Unexpectedly Intriguing!
January 10, 2017
Starbucks Rewards Logo - Source: https://www.starbucks.com/card/rewards

The modern age of airline frequent flyer programs have been around since May 1981, when American Airlines (Nasdaq: AAL) revamped an earlier version of the concept for its customers as a marketing tool in its AAdvantage program. In return for choosing to fly on AA, customers were awarded with free flights once they had flown a given number of miles on the airline's flights. The program was remarkably successful and soon other airlines began copying AA's modern version of the customer loyalty program.

Recognizing the marketing potential of the airlines' frequent flyer programs, other businesses such as credit card companies started getting into the act and began cross-promotions with the airlines' frequent flyer programs, which benefited members of the programs because they could now accumulate additional frequent flyer miles toward gaining rewards without having to pay for an expensive ticket to fly somewhere. In some cases, they could even accumulate frequent flyer miles at a considerable discount compared to what it would cost to accumulate the miles by flying, which provided a cheaper and more rapid way to realize the benefits of the airlines' frequent flyer programs.

Like airlines with their frequent flyer programs, and flashing forward to the current day, Starbucks (Nasdaq: SBUX) has a rewards program aimed at boosting their revenues from their frequent customers. The Starbucks Rewards program provides the incentive of providing a free beverage or food item from its in-store menus to the members of its loyalty program whenever they accumulate 125 stars.

After you collect 125 Stars, you can choose to redeem them for a free food or drink item (excluding alcoholic beverages and multi-serve items) at any time before they expire - either choose to redeem a Reward in your mobile App when using Mobile Order & Pay or ask your barista when you are paying at a participating store.

Once your Reward is redeemed, 125 Stars will be removed from your Star balance. You can continue to earn a free Reward for every 125 Stars you accumulate. For example, if you have 250 Stars and have not redeemed your free Reward, you are eligible to redeem two free Rewards.

Not all Starbucks locations redeem free Rewards. Company-operated stores are able to honor the Rewards, but some kiosk locations (often those inside another facility like grocery stores) cannot. We hope to continue to increase the number of participating locations.

You can redeem your free reward at any Teavana® store or Evolution Fresh™ kitchen.

Under normal circumstances, members of Starbucks' Rewards programs accumulate 2 stars for every $1 they spend at Starbucks (or 1 star for each 50 cents), which means that "free" drink or food item can be had after they have spent $62.50.

Periodically however, Starbucks' marketing team makes it possible for members of Starbucks' Rewards program to accumulate lots of stars at a considerably discounted price. Starbucks' Star Dash Challenge promotions award increased numbers stars in return for in-store purchases during set week-long periods of time, such as the one that began on 4 January 2017 that will run through the end of today, 10 January 2017, where a rewards program member could net up to a total of 200 stars, netting 75 stars once they've made 5 individual purchases, and then if they make 2 more individual purchases before the deadline runs out, they can accumulate an additional 125 stars, which enough to redeem a single food or drink item reward all by itself.

Starbucks Star Challenge - December 2016 - 200 Stars Earned

That kind of promotion is where savvy Starbucks Rewards members can maximize the bang for their bucks.

Since these promotional stars are based on individual purchases rather than the dollar amount of those purchases, rewards program members can "purchase" their reward at a highly discounted price by simply buying the lowest price items on Starbucks' menu to count toward their individual purchases. Like an airline frequent flyer member using alternate ways of accumulating miles to lower the cost of reaching the reward of a free flight at a reduced cost, Starbucks' Rewards members can do the same thing to acquire their desired "free" food or beverage at a considerably lower cost than they otherwise would have to pay.

Checking in at our local Starbucks store location, we found that the lowest price item that we could buy was the petite vanilla bean scone, where an individual scone would cost $1.25. The second-lowest cost item was the plain bagel, with a unit cost of $1.50.

Doing the math, purchasing 5 petite vanilla bean scones would cost $6.25 (ignoring any applicable sales tax for now), which means that if we committed to participating in Starbucks' Star Dash promotion, it would drop the cost of each star we might accumulate to 8.3 cents - an 83% discount. If opting for the plain bagel instead, the cost would be $7.50, or 10 cents per star accumulated through five bagel purchases. [Since sales taxes vary by location, we'll leave that particular math to you, but we'll note that taking sales taxes into account will increase the cost of each star you might buy through Starbucks Star Dash promotion.]

Where things get interesting is when considering whether to take the plunge of making the additional two purchases for the additional 125 stars that might be gained through the current promotion. For petite scone buyers, those additional 125 points could be purchased for $2.50, where each star costs just 2 cents each - a 96% discount with respect to their regular cost. Bagel buyers would pay $3.00 for those 125 points, or 2.4 cents per star.

When you consider that most individual items on Starbucks' menu - the ones that rewards program members would be most likely to redeem in exchange for their "stars" - cost in excess of $4.00 each, making it through to this point in Starbucks Star Dash promotion can represent an attractive proposition for Starbucks' frequent customers.

Starbucks Rewards Promotional Cups - Source: https://news.starbucks.com/news/rewards-automatic-gold

But the real question is whether you can realize an extra benefit beyond that. The people for whom participating in Starbucks Star Dash promotions make the most sense are those who would ordinarily consume the items that they might buy expressly for the purpose of racking up stars at the lowest cost, where the additional cost they might have in participating in the program would really represent a smaller incremental cost over what they would ordinarily pay for the same items they're buying from Starbucks to rack up points in the promotion.

For example, in the case of Starbucks' plain bagels, a consumer of bagels who might ordinarily (and regularly) pay 50 cents per bagel from a grocery store would really only be paying Starbucks an additional $1.00 out of their pocket for each bagel they would be consuming anyway, where after accounting for offsetting their cost of a bagel, they would basically just be paying Starbucks an out-of-pocket cost of $1.00 to toast it and to also supply them with pads of butter to enjoy them with it (we're afraid Starbucks charges extra for cream cheese, but we discovered that pads of Kerrygold Butter are included with the cost of their toasted bagels).

That offsetting cost then would drop their incremental cost of participating in Starbucks' Star Dash promotion to just 6.7 cents per star for the first 5 bagel purchases, which would then drop to just 1.6 cents per accumulated star for their next 2 bagel purchases during the period of the Star Dash Challenge promotion - nearly a 97% discount.

No matter how great the discount however, there is little question that rewards program members would be spending more at Starbucks than they otherwise might, so whether participating in the promotion makes financial sense is more a matter of whether or not you value what you're getting in return.

We'll leave the exercise of how to maximize the benefits of whatever "free" food or beverage item that you might then redeem in exchange for your accumulated Starbucks Rewards stars, and frequent purchases, up to you!

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