A Blog by Jonathan Low


Mar 13, 2013

Why Starbucks' Customers' Loyalty Is More Valuable Than Advertising

The average corporate profit margin is 6.2 percent. Starbucks is 11.7 percent.

Even given the fact that margins have increased in the past year to approximately 8 percent, spread over billions in revenue, that 3 to 5 percent is a lot of excess to be reinvested for expanding competitive advantage.

The company has used those margins to bolster its customer loyalty at the expense of traditional advertising because it has recognized that the returns from loyalty exceed those from identifying and winning new customers. This is true in many businesses. The cost of convincing an individual consumer or corporate customer to switch is higher than it is to convince a current customer to buy more.

So the resource allocation decision matrix is based on factors such as convenience, quality and comfort; intangibles that require some effort to measure but whose return on investment is exceptional. Increasingly, businesses are focusing on impact as a critical measure of performance because return calculations can always be enhanced by simply reducing the denominator, in other words, by cutting costs which may improve the financial picture in the short term but devalue the brand across the breadth of customer experience.

Starbucks has been able to increase loyalty which has, in turn, significantly augmented financials as well. There are those who claim to despise Starbucks for a variety of reasons, just as all big brands like Nike, Microsoft and GM engender resentment. But their numbers are dwarfed by those who embrace the company - and ultimately that volume makes the crucial difference. JL

Sheila Shayon reports in BrandChannel:

While other brands like Wendy's, Subway and McDonald's have stepped up both their coffee game and their social engagement, Starbucks still outperforms nearly all consumer brands when it comes to collecting brand fans "despite taking the exact opposite approach," notes Econsultancy.
Occasional coffee drinkers and Starbucks junkies alike all visit the Seattle-based brewer's shops for the same reason, and it's not a caffeine kick. The java giant is just as recognized for its lifestyle brand as it is its beverages, and that may be just the thing missing from competitors' offerings.
Despite the fact that Starbucks recently took a second-place post against McDonald's in a social hospitality survey, the company continues to be the most relevant coffee shop brand around—and they don't even try that hard.
With over 33 million Facebook fans, Starbucks is one of the most "liked" consumer brands, surpassing McDonald's (with over 27 million "likes"), which has more locations and a longer history. Walmart, which has about 27 million "likes," posts several times a day, while Starbucks "often goes weeks without posting anything." However, when the Starbucks social team does post to the network, the photo or status attracts more than 150,000 "likes" and thousands of comments—which the social team doesn't ever seem to engage in.
The same goes for the company's Twitter, Pinterest and Google+ accounts, which boast millions of followers with little to no effort shown on Starbucks' part. The concept is mind-boggling, especially to brands like Taco Bell, which launch huge, global, interactive campaigns on social media with only a slight chance of the same kind of consumer impact that Starbucks seems to have.
While their social presence (or lack thereof) doesn't quite amount to the company's success, its real estate sure does. With an outpost on seemingly every high-traffic corner in the U.S. and a growing international push in China and India, Starbucks may occupy more small business space than actual small businesses. But according to brand expert Priya Raghubir, a marketing professor at NYU's Stern School of Business, location is only a small piece of the popularity pie for Starbucks.
So what gives? According to a report by The Huffington Post, Starbucks customers are loyal—like, ride or die loyal.
"Starbucks stands for coffee; it's converted that into an experience," Raghubir told HuffPost. "People really have [gotten] to know Starbucks as the quintessential coffee shop, where they can sit and be welcome over a cup of coffee."
This sentiment differs from other small coffee shops, where loyal customers are considered "coffee snobs" and a walk-in customer might detect an air of snootiness. Raghubir points out that the chain has gone out of its way to create a comfortable, welcoming environment where customers are happy to spend a few hours with friends or make use of the free Wi-Fi.
Perhaps the company's motto is best described in CEO Howard Schultz's book "Onward" where he says that Starbucks' mission and social contribution is "human connection." "Starbucks never set out to be cool," he says. "We set out to be relevant!"
"It is the experience of going to Starbucks," that makes it stand out, Raghubir says. "I think they [the customers] value the convenience, they value the welcome, they value the fact that they can find the Starbucks anywhere ... and offerings are uniform." In other words, Starbucks goes out of its way to make each location feel uniquely yours, and that, Raghubir says, builds brand loyalty.


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