Article

A lesson on loyalty: Where Starbucks went wrong

Brands can learn a lot from the Starbucks reward program controversy — from using best methods in the program development stages, to structuring reward programs to remain flexible, to striking a smarter balance between customer happiness and business needs

April 21, 2016

By John Brueck, SVP of Professional Services, Salient Management Company

Loyalty programs are nothing new and their purpose is quite intuitive — to create happy and loyal customers, which ultimately help a company's bottom line. But what happens when retailers modify their customer reward programs?

Last week, Starbucks gave us a first-hand look at how customers can react when it announced dramatic changes to its reward program. Specifically, the company went from requiring a total of 12 purchases of any dollar amount to requiring customers spend more than $60 to receive a free treat.

From a business standpoint, it appears that Starbucks was making an effort to improve its stores' operational efficiency by eliminating "transaction splitting," a reward program "loophole" in which customers would make separate purchases for each item to earn rewards quicker, resulting in longer checkout times for in-store shoppers. Additionally, it's likely that Starbucks found that the cost analysis of requiring 12 purchases negatively affected its ability to maintain a profitable reward program. While the new rewards process might make financial sense for Starbucks as a company — rewarding those higher-spending customers while upping the ante for free treats — the extreme shift in how it incentivizes consumers could be more damaging to Starbucks' brand image and customer loyalty than it is successful in closing the transactional loophole and conserving funds.

Where Starbucks went wrong

The relaunch of the Starbucks reward program faces a few issues. First and foremost, customers were instantly disturbed by the drastic move from a purchase-driven model to dollar-driven. This completely changes how customers perceive Starbucks incentives and the necessary actions they must take to earn them. By making such an extreme change, Starbucks customers became confused and frustrated with rethinking the process of how they make purchases. In many cases, customers felt betrayed, taking to social media to exhaust their frustration with the new program and threatening to move to Dunkin Donuts' app. On top of this, customers experienced a slew of technical issues from the app update including the loss of hard-earned "stars," further exasperating their negative impression of the "new and improved" Starbucks Rewards.

Some of the negativity from these issues can be traced back to when the updated loyalty program was first developed. While the company likely went through a series of testing before launching the new program, Starbucks could have conducted more robust tests and focus group reaction in order to avoid negative customer feedback and plan for technology glitches from the app.

Administering these in-depth market tests during the development stages always provides a clearer picture of general customer reaction, which could have allowed Starbucks to better anticipate how the new changes would affect buying habits and overall customer attitudes toward the brand.

How Starbucks can change its course by turning to its data

When it comes to winning customers back, Starbucks took a first step by offering "Gold" status to any loyalty member who makes one single purchase over the next few weeks. However, in order to really win back its most loyal customers, Starbucks should look to its massive amounts of data from both point-of-purchase sales and loyalty program members. Combining and analyzing these pools of information can help Starbucks re-engage unhappy customers by offering them targeted, customized deals and promotions. This strategy will help to assuage customers' frustration from the new program and even re-open the door for those customers who may have walked away.

Lessons to be learned for other companies

Brands can learn a lot from the Starbucks reward program controversy — from using best methods in the program development stages, to structuring reward programs to remain flexible, to striking a smarter balance between customer happiness and business needs

Establishing a framework for collecting and analyzing data

When retailers begin developing a loyalty program, it's crucial to first understand what will be working behind the scenes. This means establishing a framework for analyzing and responding to the incredible amount of data that exists between what will be collected from the loyalty program, as well as the immense amount of POS data available. By combining these pools of information, companies have the opportunity to identify the intersection between demand and profitability. Setting up a defined framework allows retailers to continually optimize this equation and truly begin mining the gold that's already there.

Test before you launch

Conducting a series of market and technical tests prior to launching a new or updated program is an important part of focusing company efforts on making the transition as smooth as possible for the customer. As previously mentioned, these programs are meant to create loyal customers — if they don't undergo the proper tests, then the introduction of a new rewards system may have an adverse effect.

Design a more complex program with targeted offers

With the richness of POS data available today, it's possible to design more sophisticated loyalty programs that keep a company's most consistent customers happy, while driving bottom line results. Companies have the ability to use customer data to continually create and update customized offerings. For example, retailers can leverage the information gathered from the loyalty platform to push out customized offers or promotions that are simultaneously appealing to the customer from a "points" perspective and attractive to the company from a margin standpoint. By utilizing this information, retailers not only maintain their current customers, but also have the chance to re-engage those who may have disconnected with their brand.

Starbucks wasn't in the wrong for changing its loyalty program; in fact, the move was likely necessary in order to enhance the profitability of its reward program. However, the success of a loyalty program relies on keeping customer needs and happiness a top priority. For other companies looking to make similar changes to their customer loyalty strategy, this means carefully developing the program, rigorous testing before deploying it and continually finding ways to keep the customer coming back for more.