Companies desperately want to make their customers happy

But how far should they go to please them, and at what price? Should a company differentiate among its customers and not treat all customers the same? The following article explains that companies go out of their way to please their most profitable customers.

Starbucks Rewards Starts Rewarding Big Spenders^*

In 2016, Starbucks introduced its revamped Starbucks Rewards program to its then-11 million members. Why? Starbucks wanted to better align its rewards program with customer spending. The old Starbucks Rewards program gave customers a “star” for each visit, regardless of how much they spent. After collecting 12 stars, customers received a free beverage. This resulted in big rewards for low spenders. Customers asked baristas to ring up one item at a time to collect more stars for each transaction. This created delays at the cash register and increased costs for the company by extending the staff time required for purchases.

Under the overhauled Starbucks Rewards program, customers receive two stars for every dollar spent on beverages, food, and other items at Starbucks. Gold members (customers who earn at least 300 stars in 1 year) now earn free beverages and receive special benefits like free coffee refills and the ability to pre-order and pay using the Starbucks mobile app.

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For Starbucks, these changes better align rewards with customer spending. Additionally, Starbucks collects valuable user data on the mobile app that allows the company to better target their customers going forward. Though it penalized customers who visited frequently for small-ticket items, the new Starbucks Rewards program has added millions of new members since 2016.

To determine which product, customer, program, or department is profitable, organizations need to allocate costs. In this chapter and the next, we build on the activity-based costing (ABC) ideas introduced in Chapter 5 and provide insight into cost allocation. This chapter emphasizes macro issues in cost allocation: allocation of costs to divisions and customers. Chapter 16 describes micro issues in cost allocation—allocating support-department costs to operating departments and allocating costs to different users and activities—as well as revenue allocations.