Starbucks brews loyalty with mobile payments
No cash, no card, no problem. The company is averaging a million mobile transactions a week.
By David Hatch
Starbucks (SBUX) makes it easy for customers to buy coffee. So easy, in fact, that they don't even need cash or a credit card. A smartphone will work just fine. To capitalize on the growing popularity of these devices, Starbucks introduced mobile payment technology in January 2011 that enables purchases with the wave of an iPhone, Android or Blackberry.
"A lot of our customers have their phone in their hand when they come into our store," says Adam Brotman, chief digital officer at Starbucks. "We knew that customers were increasingly more mobile -- were increasingly using their phone as a primary computing device."
Recognized by U.S. News as one of America's Most Connected Companies for implementing the largest mobile-payment program in North America, Starbucks says the technology is boosting sales. Since the launch, customers have made 45 million mobile payments in the United States and are now averaging a million transactions a week, says Linda Mills, a company spokeswoman. She adds that Starbucks has experienced a ten-fold increase in mobile-payment use from March 2011 to March 2012. "If you compare year over year, or month over month, it's growing very rapidly," Brotman says.
People move through lines more quickly when they pay with smartphones. And since phone purchases are made with money preloaded onto Starbucks loyalty cards, the chain incurs fewer credit card fees, resulting in cost savings.
"They've really enhanced the customer experience at point of sales," says Denée Carrington, senior analyst with Forrester Research. "There's an element of fun" that happens when people pay with mobile phones, explains Carrington, who expects other companies to follow Starbucks' lead with similar initiatives.
Psychology could also help explain the phenomenon: Customers may feel less guilty buying lattes or Frappuccinos if they don't have to reach for cash or plastic. And for some, there may be an ego-boost along with that double-shot espresso that comes from being part of an exclusive club that can pay with the latest technology.
"The coffee retailer set out to solve a growing user problem -- wait times in stores -- and ended up with an enriched application that has materially affected the company positively," analysts with the Altimeter Group, a research and advisory firm, concluded in a recent report.
Beyond adding convenience and limiting credit card fees, the mobile app provides Starbucks valuable data that it can use for analytics and marketing. With customers' permission, Starbucks can track their whereabouts using geolocation software on their phones to alert them when they're within walking or driving distance to one of its stores. Customers can also opt to receive updates from the company via email and text message. Starbucks even monitors which items people are consuming -- or due to lack of sales, avoiding -- and responds accordingly. "It's definitely a research tool," the spokeswoman says.
To use the mobile-payment technology, patrons download an app that's synced with their Starbucks loyalty card, which rewards frequent purchasers with free beverages. To order an iced peppermint white chocolate mocha, simply call up the app and activate the on-screen bar code by holding the phone near the price scanner next to the cash register.
The app also features a store finder, customized "drink builder" that can save favorite combinations, and nutritional information. "Those are all engagement mechanisms that certainly create a richer experience that ties the customer more closely to the brand," Carrington says. Although it's optimized for iPhones and Androids, the app also works with Blackberries, but with fewer options. Earlier this year, Starbucks extended mobile-payment technology to outlets in Canada and the U.K.
Carrington, the Forrester analyst, cautions that Starbucks needs to pay close attention to potential pitfalls, from the technical glitches she says have prevented her from reloading her loyalty card with her phone to the privacy and security concerns that will inevitably be raised about the storage of credit card information. And Starbucks still faces the challenge of educating customers about this new payment option. "I wouldn't say they've saturated the market," she says.
Brotman says he hasn't heard complaints about the specific problem Carrington cited, but that the company is committed to addressing any issues that arise. He also notes that credit card data is not stored on users' phones, which helps safeguard it. Regarding outreach, he agrees that more needs to be done: "I think there's a lot of room for improvement in terms of awareness."
The company is a technology pioneer in other ways. According to Bloomberg BusinessWeek, Starbucks uses cloud services to communicate with baristas about sales and daily deals. Starbucks also claims to be among the most-liked brands on Facebook, among the most-tweeted brands on Twitter, and the most popular retail destination for users of Foursquare, a site that allows people to share their locations.
Despite the company's success with mobile payments, Brotman says Starbucks is keeping an open mind. "We are frankly agnostic when it comes to the technology itself," he explains, noting that if something better comes along, the company would adopt it. "We realize mobile's always changing, and we're trying to stay ahead of the curve."
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