Yesterday at Starbucks, as I paid my $4.92 for a Fre-Talian (1/2 French; 1/2 Italian Roast) custom Clover coffee with two shots of espresso, I wondered if I would soon be buying a more expensive reserve coffee. The reason is a change in their rewards program.
Currently, for each coffee i get a star. Twelve stars and I get a free drink. Starting during April though, my free drinks will depend on how much I spend. For every dollar, I will get two stars. Instead of 12 stars, I will need 125 for that free drink. Whereas before the number of transactions counted now it’s the dollar total.
The response…Not good:
With the incentive to spend more, in a month or so, I might change my coffee buying behavior at Starbucks.
Where are we going? To how the margin changes our decisions.
Subscriptions and Newspapers
Theater subscriptions increase the number of shows we see. When I buy five tickets in advance to five performances, I go five times. However, during those seasons that I purchase no subscription, I have to decide each time whether I want to spend the extra money and go. With the former, an extra costs me nothing when I make my decision. For the latter, i feel the cost. Similarly, a monthly parking deal creates the incentive to use a parking lot more often than when I pay for parking each time.
The perfect example though is those newspaper vending machines that open to expose maybe 10 other papers. We pay for a single paper and then close the machine. Most people don’t take an extra paper because there is no incentive. I only need to read one newspaper. A second one provides no benefit.
Like theater and parking subscriptions, and newspaper vending machines, Starbucks is manipulating our decision-making at the margin.
Our Bottom Line: Thinking at the Margin
Thinking about extras, we should thank British economist Alfred Marshall (1842-1924) for his insight. Marshall was the first scholar to suggest we keep an eye on the margin if we truly want to understand decision-making. Because the margin is where we decide if we want something extra, the cost of that extra item shapes our behavior.
With Starbucks, the margin is where we make decisions about how much extra to order and where Starbucks establishes the incentives that help us decide.