Starbucks Delivering Customer Service

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Lifetime Value For Unsatisfied, Satisfied And Highly Satisfied Customers

The story of Starbucks transformation from a small independent coffee shop tucked away in a corner of Seattle’s Pike Place Market to a cultural phenomenon spanning the globe is legendary. A number of factors have been attributed to the success - one being a keen understanding of its patrons. There are multiple methods used to obtain customer information and the value derived therein. Customer lifetime value is one.

Customers are assets, and their values grow and decline. Segmenting customers based on their lifetime value is a powerful way to target them because marketing mix activities can then aim at enhancing customer value. (Ho, 2006)

Roughly translated, customer lifetime value is the projected profits that a customer will generate during their lifetime. We used the case data to segment Starbucks customers into three distinct categories of unsatisfied, satisfied and highly satisfied. Fortunately, the case provided some useful data to make our initial assumptions about the stream of expected revenues from each category.

Exhibit 9
UnsatisfiedSatisfiedHighly Satisfied
Number of Starbucks Visits/Month3.904.307.20
Average Ticket Size/Visit$3.88$4.06$4.42
Average Customer Life (Years)1.104.408.30

The data allowed us to calculate the annual expected revenues by taking 12, the number of months in a year, times the product of each component given in Exhibit 9 for each category of customer.

UnsatisfiedSatisfiedHighly Satisfied
Expected Lifetime Future Revenue$ 199.74$ 921.78$ 3,169.67

To 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 best representative cost of servicing the customer from the given data was the gross margin from Starbucks financial statements. After all, this number reflects the true costs incurred in servicing each customer, while leaving out extraneous expenses such as depreciation and other corporate overhead that have little relation.

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 Average Net Revenue1,308,700,0001,686,800,0002,177,600,0002,649,000,0003,288,900,0002,222,200,000 Gross 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 Net 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%5.80%

The average of the five years 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 rate of 12% to give the 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 $ 3,169.67 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 4.30 7.20...
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