By David Norton
On April 16th, 2019, Starbucks implemented changes to the mechanics of its loyalty program.
Historically, the program was successful in engaging customers with 16M participating members and 40% of revenue tied to loyalty members. With version 3.0, Starbucks continues to fine tune the economics and objectives of the program to provide an enhanced customer experience centered around personalization.
Enhancements to the program:
Previous Version: Transactional Design
• Earn 2 stars for every $1 spent
• Collect rewards more quickly: Earn 125 stars to get a food or drink item of your choice
New Version: Increasingly Experiential
• Earn 2 stars for every $1 spent
• New rewards menu allows customers to redeem more quickly
• Earn 125 stars to get a food or drink item of your choice
• 25 Stars: Customize any drink
• 50 Stars: Brewed hot coffee or certain bakery items
• 150 Stars: Handcrafted drink, hot breakfast
• 200 Stars: Sandwich or salad
• 400 Stars: Tumbler, merchandise, or bag of coffee
How do these changes benefit Starbucks customers
& the business?
For Customers: Earn rewards in fast & flexible way
The promise of relevant and rapid rewards is inspiring customers to engage in the program. By removing the Gold barrier to attain rewards, Starbucks is able to increase participation and inspire purchases from infrequent customers who previously didn’t think a reward was achievable. Further, customers are enjoying the flexibility of cashing in rewards immediately for low cost items or saving up for merchandise or other higher end items.
For the Business: Driving Efficiencies & Deepening Brand Engagement
The new rewards menu is enabling Starbucks to better match redemption expense to the cost of the reward. The stars required are closely tied to the retail price, as compared to the old approach where 125 stars could be redeemed for anything from a drip to a more expensive item. Further, they are able to deepen their brand engagement through unique rewards that connect with customer wants and needs.
What are the downsides?
Based on social media commentary from loyal customers, the transition from the old to the new program has been a source of contention due to the challenge that customers no longer feel a sense of achievement and differentiation from getting to the gold level. And while it appears the investment rate has increased slightly on average (from 6.5% to 8% by my calculations) it will require higher spend (20-30%) to achieve higher ticket items like specialty drinks.
Best Practices in Loyalty Design
We have designed and modified loyalty programs for top brands across industries. There are four key principles that we believe in: 1. Creating push & pull, 2. Connecting loyalty and CRM, and 3. Avoiding a linear reinvestment curve, and 4. Celebrating customer achievements.
Creating Push & Pull
We believe a world-class loyalty experience includes not only the pull of a rewards construct, but the sophisticated push from personalized communication that encourages deep brand engagement. In the Starbucks example, this could be encouraging customers to make an additional food purchase or to visit at a different time of the day.
Connecting Loyalty & CRM
There are many examples of powerful loyalty programs that aren’t complemented with sophisticated CRM. There’s an opportunity for brands to increase revenue and connect on an emotional level with loyalty-based CRM that speaks to the customer wants, needs, and interests – while sharing relevant content recommendations.
Avoiding the Linear Reinvestment Curve
A third key principle is that the marketing reinvestment into the customer shouldn’t be linear. This should vary by stage of the lifecycle and annual spend. This should limit reinvestment on low/no potential customers and focus on rapidly increasing customer lifetime value among priority segments. This should also be a mix of programmatic (points based) and surgical – tied to incremental customer behavior driven by push CRM as described above.
Re-investment Needs to be Modeled Correctly
While the changes in the Starbucks program enable people to earn right away, the reinvestment rate is relatively flat as all of the spend is programmatic in their case.
Celebrating Customer Achievements
The final key principle is that there needs to be transparent goals for customers to attain whether they are called tiers, badges, crowns, or anything else. Consumers like to achieve and be recognized for their loyalty. Being able to offer differentiated experiences and services to customers is critical to increasing customer loyalty. We call the motivation for consumers to move up “boundary magnetism”. Think about it this way: in airline loyalty programs, people will choose to take a flight somewhere at the end of the year to ensure they maintain their status or level up to the next tier. This principle can be applied across any industry.
Boundary Magnetism Drives the Pull
Starbucks has eliminated the boundary magnetism component by doing away with the Gold tier, and they are no longer offering experiential benefits to top customers. We are all aware of the value of the possibility of being upgraded on a flight or at the very least being able to board earlier to be able to store your luggage. However, many brands are getting creative in what top customers get, including special content or access to exclusive experiences that are economically viable for the business.
Redesigning a successful loyalty programs is all about finding the sweet spot between engaging customers through valuable rewards and increasing ROI. It’s a complicated process that requires a blend of art and science, starting with a deep data-driven customer understanding.
About the Author:
David Norton is famous for his implementation of the Harrah’s Total Rewards Program during his tenure as CMO of Harrah’s and Caesar’s Entertainment – he now partners with clients to develop best-in-class experiential loyalty programs. He was named Chief Marketing Officer of the year by the Chief Marketing Officer Institute in 2010.