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Starbucks reaps reward of rare digital faux pas

Stuart Lauchlan Profile picture for user slauchlan April 24, 2016
Summary:
Starbucks digital savvy has served it well, but changes to the Rewards loyalty scheme have seen it drop the ball with customers.

starbucks-coffee
The incredible success of Starbucks investment in digital tech to drive growth has been a regular theme here at diginomica. But nobody’s perfect, as the coffee giant seems to have proved in the past week or so with changes to its rewards loyalty program.

Essentially, from 12 April, Starbucks Rewards stars are no longer doled out on a one per visit basis, but instead are linked to the amount spent in the store, with two stars awarded for every dollar spent.

The rewards tiering has also changed. Before 12 April, customers would reach Gold rewards level with 30 stars (30 visits to a store); it now takes 300 stars to reach Gold - or $150 spent. ‘Free’ rewards now require 125 stars instead of 12, or $63.

Moreover, stars will now expire if not used after 6 months for Gold members and 12 months for Green members, whereas previously there was no expiry limit.

To say that customers aren’t amused is an understatement:

Starbucks
starbucks

The party line from senior management at Starbucks is that this is early day choppiness as the new scheme takes hold. Chief Operating Officer Kevin Johnson insists:

Loyalty remains the cornerstone of our digital flywheel. And in late February, we announced changes to our Starbucks Rewards program that benefit our most loyal customers by levelling the playing field and rewarding both transaction frequency and total spend. With these changes, we also laid the foundation for customers to earn Stars Everywhere which accelerates the pace at which customers earn rewards redeemable only at Starbucks.

He argues that rewards membership has accelerated since 12 April:

At the end of the quarter, we had 12 million active Starbucks Rewards customers in the US with total program spend growth of 22% year-on-year. We've seen additional growth in active Reward customers since the launch of the new program last week.

He adds:

Just last week alone, we added more than 280,000 new Rewards members. Engaging with these new Rewards members will enable us to accelerate growth of our active Starbucks Rewards customer base.

Johnson pitches the line that the changes also help operational efficiency in-store which in turn will improve the buyer experience:

Besides bringing us new customers, the program also addresses an operational challenge where under the old program, customers would ask baristas to ring up each item individually in order to get multiple stars, a time-consuming process that created additional work for our baristas, slowed service and lengthened lines. By completely eliminating any incentive to order split, we will improve in-store operations and efficiency and increase line speed.

Matthew Ryan, Global Chief Strategy Officer, adds:

In addition to the signups we're seeing, the new people raising their hands to join, we're seeing a couple other very encouraging things. Spend-per-member is up across the board.

Ryan claims that the majority of Starbucks customers will benefit from the changes:

We do obviously track all cohorts of people in our rewards program. There are the people who are going to be better off by the new rules, [there is] going to be the majority of people who are more or less the same, and a small minority of people who will earn rewards a little bit slower. All three of those cohorts are up in terms of spend so far. We see absolutely no difference in the percentage among those three cohorts. So we are not seeing any of the noise that has been speculated on coming to bear.”

Ryan needs to take a look at Twitter in that case:

starbucks

starbucks tweet

New opps

Executives make a further claim that the changes to the Rewards scheme opens up new opportunities when combined with the firm’s mobile app, a new version of which was also released last week. To date, 86% of iPhone customers and 79% of Android customers have already upgraded to the new version.

The firm now has almost 19 million mobile app users in the US alone with mobile payment making up nearly a quarter (24%) of total US tender in the firn’s most recent quarter. Meanwhile Mobile Order & Pay transactions represented approximately 4% of total transactions in the quarter. That’s still a low number, o course, but represents a 40% increase sequentially.

Chief Digital Officer Adam Brotman says:

That's just the beginning of the story with Mobile Order & Pay.

Over 10% of all orders at our busiest 300 stores are mobile orders. We’re seeing mobile orders comprise 7% of all orders at our busiest 1,200 stores. So when you really look at our busiest stores, Mobile Order & Pay is very important. When you look at the busiest peak for those 300 busiest stores, for example, mobile orders are already approaching 20% of transactions at those peak hours.  It's benefiting the overall store performance in all these stores because of the incrementality and throughput unlock.

There are clear benefits for customers, adds Brotman:

Mobile Order & Pay is allowing customers convenience so they can have that incremental visit, incremental occasion they wouldn't normally have time for, but it's also driving a huge capacity unlock because of the program. You take 20% of transactions at peak, out of the line, out of Point of Sale, and you see it benefit all stores and allow customers to benefit from less people in line. [It allows] partners and customers to benefit from the fact that now our partners can concentrate more of their energy on making food and beverage, on connecting with customers, and that's a big capacity and throughput unlock.

The rewards program changes dovetail into this, he concludes:

We added the ability for customers to redeem their rewards in the Mobile Order & Pay flow just 10 days ago. We're seeing great customer excitement about that. We're going to continue to add a large number of new features for Mobile Order & Pay, including favorite stores, favorite orders and recommendations in the flow, all of which will contribute to the growing acceleration of Mobile Order & Pay as we move over time.

What both the Rewards program and the mobile strategy are empowering is a push into new market opportunities, says Johnson. A case in point is a Starbucks pre-paid Visa card, in partnership with JP MorganChase and Visa, that will provide Rewards customers to earn stars at 40 million merchants worldwide. Johnson says:

While the majority of credit cards in use today offer rewards or points, typically with an annual fee, there is no meaningful debit-based rewards card program out there. That means that on more than $4 trillion of annual consumer spending, virtually no one using a debit card is getting rewards. Not anymore. This new Starbucks general purpose prepaid reloadable debit card is unique, and not only is it a win for customers, it is also a win for Starbucks by strengthening our customer engagement and providing us with a direct financial reward for every customer we sign up and leading to attractive interchange rates.

My take

An unaccustomed slip by the Starbucks digital strategist. Of course, it’s early days and people don’t like change. But the bad customer reaction is out there and it does nothing good for Starbucks to take Ryan’s line that he’s not see back blast here. Give it another few months and things may well have settled down, but this is a situation that Starbucks need to track, especially since Dunkin' Donuts just rolled out its DD Perks scheme to make it easy to get free coffee, complete with a bonus scheme for entering a special STARS code.

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