In response to the initiatives of its competitors, Starbucks will be launching its Gold Rewards Program. This program offers customers 10% discounts on most purchases and other exciting freebies. In the short term, this promotional offer from Starbucks tends to retain existing customers and to attract new customers by giving them freebies. This membership to rewards programs will later on be translated to customer loyalty.
Due to the frequency of customers visiting Starbucks stores in order to fully maximize the value they paid for the annual fee, there will be an increase in Starbucks’ sales. This, in the long-run, will produce a stronger customer base for Starbucks. Firms in competitive markets offer similar but differentiated products. A customer transferring to a competitor is a usual scenario. This can be avoided by the firm as it has already developed a strong customer base.
Firms in competitive markets maximize their profits when price, which is also equal to the marginal revenue, is equal to the marginal cost. A firm is said to be losing money when its total revenue is lesser than its total costs; similarly, when price is lower than the marginal cost. In the long-run, marginal cost is not the only determinant of price. The law of diminishing marginal utility suggests that a person will not be willing to pay the same price for his succeeding consumption of that specific product. This is what the rewards program of Starbucks wanted to answer.
This entices customers to utilize their card membership to full extent by purchasing more. Hence, despite the decreasing marginal utility, there is an incentive for the customer to purchase more. This increase in purchase results to increase in revenue for the company. With a new rewards program in place, the competitors of Starbucks will also look for ways to build their own customer base. They may come up with similar advertisements and promotions that would highlight their products and differentiate theirs from that of Starbucks’.