Starbucks has a new deal where if you pay for purchases with a registered Starbucks card, you can take advantage of a bunch of different rewards. The perks range from free flavour shots in espresso drinks to unlimited refills of coffee as long as you stay in the store.

At first blush, it would seem that the net result of this reward program would be a decrease in sales, and a decrease in revenue. So why would Starbucks do it?

I realized exactly why today as I bought my morning coffee.

One of the nicest perks is the free drink with the purchase of one pound of ground coffee. We needed coffee at home, so I decided to buy a pound of coffee and score a free drink. I don’t often buy coffee from the Starbucks store because we can buy it at the local grocery store instead. So today, Starbucks took in $14 in revenue from me instead of $3.50. That’s a nice increase and all they had to do was give me a free coffee.

The unlimited refills deal works the same way. If I sit in Starbucks for a half an hour and drink a cup of coffee, I’ll have left $1.55 behind. But if they refill that coffee twice, chances are I’ll probably buy one of their new (and very yummy) donuts to go with that coffee. Net result, I’ll leave behind $3.50 instead and they take in double the revenue for the meagre expense of refilling my cup twice.

Coffee is a commodity product. Starbucks used to be able to charge more for that cup because it offered a premium coffee, and a unique experience. But now a good cup of coffee can be found in a multitude of places (including McDonald’s) and the experience is no longer unique. Starbucks has to think different to win in a crowded and competitive marketplace.

On the Internet, the story is similar. Hosting, email and online services are regularly offered for free, or nearly free. The quality of the experience is similar regardless of the price the consumer pays and so the consumer quickly looks to low price as a determining factor when choosing a service provider.

Like Starbucks, providers of Internet services have to explore new and different ways to stand out and offer alternatives that will act as a catalyst to increase revenues.

Offer free web services and users will look at your revenue generating ads. Offer a free domain name and users will pay for hosting. Offer a free blog and users will pay for a Personal Names domain that points to it. Offer hosting extras in exchange for a yearly prepayment or a long-term contract. Offer unlimited domains on a single hosting package and users will buy more domains. Offer a starter package for free and users will graduate into a paid plan.

Some creative thinking can easily translate into increased revenues and better, more loyal customers. Think about it next time you order that tall bold.

Posted on Wednesday, April 23rd, 2008 at 8:52 pm by James Koole.
Filed under: Marketing.
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