Starbucks Delivering Customer Service

Lifetime Value For Un agreeable, fulfill And Highly Satisfied guests The story of Starbucks transformation from a small independent coffee shop tucked away in a corner of Seattles Pike Place Market to a cultural phenomenon spanning the globe is legendary. A issuing of factors have been attributed to the advantage one being a keen understanding of its patrons. thither are multiple methods used to grow customer info and the value derived therein. Customer lifetime value is one. Customers are assets, and their values grow and decline.Segmenting customers ground on their lifetime value is a powerful way to target them because marketing mix activities basis accordingly aim at enhancing customer value. (Ho, 2006) Roughly translated, customer lifetime value is the projected profit that a customer will gene place during their lifetime. We used the case data to segment Starbucks customers into three straightforward categories of ungratified, satisfied and highly satisfied. Fortuna tely, the case provided some useful data to make our initial assumptions about the menstruation of pass judgment revenues from distributively family.Exhibit 9 UnsatisfiedSatisfiedHighly Satisfied Number of Starbucks reprimands/Month3. 904. 307. 20 fairish Ticket Size/Visit$3. 88$4. 06$4. 42 medium Customer Life (Years)1. 104. 408. 30 The data allowed us to calculate the yearly expected revenues by taking 12, the number of calendar months in a year, times the product of each region given in Exhibit 9 for each category of customer. UnsatisfiedSatisfiedHighly Satisfied Expected Lifetime prox Revenue$ 199. 74$ 921. 78$ 3,169. 67To derive the clv it is necessary to determine the profits. This requires taking costs against the expected future revenues. The expected costs are typically any amount incurred from attracting, selling and servicing customers. The scoop up representative cost of servicing the customer from the given data was the gross margin from Starbucks financial statements. after(prenominal) all, this number reflects the true costs incurred in servicing each customer, while leaving out pert expenses such as depreciation and other corpo tempo oerhead that have little relation.FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 Average engagement Revenue1,308,700,0001,686,800,0002,177,600,0002,649,000,0003,288,900,0002,222,200,000 uncouth Profit730,200,000939,200,0001,215,700,0001,536,200,0001,938,900,0001,272,040,000 Operating Profit109,200,000156,700,000212,300,000281,100,000310,000,000213,860,000 top Income68,400,000101,700,00094,500,000181,200,000215,100,000132,180,000 Gross Profit Margin55. 80%55. 68%55. 83%57. 99%58. 95%56. 85% Operating Profit Margin8. 34%9. 29%9. 75%10. 61%9. 43%9. 48% Net Profit Margin5. 23%6. 03%4. 34%6. 84%6. 54%5. 0% The average of the five long time of financial statement data was used for the margin to take against revenue. The figures below represent the CLV for each category using a discount localise of 12% to give t he present value. A discount rate between 10% 20% is typically used in these applications. Starbucks is a mature company at this stage of development and the cost of capital is likely to be toward the lower end of the spectrum. Unsatisfied Satisfied Highly Satisfied Expected Lifetime Future Revenue $ 199. 74 $ 921. 78 $ 3,169. 7 Gross Margin56. 85%56. 85%56. 85% Discount Rate 12% CLV Undiscounted $ 113. 55 $ 524. 03 $ 1,801. 94 CLV Discounted$105. 88 $405. 59 $1,137. 64 Finally, we calculated the annual CLV for each category to provide information for our upcoming problem facing Starbucks about investing in increasing staffing levels. The annual amounts were derived by annualizing the products of visits/month and average ticket size/visit. Unsatisfied Satisfied Highly Satisfied Number of Starbucks Visits/Month 3. 90 4. 0 7. 20 Average Ticket Size/Visit$3. 88 $4. 06 $4. 42 Customer yearly Value $ 103. 23 $ 119. 10 $ 217. 10 Traditional Customer Annual Value (textbook version)$209$24 1$440 For comparison, our group as well as decided to calculate the textbook version of CLV by taking the average retention rate of 75% derived from Exhibit 8 and inputting it into the formula used in the text. We used the same discount rate, 12%, and took that rate times the product of the number of Starbucks visits/month and average ticket size annualized.CLV = m * r/(1 + I r) Exhibit 8 % of Starbucks customers who first started visiting Starbucks . . . In the past year27% 12 old age ago 20% 25 years ago 30% 5 or to a greater extent than than(prenominal) years ago 23% Average25% $40 Million Investment In Improving Its Customer expediency Using the data provided from Exhibit 3 in the case in regards to sales data lowly down for each company operated store in North America we derived the figures in the tabular array below. DailyWeeklyMonthlyYearly Average Store Sales$2,194$15,400$66,733$800,800 Average ticket/visit$3. 85$3. 85$3. 85$3. 5 Average Customer Count5703,99017,33 8208,050 One assumption made was the investment in improving customer service would be restricted to North Ameri rump stores (4,574) from our calculations regarding the forecasted cost of $40 one million million million. As mentioned in the case, the company had plans to open 525 company-operated and 225 license North American stores in 2003. (MOON, 2006) Consequently, these were the figures used to determine the forecasted North American store growth in 2003 and the same growth projections were made for subsequent years.Additionally, using the customer count derived from the calculations in the previous table we projected the change in customer count by using the same retention rate of 75% calculated from Exhibit 8 to determine the amount of well-kept customers. This is also supported by the fact the Starbucks cannibalizes its existing store revenue by opening new stores in geographically cluster markets. But this is offset by the count incremental sales associated with new st ore concentration. That figure was and then used to provide the new customers by taking (1 75% = 25%) the percentage times the retained customer count.Thereby, our total projected customers equaled the sum of the two and those amounts were continually projected forward. YearCustomers Retained/storeNew Customers/storeTotal Customers/storeNumber of Stores 2002208,0504,574 2003156,03839,009195,0475,324 2004146,28536,571182,8566,197 2005137,14234,286171,4287,213 2006128,57132,143160,7148,396 2007120,53530,134150,6699,772 2008113,00228,250141,25211,375 One final examination assumption, the growth rate in stores was halted in 2008 to reflect the effect of the recession.All of these amounts allowed the $40 million investment in customer service to be broken out per store over our projected period spanning years 2002 2008. Year2002200320042005200620072008 Customer retained/store156,038146,285137,142128,571120,535113,002 New customer/store39,00936,57134,28632,14330,13428,250 Total custom er count /store208,050195,047182,856171,428160,714150,669141,252 Number of Stores4,5745,3246,1977,2138,3969,77211,375 gain/Acquistion monetary value per store$8,745$7,513$6,455$5,545$4,764$4,093$3,517As shown, the growth in stores allows for a considerable reduction in the per store cost over the projected period. The initial acquisition cost was made by simply dividing the initial $40 million cost by the number of stores in 2002. From the information provided on Page 11 Fig A Customer Visit Frequency, we calculated the customer base for each satisfaction level. Added to this information was the data derived from the foregoing table to break out the forecasted revenue stream less the acquisition cost to arrive at the profits made from improving customer service. 002200320042005200620072008 Number of Customers208,050195,047182,856171,428160,714150,669141,252 Customers Unsatisfied87,38181,92076,80072,00067,50063,28159,326 Customers Satisfied76,97972,16767,65763,42859,46455,74852, 263 Customers Highly Satisfied43,69140,96038,40036,00033,75031,64129,663 Total Revenue per store$800,800$840,840$882,882$927,026$973,377$1,022,046$1,073,149 Acquistion/ advancement Cost for store-$7,513-$6,455-$5,545-$4,764-$4,093-$3,517 Total Revenue AC$833,327$876,427$921,481$968,613$1,017,953$1,069,632To increase the profitability based on the CLV data, the supreme bang for the buck is gained by increasing the customer level from satisfied to highly satisfied. Making this switch, Starbucks non only will see an increase in average ticket size from $4. 06 to $4. 42, but the frequency is also increased from 4. 3 to 7. 2 visits per month. All gains yield an surplus $98 in incremental gross profit per every customer moved up in satisfaction. Additionally, customer life increases from 4. 4 years to 8. 3 years.As shown in the table below, it makes more sense to pursue after switching satisfied customers to highly satisfied customers as the NPV is far greater than the alternative. U sing the NPV from the table and improvement cost for each store we can calculate the minimum number of customers that we need to switch in 2003 per store. The minimum number of customers to be switched in 2003 = Improvement cost / NPV of satisfied to highly satisfied. = $7,513/$497 = 16 customers/store = 16 * 5,324 stores = 85,184 total customersCustomer LTV/yearChange in revenue by moving up in customer satisfaction levelAvg Customer LifeNet endow Value Unsatisfied$103 Satisfied$119$164. 4 yrs$51. 86 Highly satisfied$217$988. 3 yrs$497. 31 As Starbucks expands and builds more stores, improvement cost per store that is needed is reduced. This, in turn, has a direct effect in reducing the number of customers it needs to switch up one level. Qualitative assessment of Starbucks challenges Expectancy-Value ModelKey Attributes (Exhibit 10)Customer Ranking (Exhibit 10)Weights (Exhibit 11)Customer rank (Exhibit 11)Combined ProbabilityRanking of Importance Treated as a Valuable Customer0. 75free cups after certain number of visits0. 190. 14251 Friendly Staff0. 73Friendlier, more attentive staff0. 190. 13872 Appropriate Prices0. 65Reduce Prices0. 110. 07153 Fast service0. 65Faster, more efficient service0. 10. 0654 Knowledgeable Staff0. 39More knowledgable staff0. 040. 01565 Selection of merchandise0. 5Better Quality/Variety of Products0. 090. 00456 There is a direct relationship between customer satisfaction and number of visits and revenue which eventually leads to higher(prenominal) profits, Starbucks should raise the customer satisfaction levels of its current customer base by do them visit stores more frequently. By using key customer attributes from Exhibit 10 and the consumer weights which was given in Exhibit 11, we can use the expectancy value model to see what are the perceived values to the customer.We can then rank the attributes that consumers would value the most. The expectancy value model shows that faster service is not the highest in perceived value to consumers. There are others that rank higher. Specifically, Starbucks should focus on treating the customer as a wanted consumer by rewarding the consumer with free cups of certain coffees after so many purchases. This would surely build more loyalty to the their brand, especially among both the newer and older customers.Starbucks can achieve this by doing one or more of the following Prices and Promotions Since Starbucks typical customer profile is evolving, the company should look in to running promotions such as discounted prices or a free drink after so many number of visits which could generate excess revenue and possibly increase the average ticket size and customer life for both unsatisfied and satisfied customer level as well as build loyalty among newer and older customers. Improve value to customers with friendly staff Knowledgeable staff who offer attentive service by salute and knowing regular customers as well a remembering their drinks would serve well to impr ove the value suggest for Starbucks. This will also try to bridge the gap between Starbucks and various other independent potency coffee shops. Cleanliness Starbuckss should ensure that the store is clean at all times (i. e. , restrooms, countertops, trash cans, seating room areas, etc. as store cleanliness was ranked as key attributes in creating customer satisfaction (Exhibit 10) toilet facility next on the list is convenience. Starbucks could continue to offer customized drinks and further promote sales of its SVC cards to help customers pay for their concoction at their convenience. Improve the customer snapshot measuring techniques to strike a sleep in measuring customer satisfaction level. Improve the quality and variety of the coffee Explore additional opportunities to earn peripheral revenues in selling pastries, sandwiches, lunch menus or even liquor. Study in making store atmosphere more conducive to ethnically concentrated geographical locations. WORKS CITED Ho, T. -H. (2006). Incorporating Satisfaction into Customer Value Analysis Optimal Investment in Lifetime Value. Marketing Science , 260-277. MOON, Y. (2006). Starbucks Delivering Customer Service. Harvard line of business Review .