Having lived for 3 years, the current Starbucks Rewards program will end on April 15, 2019. The most direct comparison with the new program is the cost of “a free drink” – raised from 125 stars to 150 stars, a 20% inflation.
Taking the previous revamp into account, from pre-April-2016 to post-April-2019, the program has been through 2 major changes with “points inflation” being the unchanged theme.
Let’s go back and do some calculation.
Program Redesign In April 2016
Starbucks Rewards has been through a redesign in April 2016, which transformed the transaction-based system into a value-based one.
Basically, before 2016, a $1.95 purchase is equivalent to a $5+ purchase in terms of stars earned (1 star; 12 starts = 1 free drink).
Assuming a customer would use his/her stars for a free item with an average value of $5:
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- For a customer normally purchase an item of $2.5 to earn stars, the reward yield is approximately halved:
- previously – 5/(12*2.5) = 16.67%
- 2016 program – 5/(125/2/2.5*2.5) = 8%
- For a customer normally purchase an item of $3.5 to earn stars, the reward yield is cut by 1/3:
- previously – 5/(12*3.5) = 12%
- 2016 program – 5/(125/2/3.5*3.5) = 8%
- For a customer normally purchase an item of $2.5 to earn stars, the reward yield is approximately halved:
This change was resonating with a broader trend in “rewards” offered by consumer-facing industries such as airlines.
American Airlines is the latest major airlines that changed its rewards calculation from distance-based to money-based (announced in November 2015, effective August 2016)
Program Redesign In April 2019
As I mentioned at the beginning, the new program features a 20% inflation in terms of redeeming free drinks.
For dollar values, in the 2016-version, a Starbucks star is approximately worth 4 cents ($5/125); now, it is approximately 3.33 cents ($5/150). [to enhance the utility, one could order a venti drink and add a shot, making free drink ~$9 so a star is worth ~7 cents before and ~6 cents in the new program]
However, better yields could be found in hot coffee/tea.
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- hot tea usually has a price of $2.25/2.45/2.65 for tall/grande/venti size; simply taking it as a $2.5 value, a star = $2.5/50 = 5 cents
- hot coffee (in brewed coffee category) usually has a price of $2.15/2.45/2.75 for tall/grande/venti size; in a venti size coffee, a star = $2.75/50 = 5.5 cents
- there is a brewed product called Caffe Misto, which has a value of $3.35 for venti size, then a star = 6.67 cents
- for lunch items, to make a star’s value above 4 cents, items needs to have a value of $8; and a $10 item for 5 cents value. Those items could be easily found in Starbucks’ new Mercato lunch category
The items above will maintain the value of stars and provide the valuable revenue diversification for Starbucks (especially for lunch items).
Plus, those items usually involve less manual work from baristas. They could enhance the overall productivity for Starbucks stores and increase the profit margin on average.