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Has Starbucks Just Sent Some of its Customers to Dunkin' Donuts?

By Daniel B. Kline – Mar 1, 2016 at 12:30PM

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The chain is tweaking its reward program which could have some unexpected benefits.

Starbucks (SBUX 1.72%) has what many consider to be the best loyalty program of any restaurant chain, but a tweak to its offering might send one segment of customers to rivals including Dunkin' Donuts (DNKN).

Under its current loyalty program, My Starbucks Rewards, the chain treated all purchases equally. Whether you bought a small coffee or an expensive coffeemaker customers earn one star per transaction. After earning 30 stars participants in the program attain Gold status which make them eligible to begin accruing stars toward free drinks. 

The My Starbucks Rewards Program is going to change in April Source: Starbucks 

The size of the check does not matter nor does how many items you buy -- one transaction equals one star -- and after 12 stars Gold members earn a free drink of any size or type. That means that in theory members of the chain's loyalty program who reach the Gold level could buy a single small coffee on each visit to reach the 12-star, free-drink threshold then redeem their reward beverage for the largest, most-expensive cup of whatever on the menu. 

It was a system designed to reward frequency of visits rather than the size of each individual purchase. The new program, which goes into effect in April, tweaks that to better reward customers who spend more money.

How does the new program work?
Instead of awarding a star for each transaction the new program, simply called Starbucks Rewards, will give customers two stars for every $1 spent. Earn 300 stars by spending $150 and you attain Gold level and can begin accruing stars toward a free drink which now costs 125 stars. 

The changes clearly benefit the customer who either orders a pricey drink every visit or buys multiple items. It actually makes the program somewhat similar to Dunkin's DD Perks rewards program which gives members five points for every $1 spent with every member being able to earn a free drink for every 200 points accrued.

To put things in perspective Starbucks offers free drinks after users first earn Gold status then requires they earn 125 stars ($62.50 spent) while Dunkin' does not have membership tiers and requires users spend only $40. Both companies also have numerous opportunities for members to earn bonus stars/points which help both brands direct customer behavior. For example, Starbucks might incentivize afternoon purchases while Dunkin' might use a bonus to get customers to sample a new product. 

DD Perks is a pretty straightforward offer. Source: Dunkin' Donuts 

Why will this help Dunkin'?
Dunkin' Donuts has always had a more generous program for most customers, but the Starbucks changes make it a better deal for people who previously worked the system. That user who buys a single small coffee for let's say $2 (though prices vary by market) would earn 12 stars having spent $24 and receive his free drink. Now that same customer would only earn 48 stars for $24 spent and be less than halfway there.

Had that same customer spent his $24 at Dunkin' he would have 96 points and be nearly halfway toward claiming his freebie. That might be enough to tip smaller spenders toward Dunkin' Donuts. 

Will this matter?
Starbucks may lose some of its worst customers as a consequence of making these changes. It's actually possible the company wants this to happen. Pointing users who spend the lowest possible amount per transaction to a rival may have some benefits. It will shorten lines and push away a customer group which worked the loyalty program to their benefit.

The challenge for Dunkin' is can it turn these cheapskates into better customers? That might be easier for it to do because it's not as big a leap to add a donut to your order (around $1) than it is for Starbucks to sell someone who is already being cost conscious a $3-4 pastry. 

Starbucks making these changes may actually help both companies. Starbucks could shed some people who mostly clog up its stores while Dunkin' could take those users and turn them into decent customers. 

Daniel Kline has no position in any stocks mentioned. He is a Starbucks guy, which is rare for someone who grew up near Boston. The Motley Fool owns shares of and recommends Starbucks. 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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