Star Math


What follows is a moderately paraphrased conversation I had yesterday with my wife, Meredith, who loves Starbucks as much as I do... and possibly more.


Meredith: "I have a Star Streak on my account right now... if I make five purchases, I'll get 150 bonus stars."


David: "That's one free coffee."


M: "Right!"


D: "So... you have to buy five coffees to get one at no charge. And your average coffee costs around $8... so you're spending $40 to get $8 for free."


M: "Well, when you put it that way, it doesn't sound like such a great deal. Maybe I should use my Stars to pay for my Oat Milk instead?"


For the uninitiated, Starbucks has recently begun offering Oat Milk, which Meredith absolutely loves in her lattes. Starbucks charges an extra $0.80 for everything that's not "regular" milk -- i.e. Almond Milk, Soy Milk, Lactose-Free Milk, and now, Oat Milk -- but you have the option of using 25 Stars to pay for any alternate milk selection instead.


Now, here's the interesting part.


"How much is a Star worth, anyway?"


That, my friends, is the magic of the Starbucks Rewards program: they don't use actual currency for their rewards, they use "Stars". And the value of a Star depends entirely on how you choose to use it... so nobody really knows what one Star is actually worth.


But you can approximate, if you care to make some assumptions and do some math.


D: "This is the way I think about it... you can use 150 Stars for any drink you want, regardless of how much it costs. The most expensive drink I order is just under $9 with tax*, and to maximize my reward value, I never use my Stars for anything other than that drink. So for me, 150 Stars is worth about nine dollars... and that's $0.06 per Star."


M: "Okay, well, I usually save my Stars for when I bring get you a drink, because your drink is so expensive! So if I say a Star is also worth $0.06 for me, and I would need to use 25 Stars to pay for my Oat Milk... that works out to $1.50. But the up-charge only costs me $0.80! That's not worth it at all!"


And it's not, clearly.


But very few people are every going to do Star Math.


Which means that when Starbucks offers games and issues challenges to entice customers to earn Stars with fluctuating value, the company will typically win.


The effective gamification of the Starbucks Rewards program leads people to use their Starbucks cards more frequently. And that results in two other huge wins for Starbucks, which I make a point to share when I teach the module on Loyalty & Retention in my MBA Retail Marketing Strategies class.


I'll share those wins with you now: according to it's 2018 Annual Report, Starbucks had approximately $1.6 billion USD in "stored value card liabilities", and breakage of "$155 million, equal to approximately 10% of all card balances.


What does this mean, in English?


It means:

1) Customers, by loading money onto their Starbucks cards in advance of them actually using the money to buy stuff, effectively loaned Starbucks $1.6 billion at a 0% interest rate, and,

2) Those customers collectively forgot about $155 million, which went straight to Starbucks’ bottom-line.


Am I saying that you should never use Starbucks cards?


Not at all! I'm saying that if you have a loyalty program, you should make note of how Starbucks gets its customers to think in terms of "Stars Earned" instead of "Dollars Spent". And how they take advantage of a floating currency to their benefit, such as offering redemption rewards at wildly inflated prices.


I'm also saying that if you're going to use a loyalty program, it helps to understand how it works.


For example, because I pre-load my Starbucks card with money from my credit card -- thereby contributing to that $1.6 billion I mentioned above -- I earn two Stars for every dollar I spend instead of just one. That means I'll earn 18 Stars on every $9 drink, and at a practical redemption rate of $0.06 per Star, those 18 Stars are worth $1.08. Now, if I'm earning $1.08 on a $9 drink, that's a reward rate of 12%, compared to most reward programs that will offer you anywhere from 2-5%. Is that worth it for me? Absolutely.


You can game the system if you understand the game.


And you're willing to do a little bit of math.


- dp


* If you're wondering, this time of year my Starbucks beverage of choice would be a Quad Venti Non-Fat Pumpkin Spice Latte with Whip. It's $7.45 plus HST, which works out to $8.27. I rounded that up to $9 because I'm spending more than $8, and I typically want to deal with round numbers.