July is a special month for many premium beverage consumers. This month, my favorite coffee shop with the familiar round logo finally began offering free wi-fi at its 6800 company-owned outlets in the U.S. It’s been a long time coming: most of the independently-owned coffee shops in town have known for some years that wi-fi was a competitive advantage they could use to stick it to the man (or, in this case, the Crowned Mermaid).
It may seem like a company with the nerve to charge nearly $4 for a drink would be after every nickel it can wring out of a customer…and, frankly, it is. Starbucks’ management has simply had an epiphany about where wi-fi fits into the company’s value proposition. Even convenience stores sell specialty coffee drinks these days, so coffee can’t be the limit of the brand’s purpose. Starbucks is selling a lifestyle of casually sipping premium beverages over fascinating conversation or reading material to busy people who fantasize about that luxury. If you can’t linger today, your to-go drink will let you carry the dream of a more relaxed morning right along with you to the office. Being asked to go through the hassle of an online payment while in a lazy, surf-the-Style-section mood is enough to sour your latte.
It’s not that the internet is free for Starbucks to provide. Rather, the cost is minimal in comparison to the enhancement of the customer experience “free” internet provides. Factor in the cost to the company of the many thousands of small credit card transactions, charging for the internet access isn’t just diminishing the coffee shop experience, it’s literally not worth the trouble.
By coincidence, I happened to be finishing Chris Anderson’s Free, a book about the role of “free” products and services in the economy when word of free wi-fi coming to my favorite coffee chain reached me. His book puts forward a number of interesting ideas, ranging from business models built on the concept of free products and services to an exploration of counterfeiting and piracy.
Anderson’s book outlines an economic theory of “micropayments” put forward by NYU economist Nick Szabo. Szabo’s research examined the model in which people pay fractions of a penny (or millieuro) for each download from the internet. He hypothesized that charging even a penny for a product or service forces a decision about whether or not the product or service is worth that penny. Charging even a single penny for wi-fi would have required the hassle of a transaction, obliging one to decide if access to internet content was worth the aggravation. Szabo concluded that any business based on micropayments is doomed to fail because while economic costs may be minimized, the cognitive effort of making a decision about them is still required. In fact, history has proven him correct, as businesses based on the micropayments model have largely not made it off the launchpad.
Interestingly, my own situation and a conversation with a friend suggest that going from a paid to a free wi-fi model has some consequences for people who have been enjoying the privilege of free wi-fi for some time. Because I have a gold card to further enable my hot chocolate addiction, I would have been entitled to two hours of free wi-fi per day under the old paid model, but I never used it. I would have had to sign on—probably meaning that I would have to dig my card out of my wallet and look up a password—and then monitor myself to make certain I didn’t use the internet for 121 minutes. Even though the wi-fi was free to me under the old paid wi-fi model, it was still more trouble than it was worth. Consequently, I’m delighted by the move to free wi-fi.
Marisa Reyes, a shrewd shopper and my friend from business school, wondered what free wi-fi meant for her own Rewards card. Her reaction was quite different from mine.
“[My] initial concern was that it now devalued my Starbuck Rewards card. One of the benefits of the card (the one that drew my husband in) was to get free wi-fi, but now it's available to everyone,” said Reyes. “Did Starbucks add a new perk to the Rewards card to replace the one they're now giving away to all their customers, with or without a card?”
The common reaction to finding out that wi-fi is now free at Starbucks was, nearly verbatim, “what took so long?” As a practical matter, Starbucks was probably trying to negotiate better terms for wi-fi through AT&T, their domestic network provider since 2008. However, Marisa’s reaction does make one wonder…was the Crowned Mermaid also fearing the dismay of its Rewards cardholders if it extended this Rewards benefit to all comers?
Rewards cardholders like me just want the occasional freebie, and if someone else also gets some free wi-fi, well, that’s no skin off my nose. I wouldn’t have even thought to join the program if the manager at my local outlet hadn’t filled out half the application for me and pressed it into my hand one morning (yes, we had gotten to know each other that well). For someone like Marisa, who prides herself on getting a better deal than the average consumer, especially on premium items, the perception that she’s lost something is understandable and not offset by some other, cardholders-only promotion.
But would customers like Marisa reduce their spending at Starbucks because wi-fi was now free to everyone? Probably not. But making wi-fi free might be what would convert some customers lurking behind their laptops in independent coffee shops into Starbucks regulars. And if you’re already Starbucks, it’s pretty hard to come up with new ways to increase market share in the U.S.
Good for the Crowned Mermaid for finally doing the math on this one. The coffee chain may eventually make it up to Rewards members like Marisa if its revenues from regulars dip. Although I very much doubt that will happen, I wouldn’t be at all surprised if its marketing team isn’t thinking about how the Rewards program might have to evolve as the next phase of the free wi-fi rollout. It just would be uncharacteristic for this coffee retailer to leave money on the table.
By Lisa Jancarik
References
1. Anderson, Chris. Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing. Hyperion Books, 2009. pp. 59-60.
2. Starbucks (June 29, 2010). Starbucks Turns on Free Wi-Fi for Customers July 1st. Retrieved July 8, 2010 from http://starbucks.tekgroup.com/article_display.cfm?article_id=411
Lisa wishes to thank Marisa for her thoughts. The premium coffee beverage of your choice is on me next time I see you!
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