Wake Up and Smell the Coffee!


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published February 1, 2008

What drives engagement and loyalty for your brand?

Many companies think they know the answer to this because they’ve relied on some form of traditional conjoint analysis, which can be very helpful in determining which combination of attributes are most preferred by rational target audiences. It’s an extraordinarily appropriate approach for situations where a strong case can be made for mostly rational decision-making. And therein lies the problem.

It is no longer even fodder for good argument that consumer engagement, decision-making, and loyalty are principally emotionally-driven. Rational elements come into play of course, but not as much as they did before commoditization and mass distribution reared their ugly heads! We’ve pegged the ratio at 70% emotional to 30% rational. Feel free to argue all you want about the actual numbers, but you would be hard pressed to find anyone who thinks its even 50:50! Not anymore.

We thought this an appropriate question because in the 2008 Brand Keys Customer Loyalty engagement Index we’ve noticed that most of the category drivers in categories we track have changed substantively since last year. Today you absolutely need to know your true category drivers if you are going to be profitable.

“Category drivers” – and the category and customer values that make up the individual components of the drivers – describe how consumers view a category, compare offerings in a category, and, ultimately, how they engage with one brand versus another. Properly configured, category drivers will tell you what consumers will do – not what they say they’ll do, which are two really different things, especially if you’re keeping score by counting your sales and profits.

We raise the issue of knowing your category’s drivers, because most companies don’t. In fairness, we’re pretty sure that most companies think they do, but given the complexities of the marketplace and the existence of “bionic” consumers, most of the time they really don’t.

Take, for example, the Coffee Category. McDonald’s just announced that they’ll install coffee bars with Starbucks-like baristas in 14,000 U.S. locations this year, so along with drip coffee, McDonald’s will be serving lattes, cappuccinos, and frappes. This would seem to be a natural, next-step line extension, especially with so many locations to offer up product throughout the United States.

But what actually drives loyalty in the coffee category? Some in the industry have suggested that convenience, via “Convenient Locations,” has become the dominant driver in the industry, but that’s not strictly true. According to the Brand Keys Customer Loyalty Engagement Index, convenience has become table-stakes when it comes to coffee beverages. Consumers are driven more by actual brand loyalty than just convenience, so will having lots of coffee beverages at lots of locations do it for McDonald’s?

Not according to our Loyalty Engagement Index. Starbucks lost a lot of ground last year walking away from the critical coffee experience, the category driver, “Service and Surroundings. In the face of long lines of people who regarded the purchase of hot coffee beverages as a recreational activity, Starbucks re-engineered the process, taking away the pulling of shots. Instead of the sound and smell of coffee beans being ground, they went with vacuum packed, pre-ground coffee.  It’s not a surprise that loyalty numbers – and attendant profits – went down. Without some entertainment, some theater to fill the wait-time, where was the added value? Especially when less expensive coffee was to be found at Dunkin’ Donuts, McDonald’s or the local coffee shop or street corner kiosk. According to the Brand Keys Index, America apparently did run on Dunkin’, at least when it came to “Service.”

In the third week of January, Starbucks announced a test in some Seattle locations of a $1 cup of coffee, with a free refill, likely harming the premium brand image it has worked so hard to build and tapping into a driver that was never their strong suit to begin with. A better decision is likely their move to cut back of food items, allowing the customer to smell the coffee-an attribute that resides in the dominant Surroundings driver where they have been losing precious ground.

To address those issues, McDonald’s is apparently borrowing heavily from the Starbucks brand experience and Dunkin’ service standard, and they’ll be calling the crew members “baristas.” But it’s also been reported that the McDonald’s process will use a single machine that automatically steams the milk and combines it with the espresso, which cuts down on some of the drama and ceremony that comes with the preparation of a really well prepared drink. “Selection and Variety” is also a category loyalty driver, and McDonalds is bound to have a more narrow selection to offer than the gabillion varieties available at Starbucks.

However, “Quality and Taste” also drive engagement, consumption, and loyalty, and recently Consumer Reports rated McDonald’s drip coffee better-tasting than Starbucks.

Of course, saying it and doing it – and doing it believably – are entirely different things. McDonald’s tried to introduce a coffee distribution outlet called “the McCafé” nearly a decade ago. They set up some comfy chairs and a counter that offered cappuccinos and cookies, but a corner of a typical McDonald’s didn’t actually provide an acceptable milieu that lent itself to a cappuccino-sipping experience. Servers kept asking, “You want fries with that?” We’re only kidding, but you get the point. McDonald’s certainly had the real estate and the financial and production wherewithal to offer up the product; what they didn’t have was a believable environment. Like Starbucks did.

But with the success of its premium drip coffee as a foundation, a recent physical plant re-fit, and cheaper products than Starbucks, McDonald’s feels that introducing coffee bars will help solidify customer loyalty and will be able to address the upturn in consumption of coffee-based beverages and the downturn in carbonated soft drinks.

As this coffee study abundantly shows, relying on a perfectly good rational technique to “identify” a category is not the best way to amalgamate emotional elements. It certainly can be misleading.  Which is why reconsidering how you identify category drivers, with a focus on loyalty-based engagement metrics, is the right assessment for today’s environment. Think ‘sales,’ ‘more sales’ and ‘profits.’ And that’s the best reason to change how your company and brand identify your category drivers.

There’s not a lot you can do about the fact that category drivers change. They will continue to change, just faster. Opinions regarding flavored coffee beverages may vary, but one thing everyone can agree on is that more loyal customers is a good thing. And the only way you guarantee that is to wake up, smell the coffee, and go out and learn what actually drives loyalty and engagement in your category.

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.