Customer Loyalty is something Starbucks pays a lot of attention to, and so do I. As a loyal customer and member of their rewards program, I’ve always gotten a birthday giveaway from Starbucks every January (my birthday month). I love getting my annual freebie! Even if I’m not in a Starbucks groove of regular coffee drinking, come January, I’m psyched. I know I have a month to enjoy my birthday latte. For days, if not weeks, Starbucks will be on my radar screen until I get to the store to claim my freebie. I make a point of going, and every time I think to myself, “classy move, Starbucks.”
Everyone loves birthday presents, right??
For me, birthdays are not about getting stuff. It’s about appreciation, and feeling like my relationship with someone is valued. When someone takes time, energy and effort on my behalf, it means a lot.
When you’re a business, doing birthday outreach can be a big boost for loyalty. IF you do it right. I’ve always been a big fan of Starbucks and their birthday rewards, but this year they managed to turn their business DO into a DON’T.
One free birthday drink enhances my loyalty to Starbucks.
This year, like in past years, I got my email from Starbucks. Woohoo!!
Happy Birthday to meeeee!!!!!
Except, whoa. Hold the dang phone.
I looked at the email, and I looked again. Yup, this year there was a small – but game changing – difference.
Customer Loyalty Programs Need to Be About the Customer First
My birthday is on the 14th.
The email arrived on the 13th.
Now…notice the expiration date.
In other words, Starbucks gave me 2 days to be valued as a loyal customer. Instead of a month. A full 29 days fewer than usual.
Rather than feel appreciated…instead of thinking “classy move, Starbucks,” I thought to myself, “Dang, Starbucks cheaped out this year.”
By giving me such a narrow window to claim my birthday gift, I stopped caring about it. Starbucks wasn’t on my radar screen for the month of January. I felt no pull to go there.
If you change an unspoken agreement with customers, and offer less, people notice. Instead of focusing on what’s there, people see what’s missing.
Is that fair? Maybe not – but it’s a reality business leaders ignore at their peril.
Bottom line – instead of enhancing loyalty, you can lose it.
From Starbucks’ perspective, maybe that’s OK. After all, if I only care about claiming my free drink, maybe it’s a bad deal for them. Right??
Except it’s not.
Most years, when I go for my birthday latte, an additional treat makes its way onto the tab. A goodie for myself, a coffee for a friend. One way or another, I generally walk away with more than just my free drink.
Let’s look at the numbers.
A latte costs Starbucks…what?
There’s the cost of the drink itself (coffee, milk, paper products): Let’s say Twenty cents ($0.20)
Staff time. Three minutes (conservatively) at let’s say $10/hour (which is generous): Fifty cents. ($0.50)
Overhead varies. Let’s say rent, insurance and all other overhead costs add up, conservatively, to another Thirty cents for each drink. ($0.30)
That adds up to One Dollar per drink.
One dollar for a drink that would cost me about four dollars to purchase.
Starbucks invested one dollar in me as a loyal customer. Gave it away. Now consider how many customers are enrolled in the Starbucks rewards program. Millions and millions.
Each of those are offered a free birthday drink. Across all their loyal customers, giving away a dollar per loyal customer is a LOT. Millions of dollars annually.
Reducing the free birthday giveaway offer is a bad business move for Starbucks in both the short-term and long-term.
In the short term, it cost Starbucks a dollar to give me the drink of my choice. And normally, when I go in for my birthday gift, I end up getting something else. A snack. A drink for a friend. Something.
What cost Starbucks a dollar ended up getting them back $4.00 for whatever additional mochalatteliciousness I purchased. So they still ended up profiting on my “free” drink.
But that’s not all.
Changing the terms of the offer impacts long-term loyalty to Starbucks, too.
I’ve been loyal to Starbucks for years. I’ve retained my gold rewards status. I engage in their bonus games. I may not be a daily coffee buyer, and I’m certainly not their best customer, but I’ve been dedicated. When I wanted to go out for coffee, I went to Starbucks.
Now? I’m juuuuuuust a little less loyal to the green giant. Today, I find myself exploring indie coffee shops and experimenting with different flavors from these smaller players.
And Starbucks probably doesn’t even know it.
When a business starts to lose a customer, it generally doesn’t notice until it’s too late.
In this case, I’m not anti-Starbucks. They haven’t “done me wrong.” But they also didn’t help me stay loyal to them. When faced with other options, I took them.
Starbucks may have saved a few pennies on my free birthday drink, but they lost a lot more.
And that’s the danger – and the lesson – for your business.
Retaining customers can be tricky. Without knowing exactly how to create loyalty and retention that works, your efforts can backfire.
Even when you have the best of intentions, a customer retention misstep can do your business more harm than good. That’s bad for customers and bad for you.
I don’t want to see your business ding’d when you’re putting in time, effort and good intentions.
Here are FIVE easy steps for getting the most from your loyalty initiatives.
1) Be Clear About Your Goals:
What EXACT target are you trying to hit?
Starbucks probably started the birthday offer to promote loyalty. To make sure people were dedicated caffeine-heads who were loyal to Big Green for their fix, they celebrated customers’ birthdays in a big way. It was a huge success. If Starbucks had the goal of increasing loyalty, they knocked it out of the park. Clear goal, clearly successful execution.
Here are three goals to consider:
– Customer feeling loyal to the brand.
– Customers making repeat purchase more quickly.
– Word of mouth goals.
Each of these goals would best be supported by different programs. The Starbucks birthday freebie is a great example of a loyalty-boosting program.
To get customers to make repeat purchases more quickly, you’d consider an incentive offer. Buy 10, get the 11th free, is an example of an incentive offer. Another kind of incentive offer is a VIP program.
These incentive offers will differ based on the amount of customer engagement you’re seeking. A transactional business, like a frozen yogurt shop, will likely want something very different from a relationship-based business, like a luxury retail boutique.
To improve word-of-mouth, you’d want to craft an incentive for customers to refer to the business. One client created a special reward gift for customers whenever they make a referral. Once she introduced the offer, and word got out, customers began referring much more regularly. They were happy with their gift, and she was thrilled with the referrals!
2) Think Ahead:
Perhaps nobody realized how successful the birthday rewards program would be at Starbucks.
It’s not hard to imagine someone checking the numbers and saying “Whoa! We are giving away a TON of free birthday coffees. It’s costing us millions in real dollars. Let’s turn off that money hose.”
Giveaways can be expensive!
Instead of keeping their focus on the best loyalty promotion, they shifted their goal. (Maybe they hoped most people wouldn’t notice the change.)
It would have been better for the company to think ahead and consider the impact of success. Had Starbucks thought ahead, they likely would have been able to craft the program in a way that wouldn’t remove rewards from loyal customers, or wouldn’t have made it so obvious. The company has created a few changes in the rewards program that will give them more flexibility to reduce the cost of their freebies.
Instead of offering the same thing, but less they could have found a way to offer something different, equally wonderful, but without taking something away from their loyalists.
When you create your loyalty program, consider how it will impact you when your business explodes and is a huge success.
How will you continue to reward loyalty without losing too much money in loyalty rewards?
3) Understand what loyalty means for YOUR business
For some businesses, like Starbucks, a loyal customer can be someone who buys a drink or food multiple times a day. For a realtor, a loyal customer may be someone who buys three houses in a decade.
Working with owners of independent businesses, one thing I’ve seen is a tendency to over count the frequency of purchases by their customers. It’s easy to remember the loyalists – the folks who come in all the time. It feels good to have loyal customers who love you! This tendency is normal, and grounded in science. It’s called selection bias.
Selection bias is dangerous for businesses because it gives business owners a false sense of loyalty. It is important to understand what’s actually happening in the business.
To combat selection bias, it’s vitally important to track customer activity. Whether you use a POS system or something else, knowing who is buying, what they are buying and how often will give you the insight needed to understand their behaviors.
Understanding your customers will help guide the exact kind of loyalty program you want to craft for your business.
4) Know the value of the upside and what it will cost you
Just as we went through the cost of the Starbucks birthday offer, it’s important to know precisely how much your loyalty offer is giving away.
Consider a clothing store that sends out a 20% off “thank you for your loyalty” coupon.
Let’s say the customer redeems the offer on a $100 dress that cost the store $50 to purchase the dress wholesale. The customer purchases the dress for $80 using your coupon, so the $50 gross margin has been cut by $20.
That’s $20 right off your bottom line.
Now consider the customer who spends $1,000 and uses the coupon.
You’ve given away $20 and $200 in pure profit, respectively. Was that a good investment in loyalty?
Not all customers are created equal. You need a system to understand your customers and how they’ll respond to the offer. Plus, you need a way to consider the cost of your offer today and in the long-term.
Without it, you might be giving away too much – or too little. Your $1000 customer may be a one-time buyer. Your $100 customer may be a brand evangelist who’s responsible for tens of thousands of dollars in sales.
How are you measuring the value of loyalty offers?
To manage the financial impact of a loyalty offer, consider ways to offer promotions with “soft cost” vs. “hard cost” dollars.
Here’s what I mean by that…consider a medispa. They offer everything from laser hair removal to botox injections. What should they offer as a loyalty giveaway?
The laser hair removal. Here’s why.
The botox is a “hard cost.” Each injection costs the medispa real dollars. The laser hair removal machine, in contrast, is a one-time investment to purchase the machine. Each use doesn’t cost the medispa any additional money.
What services can you offer up that create a lower financial impact for your business?
5) Make offers unique to stand out from the crowd
Let’s go back to Starbucks again. They made a point of celebrating customer birthdays at a time when few retailers were doing birthday loyalty recognition. They stood out from the competition by offering something real and valued by their customers. The offer was about THE CUSTOMER and created a mental relationship between birthdays and Starbucks. It was a smart offer – cool, interesting and different.
Were they the first business to celebrate birthdays? No! But the way they did it made people take notice.
Let’s face it – most customer experiences are pretty lousy. So a little attention goes a long way.
Find a way to make an impact that’s aligned with who you are as a brand and unique in your market.
Buy 2 get 1 free may encourage customer to purchase more today, but does it promote loyalty for the long term?
Creating a memorable experience for your customers will go a long way toward building a deep relationship with customers that’s a win-win.
Amazing, value-based experience for them. A foundation of loyalty, retention and profit for your business.
And for the sake of all that’s precious in this world…do not give to your customers and then take away! We’ll just call that the “Starbucks Rule” of what NOT to do in the world of customer loyalty.
Let’s talk to find out what gets in the way of customer loyalty for your business – schedule some time with the Alignmint Team!