Starbucks (NASDAQ:SBUX) has built its loyalty program around the idea of earning free coffee.
On a basic level, members of the Starbucks Rewards program earn two stars for every dollar spent at the coffee chain. Earn 300 stars and you bump up to the Gold level, where 125 stars get you a free drink. It's a fairly generous offer designed to encourage members to spend more money at the company's locations by making cashing in with a free beverage very attainable.
This has decidedly been a good program for the company, adding nearly 2 million members in a year, including 300,000 in Q3, according to CEO Howard Schultz in the Q3 2016 earnings call (transcribed by Seeking Alpha). With 12.3 million Rewards users in the United States, that directly leads to higher spending.
"We are already seeing the percentage of tender from Starbucks Rewards U.S. customers rise to 33% in Q3, up three full points from last year, continuing an established pattern in which revenue growth from Rewards customers typically outpaces revenue growth from non-Rewards customers," Schultz said. "And we are seeing both incrementality of spend and increase in total profit per customer, both directly attributable to a customer's having joined the Rewards program."
Because of those strong numbers, Starbucks has a strong incentive to drive membership growth and engagement for its Rewards members. To do that, the company has decided to offer a summer edition of its "Starbucks for Life" promotion.
What is Starbucks for Life?
Starbucks for Life is a classic, traffic-driving promotion that rewards consumers with chances to win based on how often they visit stores. In some ways, it's a lot like the McDonald's (NYSE:MCD) Monopoly promotion, which hands out game pieces that let people win immediate prizes or collect them for chances to win something bigger.
In Starbucks' case, it's basically running Monopoly without the official tie-in. During the promotion period (in this case, Aug. 2 through Sept. 12), Rewards members earn a chance to play the Starbucks for Life game each time they make a purchase using a registered Rewards card or the chain's app. They can earn up to two games per day by making separate purchases and get a chance to receive two extra daily bonus plays if they spend more than $10 in a single transaction.
To redeem their earned games, Starbucks members must visit a special webpage, log in, and play. To win, members must collect the game pieces in a given row on their digital game board.
Seven people (five in the U.S. and two in Canada) will win the grand prize of Starbucks for Life (delivered as a daily credit for a free drink or food item for 30 years). Another 30 split between the two countries will win free Starbucks for a year while 150 will get a month for free and 550 will win Starbucks for a week. People who do not win the big prizes can win Bonus Stars in increments of 125, 25, 10, and five stars.
A very smart promotion
Starbucks has created a promotion that not only drives people to join its Rewards program, but also incentivizes existing members to visit more often. Better yet, it has done that without spending heavily on prizes or promotion. The chain is giving away coffee and food items -- things it has in abundance -- in a way that costs it very little money.
It's a valuable prize with a negligible cost. In general, Starbucks has done very well with its member promotions. Schultz mentioned during the Q3 earnings call that "2015's Frappuccino promotion drove a 30% increase in revenue over the prior year."
The company has not provided details on how previous Starbucks for Life promotions have done, but the fact that it's launching a summer edition suggests that it's worked well. This will bring more traffic to stores, increase short-term customer spending, and drive memberships, which have proven to increase long-term customer purchases. That's a sort of perfect storm, making this a very smart decision for Starbucks' bottom line.
Daniel Kline has no position in any stocks mentioned. He has been working at Starbucks all week while his son goes to NERF zombie camp. The Motley Fool owns shares of and recommends 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.