Dunkin’ Donuts Perks Up Loyalty Battle With Starbucks

Starbucks has one of the most successful customer loyalty programs going, and now its coffee competitor is attempting to launch a rival program.

Mar 26, 2014 at 12:52PM

If imitation is the sincerest form of flattery then Starbucks (NASDAQ:SBUX) should be very flattered. Dunkin' Donuts (NASDAQ:DNKN) -- Starbucks' biggest coffee shop competitor -- has begun advertising its DD Perks plan, which looks an awful lot like the Starbucks' Rewards program.

The Dunkin' plan was announced in late January and integrated into the company's smartphone app in late February. It's being advertised heavily currently. The program lets customers earn points for every dollar spent, which ultimately leads to free beverages exactly like the Starbucks program does.

Dunkin' Donuts DD Perks versus Starbucks Rewards

The Starbucks rewards program uses three tiers. Basic members (basically people who have just signed up) get a free drink or food item on their birthday along with a 15% off coupon for the Starbucks online store. This level also gets email coupons and special offers in the Starbucks app as do both higher tiers (though the offers may be different). Earn five stars (by making five purchases) and you add free in-store refills on brewed and iced coffee as well as tea. The real perk comes when you collect 30 Stars within 12 months. That brings you to the Gold level where in addition to all the other benefits you get a free drink or snack for every 12 stars you earn. Gold customers also get mailed a special (albeit kind of cheesy) gold card signifying their lofty status.

Stars can be earned at participating Starbucks, Teavana, and Evolution Fresh stores, or by entering star codes from specially marked Starbucks products at grocery stores.

The Dunkin' Donuts program is similar but not exactly the same. First, the Dunkin' program is not tied to tiers and removes the status aspect of the Starbucks program. That may be intentional as Starbucks clearly wants its customers to crave the status of a gold card and that type of status-seeking may clash with Dunkin's everyman brand image.

"Your barista will know you're somebody special when you place an order," according to Starbucks.com.

Dunkin' has always marketed itself as a more blue-collar brand and treating all people equally -- not giving them status levels -- seems like a logical play.

As for the actual rewards Dunkin' offers more than Starbucks for entry level customers. Just signing up for the DD Perks program earns you a free medium beverage as well as a second one on your birthday. After that customers earn five points for every dollar spent and get another free beverage for every 200 points they earn. Much like Starbucks the company will also send its members special offers including ways to earn bonus points. Dunkin' does not however offer free refills, which is a pretty nice perk from Starbucks for the people who use its cafes as remote offices.

Is Dunkin' Donuts Perks or Starbucks Rewards a better deal?

The free beverage for signing up from Dunkin' Donuts is a nice perk but since the company is starting from scratch it makes sense to offer a little something extra. Since both companies offer free beverages on your birthday the real difference is in how customers earn further rewards. Starbucks puts up a high barrier to be eligible, requiring customers to earn 30 stars before being eligible for the "12 stars equals one free drink" plan. Dunkin's plan of offering five points for every dollar spent and a free drink every 200 points means customers must spend $40 to earn a free medium beverage.

Starbucks' plan is a little less dollar specific as stars are earned for any drink, snack, or other qualifying purchase. That makes it harder peg exactly how much a customer has to spend to get a free drink. Starbucks' drink prices vary by region (and sometimes even within a city) but if you assume an average price per drink of $3, a customer would only have to spend $36 to earn a free beverage. For anyone drinking brewed coffee (not any of the fancier beverages) that makes the Starbucks app a comparable or slightly better deal. Move up to a $4 drink and you must send $48 to buy 12 beverages and a $5 drink raises your expense before reward to $60.

The Dunkin' deal is a little more clear -- spend $40 and get a free medium drink. The Starbucks deal is more variable as you could earn your stars buying low-priced tall (small) coffees and redeem your rewards for a venti (large) Caramel Macchiato, which costs much more. 

Do customer loyalty programs work?

Starbucks certainly did not create the concept of a rewards plan and while the company has seemingly had some success with it, research shows that many customer loyalty plans may not actually work.

Authors Grahame R. Dowling and Mark Uncles did a case study for the Massachusetts Institute of Technology's Sloan Management Review that suggests that the programs "do not fundamentally alter market structure and, instead, increase market expenditures without really creating any extra brand loyalty." The pair, which conducted a review of behavioral loyalty research, found that for "any loyalty program to be effective it must leverage the value of the product to the customer."

The authors cite the way General Motors' rebate program helps users build up savings toward a new car as an example of this. 

Both Starbucks and Dunkin' Donuts appear to be meeting this standard for a successful customer loyalty program. Both leverage the value of a cup of coffee to its customers as a way to get them to keep coming back. 

Will loyalty programs decide the coffee wars?

Both companies are now offering similar reward programs, which takes away what was once a competitive advantage for Starbucks. This is a move Dunkin' had to make as whatever portion of customers would consider shopping at either brand might have been swayed by Starbucks offering a kickback. Realistically though the real value of the rewards program for both companies is that they offer incentives for customers to use their apps. (You don't have to -- you can just use a card, but it's a whole lot cooler to track your progress to earning a reward using the app.)

Driving customers to these apps pushes them further into the Starbucks or Dunkin' Donuts ecosystem and through digital checkout removes a barrier to purchase. Buying coffee through either app does not feel like spending money and if you're earning rewards too, the mental link between buying and your bank account becomes even more vague. That will likely lead to an increase in sales as people buy coffee they might not have if they had to take actual cash out of their wallets.

Neither company is going to steal customers from the other just based on having a loyalty program, but they should be able to increase their relationship with their existing customers through them. Dunkin's move simply puts it on equal footing with Starbucks and gives it another weapon to keep fighting the coffee war. 

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Daniel Kline has no position in any stocks mentioned. He has a Starbucks gold card. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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