I Hate Coffee Shop Loyalty Programs. Am I Wrong?
Despite their promises, I'm unsure if loyalty programs are actually the best way to generate customer support.
I had a weird interaction in a coffee shop a few months ago.
I went to a shop I frequent here in Madison, though I’m not around enough to know all the baristas. During that visit, one of the baristas offered me a loyalty card.
Usually, I just politely decline, but for some dumb reason, I said, “I don’t need a loyalty card to come here.” It’s true, but why would I say that out loud? There’s no reason the barista needed to know that, and I put her in a weird position with my response.
But now that you—and this barista—know, I really do hate loyalty cards. I hated them as a barista, and I continue to hate them as a consumer. Part of my distaste is that I think loyalty cards make people feel entitled, and that they create weird dynamics between those who are being served and those who are serving others. But I hadn’t thought deeply about loyalty cards until that interaction—and now, I can’t stop thinking about them.
I had a hunch that loyalty cards aren’t just silly, but are actually an ineffective way to draw in customers and create repeat business. But I didn’t yet have the proof—so I set out to see what I could dig up.
For the sake of this “investigation,” I defined loyalty cards as any program that rewards consumers with a gift or freebie after a set number of purchases or amount of money spent. Loyalty cards are free (we’ll talk about paid loyalty programs later), and can be accessed by any customer who walks into a given coffee shop. Think of “Buy 10 drinks, get one free” or “Spend $50, get $5 back” offers.
I can already anticipate some of the arguments loyalty-program fans might respond with: “But loyalty cards work in my cafe!” or “I LOVE cashing in that free drink after I get all 10 of my punches/stamps/whatever.” I don’t mean to dismiss personal preference or observation—if something works for you, you should continue to do it.
But I wanted to see if anyone had definitively proven that loyalty programs work. I assumed we’d have a lot of data available, since many businesses use point-of-sale systems like Square or Shopify that have built-in loyalty program options. I also thought that, since many non-coffee industries also run loyalty programs, there would be lots of stakeholders interested in answering this question.
So, I tried to stick to reported and researched sources, like scholarly work, data (or a lack thereof) from POS companies, and think pieces from business researchers. The results were a mixed bag—it seems that loyalty programs are effective, but there’s a lot more to the idea of loyalty than we think.
On Defining if Loyalty Programs “Work”
As I began researching, I was intrigued by a series of questions posed by the authors of a piece from MIT’s Sloan School of Management called “Do Customer Loyalty Programs Really Work?” In exploring the topic of loyalty programs, the authors ask:
“Do these programs really create extra loyalty beyond that which is derived from the relative value of the product or service? Do they encourage customers to spend more? Or do they merely bribe a customer to buy again?”
The word “bribe” immediately caught my attention, and articulated some of my suspicions about loyalty programs. Namely: Do they encourage genuine loyalty? Do they help foster new relationships with customers? Or do loyalty programs simply lure in consumers with a fleeting reward that doesn’t translate into long-term connection?
I also thought about what loyalty means for consumers. Loyalty is a loaded word—one I hate when it’s used to explain workplace dynamics between employers and employees, but one that feels different when we speak about customers. If not loyalty programs, what truly creates loyalty to a business or brand? Do we sidestep the process of building that deeper attachment when we ask loyalty programs to do the heavy-lifting of fostering that relationship?
One crucial question loyalty loyalists should ask themselves is: If they removed their loyalty program, would they lose customers? And if so, does that scare them?
It's unclear whether coffee shops should build a business model on loyalty programs which, if they were not in place, would severely impact sales. A loyalty program in a shop like this might seem to “work”—but should we call it “effective” if a significant portion of revenue relies on consumers having no meaningful stake beyond their punch cards?
I think we need to establish why a business would adopt a loyalty program in the first place. Turns out, getting new customers to frequent your business costs money! The Harvard Business Review (HBR) reports that “acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.” Loyalty programs are designed not only to attract new consumers, but also to offer them something that immediately makes them more likely to return.
Secondly, loyalty programs are popular—like, silly levels of popular. One paper, a longitudinal study on loyalty programs over the last four decades, says that U.S. consumers belong to 3.8 billion loyalty programs. However, much of that is passive: The same paper cites that “the average consumer belongs to 14.8 LPs [loyalty programs] but is only active in 6.7.” This article also reports that “loyal customers are believed to be less price sensitive and more profitable, more committed and tolerant of a company’s downsides, and resistant to competitive offers. They are also more engaged on social media and generate favorable word-of-mouth.”
This paper also distinguishes between attitudinal, conative (“a deeply held commitment toward the LP provider”), and behavioral loyalty (when someone changes their behavior towards the people dishing out the loyalty program). The former is the one companies should aspire to, what the authors call “true loyalty,” or “the degree of liking and positive attitude that consumers hold toward LP providers.”
It’s clear there’s value in loyal customers, and specifically, loyal customers who genuinely like your brand. However, a lot of the research I explored questions whether loyalty programs create loyal customers. Another HBR article called “Do Rewards Really Create Loyalty?”, written by Louise O’Brien and Charles Jones, looked at popular loyalty programs from brands like MCI (remember them? Destiny’s Child does), American Express, and General Motors. The article actually points to small businesses as having a better handle on what makes loyalty programs successful: “For many years, successful neighborhood merchants and restaurateurs have understood intuitively the broader strategic purpose behind an effective rewards program.”
Initially, I thought the following line would be something about loyalty cards and would completely crush my hypothesis, but the piece continues: “Such businesspeople make it a point to get to know their best customers personally and often reward them with special services and attention—notifying them when sought-after merchandise arrives, for example, or giving them a free drink or a special dessert.” Instead of talking about loyalty cards, the authors indicate that ad hoc gestures rewarding loyalty—which rely on owners and workers paying attention to their customers—might be more effective.
Many of the articles I read hinted at the same problem: Wide-sweeping loyalty programs are often ineffective because they don’t target your most loyal consumers. “Unfortunately, most companies inadvertently treat all customers as equal, providing them with products of equivalent value regardless of how much they spend or how long they’ve been customers,” O’Brien and Jones write. “A company that offers average-value products and services to everyone wastes resources in over-satisfying less profitable customers while under-satisfying the more valuable loyal customers.”
Show Me the Stats
I did read a lot of articles that spoke as if loyalty cards were effective—but didn’t necessarily provide proof or data that indicated that effectiveness. I’m thinking of stories with titles like “Coffee loyalty programs: 10 successful examples” or “Why Coffee Shops Should Create Loyalty And Rewards Programs For Their Customers.” Pieces like these assert that loyalty programs are successful because loyal customers are valuable—but they don’t prove that loyalty schemes actually create loyalty.
Since so many coffee shops use platforms like Square or Shopify, I expected at least one of these platforms to have data on the effectiveness of loyalty systems—and Square did! It says that “Sellers who use Square Loyalty see on average a 40% increase in customer visit frequency.” Shopify cited several appealing statistics: “As many as 84% of consumers say they’re more apt to stick with a brand that offers a loyalty program. And 66% of consumers say the ability to earn rewards actually changes their spending behavior.” Yet, none of the data seemed to derive from Shopify’s own customers, and many of the links I clicked were dead (the first link in the quote above) or didn’t seem to include the number or statistic that was cited (the second).
There are two more critical wrenches to consider here. One is that we have yet to break down the differences among loyalty programs across sectors. The longitudinal study was the only source I found that acknowledged this potential variation in any meaningful way, when noting that the frequency of purchase (you might buy coffee every day, but beauty products only every few months—and yet, you might belong to both company’s loyalty programs) can impact effectiveness: “Further, LPs are more effective in lower purchase frequency industries, which aligns with the notion that less frequent purchases may involve more risk and hence the consumer may rely on LPs to decrease it.”
(I encourage you to review this study if you can, because it goes into way more detail—like if an exclusive reward system is more effective, or if people value “hard” perks like money or discounts versus “soft” rewards. It also compiled its findings by poring over 110 former studies on the topic, so it’s more like an aggregate of existing research).
The second wrench is how effective a loyalty system is once you look at the program over time. If you see an initial spike in consumers cashing in loyalty cards, you might think, “Great! This program is working!” But shortly after, you might realize you’ve gone through a lot more coffee this month—and that your spending on goods is going up. In an article from the Wharton Business School, author Angie Basiouny explains the research of Raghuram Iyengar, a Wharton professor who co-authored a piece called “The Impact of Subscription Programs on Customer Purchases.”
Basiouny breaks down Iyengar’s research, and explains how a retailer initially thought a loyalty program was successful—until they ran the numbers.
“In the study, the professors analyzed 15 months of sales data for 24,000 customers enrolled in a loyalty program with a cosmetics retailer in Asia. The program was an instant success: Customers on average spent twice as much per month after joining. But that growth was unevenly spread across the program, with some members spending a lot more than others.
‘I think there are lots and lots of positives,’ Iyengar said of loyalty programs. ‘The big negative, which [surprised the company] and speaks a lot toward some of the other subscriptions we’ve seen failing, is that not only do the revenues go up … but the cost to serve customers also goes up.’”
Some programs find success in ways that seem counterintuitive. The consulting firm McKinsey conducted a study in 2020 and “found that members of paid loyalty programs are 60 percent more likely to spend more on the brand after subscribing, while free loyalty programs only increase that likelihood by 30 percent.”
I think we’re seeing a repeated pattern here: Loyalty programs work—kind of. They’re not an unqualified success, but they do seem to be a useful tool for brands and businesses that know how to utilize them well. tStill, thinking of them as an on/off button to build customer loyalty is a reductivist mistake. Or, as O’Brien and Jones put it in their HBR article, “The full potential of value sharing through rewards is realized only when customers change their habits to become sustainably loyal. And that shift occurs only when the company has developed and communicated a proposition that clearly has long-term benefits for the consumer.”
Starbucks: A Case Study, Sort Of
One of the reasons I wanted to tackle this topic was because it feels like the expectation of loyalty programs in retail spaces is exceedingly high. In one of the HBR articles I reviewed, the author talked about credit card programs that help you accrue airline miles: “If, to earn a domestic round-trip ticket valued at $400, one must spend $25,000 with Citibank AAdvantage, the cash value of the reward is 1.75%.”
In a coffee shop, the most common loyalty program model I see is a “Buy 10, get one free” drink promotion. That proposition is a 10% value reward, which feels absurdly high compared with the monetary value of most other reward programs. Coffee shops with these promos tend to be independent outlets, which strikes me as unfair. Why are small businesses, which already make less money than large conglomerates, forced to offer more to consumers? Why do we expect bigger discounts from them?
For many of these businesses, the pressure to offer a loyalty system is real—especially when every other business has some loyalty program structure. Many articles I read studied loyalty programs across sprawling, international companies—think credit cards, airlines, and cell phone providers. But I wanted to look at arguably coffee’s most famous loyalty program: Starbucks.
The Starbucks Loyalty Program works on a points, or stars, system. Every dollar you spend earns you one star (and you can earn double stars for certain things, like pre-loading your Starbucks card with money, spending on specific days, or taking advantage of promotions). At 25 stars, you can earn a drink modification—add a shot of espresso or syrup to your drink. Your next reward doesn’t kick in until 100 stars, which means you have to spend $100 before earning your next perk.
And the perk is, honestly, pretty paltry: A free hot or iced coffee or a pastry. You’re not eligible for a “fancy” drink like a PSL (’tis the season!) or a specialty drink until you spend $200. Starbucks changed this model recently—in September 2023, despite posting record profits, the mega-chain announced it would increase the number of stars needed to redeem certain perks.
But even though it opted to nearly double the amount of stars needed to earn one free coffee, the brand still credits its loyalty program as a key driver of growth. An article for RIS News reports that then-CEO Kevin Johnson believed the program “helped the coffee retailer’s pandemic recovery” and that over half of all spending comes from loyalty rewards members.
In many of the shops I worked at, I’d see people order small black coffees, get their punches, and then order the most expensive drink on the menu for their “freebie”—and they should! If the system was designed to allow customers to maximize the value of their free drink, they would be well within their rights to do so. But I wonder why so many shops have defaulted to this system, and why we expect the most from small outlets.
That’s part of the reason behind my disdain for loyalty programs. Because of their ubiquity, it feels like everyone has to adopt one—and yet, small businesses are the ones left to shoulder most of the burden of offering deeply discounted or free items for the sake of customer retention. I also suspect that other investments in a shop—like more employees, or higher starting wages—would not only have more value for that particular business, but might even foster customer loyalty as well. I wonder if loyalty programs are a band-aid solution to a much bigger problem—one that might be better solved by forging more meaningful connections with consumers.
Ultimately, this exploration and research deep-dive have left me with more questions than answers, but I think they’re the right questions to ask. How do we build versus garner loyalty? What systems do we have in place to empower workers to make connections? And how do we show we value the people central to making our spaces run?