The psychological factor behind why changes to the rewards program is infuriating, even though many will reap great benefits

(The Conversation is an independent, nonprofit source for news, analysis, and commentary from academic experts.)

            Sami Karaga, Boston University, and JL Zagorsky, Boston University</p><div id="paywall">            <p>(The Conversation) Starbucks, the coffee chain giant, is adjusting its rewards program, and the news is full of stories of angry consumers.
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The main focus of their ire is that as of February 13, 2023, it will cost you double the program’s reward points, called stars, to earn a free cup of hot coffee.
When companies split rewards programs, there is often a huge backlash from customers. A recent example was seen in the coffee market in the fall of 2022 when Dunkin’ made it difficult to get free items through its rewards program, which also led to a backlash from customers.

            We are business school professors who teach frequent flyer programs and other rewards programs.  Even though we don't drink much Starbucks coffee, we're intrigued by the reaction of Starbucks customers—and what they seem to be missing out on.

            Build loyalty

            Rewards programs and frequent flyer programs are designed to build loyalty, as they provide a form of discount to regular employees.  It is also seen by consumers as a good way to save money, especially when inflation is high.
            They also aim to lock customers into a particular company or airline.  In the case of Starbucks, the rewards program makes it less likely that its customers will buy coffee from competitors such as Dunkin', Costa Coffee, Tim Hortons or Peet's Coffee.
            Although airline rewards programs have been around for years, rewards programs among large restaurant chains are relatively new.  For example, sandwich chain Subway didn't start one until 2018. Fast food company McDonald's only launched its loyalty program in 2021.
            And now, even small businesses are finding it easy and easy to start loyalty programs, thanks to the acceleration of digital technology in restaurants during the pandemic.  About 57% of restaurant chains now have a loyalty program.

            Mathematics rewards

            However, Starbucks is old, having started its own rewards program in 2008.
            The program, considered by some to be one of the most rewarding programs, steadily gained members for the first two decades, but it picked up growth during the pandemic.  At the end of 2022, about 29 million people were signed up, up from just over 16 million in early 2019.
            The rules of the rewards program are very complex: legal language runs five times longer than this article.
            In short, customers earn credits by spending money.  Every dollar spent on food or drink earns 1 star.  However, preloading money onto a Starbucks gift card or mobile app earns double the stars.
            The stars can then be spent on drinks, food, or merchandise.  Under the current program, the simplest and cheapest reward for 25 stars is to add a free shot, dairy alternative or flavor to a drink.  The most expensive items, for 400 stars, are merchandise, such as a branded cup or bag of ground coffee.

            Consumer friendly?

            Starbucks announced changes to the terms and conditions of its rewards program in December, adjusting the "price" for some of its items.
            The change that got the most attention was that the cost of a cup of regular hot coffee or tea would double from 50 stars to 100 stars.
            At first glance, Starbucks adjusting its rewards program might be seen as a bad thing for consumers.  But there is more to this change than meets the eye.  What no one noticed is that the company is also lowering the price for a free iced coffee or tea from 150 points to 100 points.
            For the unsuspecting consumer, decreasing points for iced coffee may not mean increasing points for hot coffee.  However, the coffee business has changed drastically over the past few years.  The change is best summed up by a recent New York Times headline, "Does Anyone Drink Hot Coffee Anymore?"  Iced or cold-brewed coffee is the rage now—even in the winter—and growing fast.  Cold drinks have accounted for at least 60% of Starbucks' total sales each quarter since early 2021, thanks in part to the popularity of iced drinks among Generation Z customers.
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This means that for a large percentage of Starbucks customers, one part of the rewards program is actually getting generous.
So why the fuss, if one of the most popular items on the Starbucks menu is getting cheaper?

            Loss aversion, a key concept in behavioral economics, provides a simple explanation.  Loss aversion means that people see something they lose as a bigger deal than something equivalent they gain.  People who need to spend 50 more stars from now on to get a hot coffee feel more pain than customers who would spend 50 stars less to earn a free iced coffee.  This extra pain leads to more complaints from those who are hurt and less praise from the recipients.

            Customer reward

            For its part, Starbucks explained the new rewards system this way:
            “This change allows us to improve the health of our program while also making member favorites like iced coffee easier to earn.”
            While its critics may disagree about the reason for the decision, ongoing research conducted by one of us at the tea chain suggests that retailers have a profit incentive to make their rewards programs more generous.  The reason is simple: when rewards are easier to earn, customers are more motivated to collect points, especially when they are closer to a reward they can redeem.  This is why airlines see some customers cut miles at the end of the year, just to earn a better standing.
            From a company's perspective, the benefits to customers who shop frequently can outweigh the costs they incur by providing more rewards.  And so for businesses and consumers, rewards programs can benefit everyone.
            This article is republished from The Conversation under a Creative Commons license.  Read the original article here: though-you-will-get-grand-benefits-198361.
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