Nowadays cash back and reward programs are ubiquitous in customer-facing industries. The humble beginnings of one of the industries pioneers can be traced back to the 2001 holiday season when Starbucks launched its first re-loadable gift cards. The cards featured imagery of white snowflakes, potentially foreshadowing that soon, just like no two snowflakes, no two Starbucks customers’ experiences would be alike!
While the re-loadable card program was a success and laid important groundwork the real success story starts 10 year later with the launch of the Starbucks Card mobile app which enabled mobile payment and assigned a persistent digital identity to each customer.
How does the Starbucks Rewards program work?
The in-app currency Stars is the centerpiece of the Rewards program. Customers are rewarded stars for completing specific actions. The primary action is simply spending money in the Starbucks ecosystem. Per dollar spent customers are awarded 1-3 Stars, depending on the payment method (more on that later). Stars can finally be redeemed to purchase products e.g. 25 Stars for a drink customization, 50 Stars for a brewed hot coffee or bakery item or 400 Stars for select merchandise items. Customers can earn additional Stars by completing challenges (e.g. buy a coffee every day of the week, buy a lunch box on Wednesday), making use of Double Star Days or by taking part in games.
The Rewards system gives customers a clear incentive to link every purchase in the Starbucks ecosystem to their Rewards account. This gives Starbucks the holy grail of customer data: Full transaction history of personally identifiable customers across their entire ecosystem.
Traditional marketing approaches rely on segmenting the customer base into a subgroups (e.g. by age, gender, estimated household income, zip code) and then targeting each subgroup with hand-designed marketing strategies. Objectively estimating and comparing the effect of different marketing strategies is a time-consuming and inaccurate endeavor. Their enormous amount of data allows Starbucks to revolutionize every aspect of this process. Each customer can be individually targeted with a marketing strategy (challenges, double reward opportunities, games, etc. offered at the most opportune time) that is automatically designed by a marketing engine based on analysis of existing data. By analyzing the resulting transaction data the strategy can be clearly evaluated with regards to any metric (e.g. revenue, profit margin, customer retention). The resulting leanings are fed back to the engine and will be used for more effective targeting of all customers.
Effects of the Rewards programs
If imitation is the sincerest form of flattery, then the current ubiquitousness of reward apps and programs is the strongest testament to the success of Starbucks pioneering Rewards program. Looking at the numbers further supports that sentiment.
As of 2020, almost 20 million customers have signed up for the Starbucks Rewards program and it accounts for an impressive 50% of their entire revenue (https://stories.starbucks.com/press/2020/starbucks-reports-q4-fiscal-2020-results/).The Rewards program contributes to Starbucks strong customer retention and brand loyalty. 71% of Starbucks app users are visiting a store at least once a week and furthermore, app users are 5.6 times more likely to visit a Starbucks every day (https://www.numerator.com/resources/blog/mobile-mastery-insights-starbucks-app).This can be attributed to the improved customer experience. Their data-driven approach allows Starbucks to show customers only offer that are relevant to them and the strong gamification provides another engaging element.
Lastly, the Rewards program has lead to an unique side effect that deserves to be mentioned. Starbucks encourages customers to preload money on their account or Starbucks-associated credit card by offering increased Star rewards per $. The sum of this pre-paid money across the user base amounted to an incredible $1.2bn in 2016 and has since grown to $1.5bn which means Starbucks holds more cash than most banks and payment providers in the US!
This money is basically an interest-free 1.2 billion dollar loan. Yet, it is not subject to any of the usual regulation for loans and securities – there are no minimum liquidity requirements and creditors may be paid back exclusively in coffee, bagels and mugs.
To sweeten that money frappuccino even further, around 10% of that money will end up being breakage, i.e. it will be entirely forgotten/lost by the customers and never redeemed. Each year Starbucks reports more than $100 million of breakage income (https://stories.starbucks.com/press/2020/starbucks-reports-q4-fiscal-2020-results/). Who wouldn’t want to have such generous customers?