Back in the late 1990s, America Online shocked the Internet by abandoning the $19.95 monthly subscription fee everyone was charging, and raised its rates to $21.95. President Robert Pittman said at the time that it was likely AOL would see a few customers defect; but it would be a temporary loss, and AOL would "go right back to the growth curve, albeit more slowly."
And that largely happened. AOL didn't lose many customers; as the biggest Internet service provider, it had "stickiness" that rival services did not. That's why the recent moves by both Amazon.com (NASDAQ:AMZN) and Starbucks (NASDAQ:SBUX) to change the terms of their popular membership programs are smart moves. There's going to be some squawking from those who previously enjoyed getting something for nothing, but by and large, they'll be boosting their revenues with little downside risk.
As the king of e-commerce, Amazon has an unparalleled ability to drive consumer choice, and it's decision to increase from $35 to $49 the threshold for non-Prime members to earn free shipping is a clever way to drive more customers to its $99-a-year Prime service. People might complain about having to pay more before qualifying, but few will stop shopping at Amazon, and more than a few customers will sign up for a Prime membership to get all the benefits. It's estimated as many as 54 million people are already members in the U.S., and 78% of them say free shipping is the thing they like most about it.
Similarly, Starbucks is changing its loyalty program, though it's not so straightforward as Amazon raising its free-shipping threshold. But the effect is the same: Customers will need to spend a little more to earn free rewards, while those who already do will be rewarded more lavishly.
There's a good reason why the coffee shop is doing this. It's estimated that the 11 million My Starbucks Rewards members spend three times more at its restaurants than do non-members; but of the chain's 75 million customers who visit a Starbucks each month, less than one in six are members of the loyalty program.
Naturally some customers are upset by the change, but the coffeehouse says a dollar-based rewards program is the No. 1 thing its customers have requested. Quite likely, the customers spending the most at Starbucks want to be rewarded for their loyalty.
But analysts seem to have different views of the changes made by Amazon and Starbucks. On the one hand, the e-commerce retailer's change is being hailed as a smart move to help offset some of the $3 billion a year in shipping costs Amazon incurs. On the other hand, Starbucks is being castigated as having committed a major faux pas with Dunkin Brands' Dunkin Donuts chain possibly stealing customers away from the coffee chain as a result.
The flaw in that thinking is the "stickiness" Starbucks enjoys with its customers. Stopping by its restaurants for its coffee is something they're already doing, so they're not going to have to change their habits at all -- just delay their gratification before earning a free cup of coffee. Or they could spend a dollar extra to earn a reward more quickly, an expense that isn't going to suddenly make them go downmarket to Dunkin Donuts.
Think of it as similar to when Netflix (NASDAQ:NFLX) bifurcated its DVD and streaming services and raised the cost of both. It was deemed the death of the company; but one analyst just bolstered his estimates of how many customers Netflix will sign up this year, expecting it to add 21.5 million new members, which would give it close to 100 million global subscribers. You don't hear anyone saying Netflix is about to die anymore.
AOL's ultimate demise -- OK, it's not dead, there really are still millions of people accessing the Internet on the ISP's dial-up service -- wasn't due to it raising its price, but rather the advent of better and more reliable services. Changes to the Starbucks rewards program also won't make the coffee shop as stale as day old joe, either; before long, analysts will be praising it, too, just as they are for Amazon.com, as a shrewd move that bolstered its financial position.