 million of them this year alone.

If you want to be part of the new rewards program, you’ll have to get a card. This is a pain. Wallets are thick enough already. Partly as a salve for the added bulk, Starbucks decided to make all its perks available immediately to rewards program members. You don’t have to earn the privileges by spending $50 a month or wait until you’ve bought 10 beverages.

Rewards are nice, but recognition is better. So if I’m one of Starbucks’ best customers, I want to have elite status, as I do on American Airlines. I want shorter lines, better freebies, special seating (Aeron chairs, preferably) and electrical outlets reserved just for me and my laptop.

When I dared express these thoughts in a post on the personal finance Web site FiLife a few months ago, commenters there and on the Starbucks Gossip site called me selfish and self-absorbed and suggested that I get a life. After all, it’s just coffee, they said.

Look, we all want to be recognized for our loyal patronage. I happily plead guilty to self-absorption on that front. And while it is just coffee we’re talking about, Starbucks is a company that others look to as a model. What it does with this program will influence plenty of businesses that deal in higher-dollar products.

And that is why I’m glad to report that Starbucks is indeed considering some sort of elite status. It is also studying ways that card use can speed up your visit and is looking for ways to make the giveaways more generous. Big, ambitious loyalty programs evolve over many years. So it will be fascinating to see what Starbucks adds to the mix.

Alas, special seating may not be part of it. Stevens, from Starbucks, tried to let me down easy on that one. “You’ll probably see us address the line thing first,” he said. “Whether we get into reserving seats, that’s probably not high on our examination list.”

What Starbucks offers

Once you register your rewards card online, these are the four main benefits:

• Get a free drink with beans: Buy one pound of whole-bean coffee at a Starbucks store and get a tall beverage of your choice. This may be the most lucrative part of the rewards offering. The chain’s average price for a pound is $10.75. A tall beverage, depending on the extras, can run $3 or more if you’re not in the rewards program. The return on your purchase could top 25 percent here.

• Add free syrup and soy milk: Syrup normally costs 30 cents. Soy milk or heavy cream are generally 40 cents. Use the card, however, and they are free. The discount here depends on the size of your drink and how much you like to customize it, but it may end up yielding even more than the free-drink-with-beans offer.

But there is some fine print. Syrups are free, but sauces, like caramel, are not. Limited-time beverages like pumpkin lattes don’t qualify for the free add-ons either.

• Free refills: Plain old brewed drip coffee (hot or iced) usually costs 50 cents for a refill. Now it will be free as long as you haven’t left the store and come back hours later. Given the takeout traffic, it’s not clear how many people will find this useful. But there’s no limit on how many times you can go back to the urn. Avail yourself of this one at your own risk.

• Free Wi-Fi: Starbucks deserves no credit for this. Plenty of competitors offer unlimited wireless Internet access. Starbucks’ offer of just two free hours feels piddling.

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