Are you confused as well after looking at the title? Take a look at this case and you will understand how this stands true
In this case, we are going to see how Starbucks first created a market along with a loyal customer base and then launched its loyalty program.
Let's go back to the 1990s where it was assumed that coffee is something that is only had either at home or in the office. Starbucks saw this opportunity and created a market with the concept of having a Starbucks coffee with friends and family while hanging out, they made it about the experience of having a Starbucks coffee. This is how Starbucks created a market and became a giant in the industry and later launched its loyalty program and digital app in the year 2009 under the leadership of Howard Schultz (CEO) and Adam Brotman (CTO)
The Loyalty Program - ‘My Starbucks Rewards’, the loyalty program was launched in the year 2009 along with the Digital Mobile App ‘My Starbucks App’. In order to make the transactions cashless and easier, customers can deposit their money into the Starbucks card or the app and use it to buy coffee later whenever they wish which in turn helps them to earn Loyalty Points / Stars. The collection of these ‘stars’ help the customers unlock great offers and discounts in the future.
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As Starbucks created a very loyal customer base before launching the program, customers have never been afraid to trust the company and hence they do not hesitate before putting large amounts of money into their Starbucks accounts as they feel that ‘they will purchase coffee against the deposited money in the future’. The best part about this deposited money is that it is technically a loan that is collected from the customers but at 0% interest! This is when Starbucks starts acting like a bank. Similar to a bank, it collects large amounts of deposits from its customers but the place where it differs from a bank is that Starbucks doesn't have to pay back the customers in cash, but in coffee. Unlike a bank, there is no withdrawal system for customers to debit the excess money from their accounts in the form of cash. This is what makes Starbucks an unregulated bank.
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One of the best sources of income for Starbucks is the money earned through the loyalty program. Customers all over the world have inadvertently yielded the company over $1.6 billion in revenue at 0% interest. The company also generates around 10% of the loyalty program revenue i.e., about more than $100 million per year on breakage.
Where does the huge amount of money accumulated through the loyalty program go? As Starbucks is not a legal bank, it is not liable to keep a certain sum of money aside like a normal bank in order to give back to the customers. Starbucks just has to make sure that there is enough coffee to be given to the customers as and when they want and thus, they can use this money in various domains like marketing, investments and expansion of the business however they like.
The program not only helps the company earn huge amounts of money but it also helps them to gather data about the customers as in order to become a member of the program, the customers need to give basic details about themselves to the company. The point where the company stands out from its competitors is that Starbucks has made itself highly personalised for its customers. This level of personalisation is possible because the company makes use of Machine Learning and Gamification (Gamification is the process of incorporating game design elements into non-game contexts in order to increase engagement and motivation). The Machine Learning algorithm keeps updating itself as new customers enter their data and tries to make it as personalised for the customer as possible with an aim of making the customer journey unforgettable. From free drinks on birthdays to levelling up on the program with the help of collection of stars, the company taps into the emotions of the customers and makes the best possible use of technology.
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Not only has Starbucks proved to be one of the largest coffee chains to ever exist, but it also has cracked the code of generating revenue with the help of its bank - based model. Here are some impressive numbers :
$1.6 Billion in Starbucks cards / apps in the world
20 Million people are Starbucks loyalty members
50% of Starbucks revenue comes from these folks
All in all, there are a lot of different companies trying to duplicate this model but no company has been able to become as successful as Starbucks till date and this proves that Starbucks is amazing with understanding human psychology.
