Trouble Brewing at Starbucks? CMO David Norton Shares His Thoughts on Their New Rewards Program

By: David Norton

By now you’ve read about the changes Starbucks is planning on making to its Rewards program this April. You’ve likely been amused by the reactions expressed by Starbucks zealots on social media. Clearly, the loyal drip coffee drinker is not pleased that it will take 2.5x times the spend on their regular brew to earn the same amount of rewards.

This dramatic change highlights why it’s so important to get the construct and economics of a loyalty program correct right out of the gate. Substantial modifications can lead to feelings of mistrust from customers and have a negative impact on employee morale as they deal with complaints. Many have lauded the Starbucks Rewards program since its launch in 2009 and I’m sure Starbucks has been thrilled by the adoption of mobile payment. However, the economic challenges it brought on might have been predicted given the extreme frequency of visits from their most loyal customers. The operational issue of split transactions has been highlighted as one reason for the change, though that is secondary. In the casino language I’m familiar with, my thesis is that the reinvestment rate of likely 16% in the old scheme was untenable from a profitability perspective going forward. Therefore, Starbucks lowered it to 6.4% in essence, though there may be new ways to earn Stars in the future that will increase that rate. The relative transparency of the program has enabled numerous publications and customers to do the math and see what type of customer is impacted and by how much. Starbucks is not the first company to make this kind of change — airlines have historically changed their approach to incrementally reward higher fares.

The old design of the Starbucks program violates some of the core loyalty principles we believe in at GALE Partners as we help our clients conceive and modify their programs. The first principle is that it’s best to tie reward amounts to profitability. Second, as much of the marketing spend as possible should be surgical — that is, tied to incremental spend and behaviours. Spend that is programmatic and associated with purchases the customer would make anyway should be avoided. Finally, tiers that provide aspirational benefits, experiences and services that customers often value more than points are a critical component of any loyalty program. If developed properly, the cost of delivering differentiated benefits will not be directly correlated to the spend the customer gives you. That is, tier benefits should be much more economically viable than points and will lead to even greater satisfaction from your best customers. For Starbucks, a few ways of personalizing the experience of best known customers come to mind. For example, having their favorite drink ready at the time they arrive every day.

It will be interesting to see how things evolve for Starbucks before and after April 1st. There will be a lot of noise, but I am sure they will be just fine as ultimately people make their regular visit for the fantastic ambience and experience.

David Norton is Chairman and CMO of GALE Partners. He’s famous for his implementation of the Harrah’s Total Rewards Program while serving as CMO at Harrah’s and Caesar’s Entertainment. He was named Chief Marketing Officer of the year by the Chief Marketing Officer Institute in 2010.