MARKETING MANAGEMENT – II
STARBUCKS: DELIVERING CUSTOMER SERVICE
SUBMITTED TO: Dr. M Sivagnansasundaram
Ryan Raut 17A1HP271
Shivangi Singh 17A1HP343
Aditi Srivastava 17A1HP420
Richa Khurana 17A1HP426
Aman Gupta 17A2HP459
B. Manoj 17A1HP529
STARBUCKS: DELIVERING CUSTOMER SERVICE
Starbucks corporation is an American coffee company founded in Seattle’s Pike Place Market in 1971. The coffeehouse giant that it is now, started off as a small coffee shop and specialized in selling whole arabica beans to a niche market of coffee purists.
Mr. Howard Schultz, joined the marketing team in 1982 and later when on to take over as the chairman when the founders agreed to sell him the company. This resulted in the immediate expansion of a small coffee shop into a chain of 140 shops then by 1992. The same year saw the company going public, which was never expected from a corporation that sold coffees. By 2002, Schultz had established Starbucks as the-anywhere-go-to specialty-coffee brand in north America and was serving 20 million unique customers in well over 5,000 stores around the globe and was opening three new stores on an average every day.
With the company spending almost nothing on the advertising to achieve any of the above-mentioned feats, the one compelling problem that Starbucks was facing, was the rather unexpected results which showed that the company was not meeting the customer’s expectations in customer satisfaction.
This prominent-concern resulted in further implementation of a strategy by Christine Day, the senior vice president of administration, Starbucks corporation. The strategy was to invest an additional $40 million annually in company’s 4500 stores, which would allow each store to add to 20 hours of labor a week. This was to be done to improve the speed-of-service and thereby increase the customer satisfaction.
With Day expecting the above-mentioned strategy to be met with internal resistance by the CFO. She has two days to make a final recommendation to Howard Schultz and Orin Smith about whether the company should roll out the $40 million plan, thus reducing the overall EPS.
Q1) What factors accounted for the extraordinary success of Starbucks in the early 1990s? What was so compelling about the Starbucks value proposition? What brand image Starbucks develop doing this period?
There were various factors which contributed to the extraordinary success of Starbucks:
Change the experience:
As in 1990, people used to drink coffee once a day. So, to add a value proposition and an experience of drinking coffee, Starbucks came out with the idea of having coffee as experience. It moved away from the tangible benefits that the coffee offered, such as taste to intangible benefits of experiencing a Starbucks coffee.
There were only two places for people to have coffee, first is the house and the other is the office. The company came out with the idea of having a third place for the people to have coffee. As they targeted primarily towards the affluent, well-educated, white-collar people (age group: 25-44).
Starbucks was a place where people can enjoy their social interactions, relax, or just spend some time by themselves.
First Mover Advantage:
This concept was new, because no one came out with this type of service provision to the people earlier, also there was no competition in the market.
The following were the three pillars for the Starbucks’ value proposition:
As they say, “Our goal is to create an uplifting experience every time you walk through the door.”
Speed of Service:
They serve the customer within 3 minutes.
Just say Yes Policy:
Provide the best service possible, even it required going beyond company rules. This policy places the customer and the service delivered to the customer above everything else.
The seating area Starbucks had was to encourage lounging. It had universal appeal.
Starbucks offered highest quality coffee in the world, sourced from Africa, Central & South America etc.
The Brand Image:
Starbucks was known for being widely available. As till 1992 it had 140 stores in the Northwest and Chicago which was successfully competing against other small-scale coffee chains such as Gloria Jean’s Coffee Bean and Barnie’s Coffee & Tea.
Starbucks was also known for its varieties and specialties of coffee.
Customers also thought that the stores looked attractive and were satisfied with the product.
Q2) Why have Starbucks customer satisfaction scores declined? Has the company’s service declined or is it measuring satisfaction the wrong way?
There are various possibilities that the customer satisfaction of Starbucks declined over the time. This can be inferred by taking a close look at Exhibit 11, which clearly states that 34% of the customer wanted an improvement in service when asked about what can make them feel valued customers.
This decline in customer satisfaction can also be termed as outcome of Service Gap. As quoted in Exhibit 11, the customers said that they needed a more of personal treatment which was low on the part of Starbucks as compared to friendlier and faster service.
From Exhibit 8, it can be also inferred that overall opinion of existing customers were 44% and that of new was 25% which clearly stated that may be changing customer demographical and expectations were another reason for declining customer satisfaction.
Another reason can be change of outlook of customers as Starbucks was initially a “Third Place” which now turned into place which focused more on “money making”.
And since the company now focuses more on building brand and product innovation, it leads to declining customer satisfaction as the recent focus went contrary to the company’s initial customer oriented approach which can be also termed as losing sight of core preposition.
Talking about whether company was measuring satisfaction in right manner or not, the conclusion will be that the company was measuring the satisfaction in the manner as Day said that: “The snapshot is not a perfect measurement tool, but we believe it does a good measuring trends”
Q3) How does the Starbucks of 2002 differ from Starbucks of 1992?
Starbucks during 1992 was in its initial stages and was trying to establish itself as a prestigious company. Its major sales were from sales of whole bean coffees which was the only item in the menu that was served. It had a lounge with an Italian coffee culture where mid to upper class professionals were targeted. They had fewer beverages at that time due to which the processing time was very low and many number of customers could be served with a high rate of customer satisfaction. One reason for fewer beverages could be that people during that time just wanted coffee instead of personalized orders which made them understand the customers in a personal level. Thereafter, the company decided to go public and offer coffee to a variety of people after which the company became a successful venture.
During 2002, the company after being public became too trendy over the years. It began operating in a huge level gathering over 20 million consumers in more than 5000 stores. 77% of the sales were from coffee beverages and various additions in the beverages were made. The shop sizes were made small without lounging, targeting younger and lower income groups. The process became more complex and service time for a customer increased due to which customer satisfaction could not be addressed to. Earlier the norm was customers going to Starbucks which changed to Starbucks reaching out to its customers. The prominent difference between the Starbucks of 2002 and 1992 is the customer satisfaction. The company grew so much in between this period that it lost sight of the customers.
Q4) Describe the ideal Starbucks customer from a profitability standpoint. What would it take to ensure that this customer is highly satisfied? How valuable is a highly satisfied customer to Starbucks?
With Starbucks’ focusing for the most part on esteem, consumer loyalty and environment, there was no place for low costs. These higher costs were not an issue amid the 1990’s, but the client base is quickly developing. The client is changing far from the built up high-wage representative, who has more extra cash for top notch espresso. The average Starbucks’ client that has developed, in the late 1990’s and mid 2000’s tends to be more youthful, less accomplished and in a lower level of pay.
The typical Starbucks’ client would be the type of client that visits Starbucks no less than eight times each month. These clients make up to 62% of every one of Starbuck’s revenues. If the quantity of clients who went by this regularly expanded, deals would increase massively. Research demonstrates that clients who visit just one to two times each month create merely 11% of all Starbucks revenues. In general, Starbucks should concentrate on acquiring the present client even more frequently.
To guarantee that the client is profoundly happy with each component of their Starbucks encounter, there are a couple of key variables, beside the espresso itself that the Starbucks stores and its employees must show. From a Starbucks’ overview in 2002, a spotless store was the main factor prompting consumer loyalty, with 83%. Considering the face that a store seems clean and has a high sanitation review, clients will be guaranteed that what they are devouring has been produced in a spotless situation.
Accommodation is the following element prompting consumer loyalty, with 77%. Clients adore having a Starbucks area on their ordinary movement course. Making client dedication has ended up being the purpose for the heft of Starbuck’s exchanges since the exceedingly fulfilled client is the dependable client.
It is vital that Starbuck’s keep up consumer loyalty to keep these dedicated clients returning. Without the 21% of clients, averaging eighteen visits every month, Starbuck’s would free 62% of every one of its revenues. Starbuck’s has additionally discovered that exceptionally fulfilled clients have a normal ticket cost of $4.42, instead of a fulfilled client who just spends by and large $4.06. Subsequently, having a fulfilled client is extremely significant to Starbucks and its deals.
Q.5) Should Starbucks make the $40 million investment in labour in the stores? What is the goal of this investment? Is it possible for the mega brand to deliver customer intimacy?
In today’s competitive marketplace, the buying experience is often detached and impersonal. Businesses have resorted to staff sparsely to reduce overall costs. Customers can now walk into stores and not ask for assistance and it is completely feasible to make a purchase with no human interaction. We are unfortunately used to this, which is sad because the art of personal selling has become lost.
Part of Starbucks’ success was driven by its customer service. They are not the only place that consumers can buy a cup of coffee, but they are one of the few that can get away with charging 8 bucks for it. Starbucks manages this by creating an atmosphere and an experience worth paying for. One of the crucial elements of this is how their partners interact with their customers. The level of service partially justifies the price of their product, and helps reinforce the experience. Coming to the question of whether $40 million in additional labour would be beneficial to the company has a more complex answer than a mere yes or no. There are certain major assumptions that are being made in this case. The first assumption is that the speed of service is the number one influencer of satisfaction and that the additional labour will result in an increase of speed of service. However, this is not true since the rankings of the key attributes by Starbucks customers suggest that fast service ranks number 6 in importance. A second assumption is that all stores are equal in size, number of customers they attend, prices, and that all the stores need this additional investment. A final assumption is that satisfaction is correlated with loyalty and that if a satisfied customer becomes highly satisfied, the number of visits per month to the store will increase substantially, thereby augmenting the sales revenue for the company.
Based on the company’s research, it is evident that only 10% of Starbucks’ customers have asked for a faster, more efficient service. Even if the $40 million investment is made and customers get a faster service, there is a big risk in losing value in some of the other perceptions. Having more partners in a specified work area might lead to the risk of less friendly, less attentive staff and might also risk the loss of the personal treatment. It even appears impractical and inefficient to allocate the $40 million investment equally to all the stores. It would make sense to allocate the money based on size of store, number of customers, location and need for additional labour. Hence, Starbucks could invest in additional labour but only after conducting further research about the actual necessity of such an investment. In addition, there would be no need to invest in a store where all customers are highly satisfied and there would be higher need to invest in a store where there is a high percentage of less satisfied customers. The goal of this investment would be to increase customer satisfaction and in turn generate profits for the company.
It is important for any company to realise the importance of customer intimacy. Personal interaction is a powerful selling tool. The associate on site is the human face of the company and important in humanizing an otherwise faceless cooperation. A mega-brand can deliver customer intimacy, and while it is harder than a local operation but it is possible. It is done the same way by personal selling skills, but the company must enable its associates to achieve this goal by giving them the time and training to do it. Increasing the labour would certainly give more room to serve more customers, but the quality of service and the intimacy can only be developed when employees make the required effort in making consumers feel not just welcome, but uniquely valued.