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Starbucks Delivering Customer Service
Starbucks Delivering Customer Service
The value proposition of Starbucks is compelling because they give utmost priority to customers
and to the service provided to them. They offered the customer, the highest quality coffee. Also,
the value proposition is not only about the coffee but also the “experience” around its consumption.
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Starbucks: Delivering Customer Service
Changing customer demographics & expectations: The new customers were younger,
from a lesser income bracket, had different perceptions about the brand. This difference in
brand perception & service expectations i.e. fast service versus customization and lounging
is another reason for low satisfaction scores. While case mentions that most of the service
delivery design and metrics were still keeping in mind the established customers.
Service decline & measurement gap: The case mentions customer satisfaction gap could
possibly be an outcome of service gap. A large number of customers (34%) believed
service was an area Starbucks could improve upon. Friendlier and faster service was a
higher rated attribute by customers than personal treatment which was an essential part
of Starbucks measurement system. The amount of customization in drinks made serving
customers within time difficult for the baristas.
Brand Identity and Image: In spite of attempts to differentiate Starbucks from other
specialty coffeehouses, there was little differentiation in the minds of consumers. Because
of their limited presence, the specialty coffeehouses were able to deliver differentiated
service to a niche crowd, which was difficult for Starbucks to achieve considering its
ubiquity. Starbucks, which positioned itself as the ‘third place’, was now being perceived
as a place for coffee on run. Starbucks came to be seen not as a coffee chain with a
difference, but as corporate which ‘cared primarily about making money’.
Losing sight of core proposition: The recent focus of the company had been product
centric as well as to expand rapidly versus the customer centric approach adopted earlier.
In their drive to build brand and introduce new products, they lost sight of changing
consumer needs. The tenuous connection between customer satisfaction and growth seems
to have been disrupted by focusing too much on brand building.
Question 3. Describe the ideal Starbucks customer from a profitability standpoint. What
would it take to ensure that this customer is highly satisfied?
A large portion of Starbucks’ sales came from the loyal customers. 21% of the customers
contributed to around 62% of all the transactions i.e. an average of 19 transactions per customer.
In addition the case gives the customer life time value per customer as shown in exhibit 1 from
which it is amply clear that a highly satisfied customer is a source of a higher revenue. A new
customer accounts for about 15 coffee cups/ week while an established customer accounts for 19
coffee cups/ week. As per the case, from a cost standpoint labour was Starbucks’ largest expense.
Store operating expenses accounted for about 41% of the total store revenue.
The case mentions 2 important facts about the store costs.
1. The heaviest users i.e. the established customers demanded customization, increasing
the labour content and slowing down service. They also lounged more.
2. Drive through accounted for 50% of sales in stores having the facility.
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Starbucks: Delivering Customer Service
These facts point out to the fact that the new customers, who are also loyal, would have similar
revenues but significantly lower labour content in the coffee, making them more profitable
customers.
However, overall satisfaction of new customers was significantly less that of the established
customers owing to different service expectations. To ensure satisfaction of the new customers
Starbucks must have faster and attentive service, appropriate prices. This can be achieved by using
more labour saving and product standardizing techniques like the verismo machines, Frappuccino
like products top boost off peak sales, increased ergonomic optimization, if necessary more labour.
Question 4 Should Starbucks make the $40 million investment in labour in the stores?
Starbucks considers customer service as a vital element of in store experience. Starbucks has a
service index called the ‘Customer Snapshot’ comprising ‘basic’ and ‘legendary’ service. Speed
of service forms one of the criteria of the basic service and Starbucks has improved on the
parameter. However, despite that customers want a higher speed of service this shows gap in
between the company’s targets and customer expectations. In order to plug these expectations
Christine Day, Sr. VP administration has proposed a $ 40 million per annum additional expenditure
on increased labour hours. Company’s management, however, wants that the $40 million
investment should also translate to business growth.
With the current average hourly rate of $9 and average labour hours of 360 per week, the average
weekly labour cost comes to $3240. Also with average ticket size of $3.85 and average daily
customer count of 570, the average weekly revenue comes to $15361.50. Thus the weekly profit
figure becomes $12121. Break even with the investment of $40 million can be through –
1. Increasing the customer count.
2. Increasing loyalty thereby increasing the average ticket size and life time value
As shown in the Exhibit 3, we can achieve the break even by either increasing the average daily
customer count to 577 or by increasing the average ticket size to $3.9. Increase in ticket size
requires a migration of 84 customers from unsatisfied to satisfied category and migration of 74
customers from satisfied to highly satisfied category in each of the store to breakeven an
expenditure of $40million. These numbers represent around 6% of the total customers in the
respective categories and appear feasible. Therefore Starbucks can go with the proposal
without straining the earning per share. Additionally, increase in the investment on the in store
labour would have the following benefits-
1. Customer Satisfaction- Starbucks is dealing with 2 customer segments i.e. the existing
customers who value customization and personal attention and new customers demanding
faster service. Existing customer segment puts pressure on the service of the Starbucks store,
yet are loyal customers of Starbucks to whom Starbucks owes its brand identity. Hence
Starbucks will be able to serve this segments’ needs adequately with increased labour. For the
new customer segment speed of service is an important service parameter. Hence increased
labour would also enhance satisfaction and loyalty of this segment translating to a higher
revenue.
2. Customer Retention- The penalty in terms of customer life time value of a customer going
from a highly satisfied state to satisfied is $2248. This is a huge downside and additional labour
can be used to retain the highly satisfied customers in the same state.
3. Partner Satisfaction- Investment of $40 million will also enable Starbucks to achieve a higher
partner satisfaction since the workload would get distributed. This will also enable Starbucks
to introduce new beverages at regular interval, another key proposition of Starbucks.
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Starbucks: Delivering Customer Service
Exhibit 3: Justification for investment of $40 million per annum on increasing the labor
hours in stores. Calculation of Break-even point
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Starbucks: Delivering Customer Service
Now, annual increase in revenue for transition of unsatisfied customer to satisfied customer
category is $28 and increase in revenue of a satisfied customer to highly satisfied customer is $172.
COGS is 41 % of the revenue (Source Exhibit 1: Starbucks Financials). Exhibit 11 of the case also
mentions that around 34 % of customers have service as a sore point. Hence we can assume that
at the most 34% of the customers in each category will migrate to the next higher category. Table
below lists the average number of customer migrations required to achieve breakeven investment
of $40 million.