Hotel Profit Discovery

Free Coffee with Cream, no Analytics

Today is a great day. It’s great because I unexpectedly got a free cup of coffee from a multinational corporation and, at least during this transaction, I gave them nothing in return, except maybe, some discouraging data.

Here’s the story of my $2 coup in a cup:

My father and I decided to take my two young boys to the park to drain some of their energy (if that’s possible). On the way, I asked my father to stop at Starbucks for coffee. Without hesitation, he went into his glove box and pulled out a coupon that he received in the mail for a free McDonald’s coffee – any size, and there happened to be a McD’s at the next light whereas a Starbucks trip would have taken us away from the park. I scanned the coupon to find out what I would have to buy to get the free coffee and to my surprise it did not have any restrictions. When I alerted my father to this fact he was also very confused.

We pulled up to the drive thru speaker where I proudly announced that we wanted to exercise our moral obligation to redeem this “gift” which we are legally entitled to obtain. After successfully fielding a series of questions that were aimed at discovering whether I was a thief or stupid, such as “Are you suuuure it does not ask you to buy another coffee at full price?”, the attendant was so perplexed that he asked us to drive up to the window. He took the coupon, called his manager, entered a few dozen override codes into the register, and then he asked me how many creams and sugar I wanted. It seemed too easy. Was this really happening? I told him that I would like three creams with my large coffee, no sugar. The manager predictably told me that I would get a regular coffee. I reminded them that the coupon said “any size”. They agreed, gave me my coffee, and I rode into the sunlight.

Now my analytics hat went on and I tried to make sense of what just happened. I discarded the notion that this coupon could have been part of an actual promotion to drive sales. I mean, McDonald’s had to know that the bearer of this “gift” was most likely going to take the one coffee and run. Then again, it’s been well documented how fast food franchisors often launch discount programs aimed at increasing traffic at the the expense of the franchisees’ profit. But by now we have to assume that McDonald’s has enough data to successfully separate the marketing actions that work from the fruitless.

Let’s retrace our steps. The intended audience, I think, was my father, who never eats McDonald’s or drinks coffee. The coupon was part of a flyer full of coupons with buy-one-get-one offers. But I redeemed the coupon – a morning coffee drinker who never drinks McDonald’s coffee. I bought nothing else. We made the purchase at a store about 10 miles from his house. What did McDonald’s get?

Of all the myths ever perpetuated in B2C marketing, the most dangerous is the belief that giveaways create customers. While this tactic may work for the town’s new baker who is trying to earn the trust of the local villagers, in today’s non-captive and saturated marketing environment, giveaways achieve the opposite of their intended effect. In trying to promote an “incentive to try” via a “foot-in-the-door” tactic, giveaways actually open up an unintentional “floodgate to pillage”. The result is that you WILL attract new users, but you will not convert enough of them into profitable customers.

To be clear, by giveaways, I am not referring to limited demos, betas, stripped down samples or freemiums – standard versions of premium products. Those are all inferior versions of the actual product. My cup of coffee was the same as the one that the customer behind me paid for.

For the past 50 years, psychologists have studied the effects of promotions and giveaways on purchase behavior. In a 1977 paper, Shoemaker and Shoaf found that the probability of repurchasing a brand actually dropped if the previous purchase was on promotion. Since then, numerous papers explained this phenomena using self-perception theory which postulates that you are most likely to value a product by the promotion that you received rather than by the benefit the product gives you. This cognitive condition makes it unlikely for you to ever pay full price for that product in the future. In other words, once a person has received something on discount or for free they will subconsciously ask themselves, “Am I the type of person that would pay for something that I just enjoyed for free?”. For most, the answer is no, and Groupon is now feeling this well documented fact.

Examples of our reluctance to go from free to paid are everywhere. Most recently we had the Netflix service split, rate hike fiasco. But most notable is the strategic minefield crossed by Google and Facebook in trying to monetize their platforms. In the end, both had to conform to the “ad impressions” model wherein their role is to engage potential customers while sellers try to bate them to spend. Unfortunately, once you go free, you can’t go back.

More importantly, the McDonald’s coupon was ill conceived in another category – they did not get any useful data. Had the coupon stipulated that to redeem it, I had to fill out a short (3-5 questions), well-crafted behavioral survey, then I could definitely understand why they were willing to give away the immaterial cost of a cup of coffee. I could have easily completed the survey at the drive-thru window or I could have activated the coupon on my phone via a survey app that required my facebook login. In the analytics age, all business activities should be measured by either a direct revenue minus cost figure or by its indirect “data capture” value. By focusing on the potential sale instead of the potential data, this company missed an opportunity to gain some insight into discovering the process that could potentially make its competitors’ customers switch to their brand.

Still, some of you may be thinking that since I have tried McDonald’s coffee, I would be more likely to buy one if a Starbuck’s was not within reach (foot-in-door strategy). It’s true, the fast food business thrives on accessibility. However I am a loyal subject of the “experience” culture. I go out of my way for Starbucks and pay a premium, not because their product is better (I’ve had plenty of bad ventis), but because they make coffee drinking sexy. Marketers must use behavioral data in order to figure out new ways to affect the motivations behind brand loyalty instead of blowing their money on trying to manipulate the mechanics of the purchasing process.

Therefore, my free coffee was a missed opportunity, not only to impact immediate sales, but also to capture valuable data that could have impacted future sales. In this regard, this giveaway was poorly brewed.

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Robert Hernandez, Statistical Analysis and Data Mining for Revenue Growth Robert is an expert in the field of mathematical Hotel Optimization and Analytics. He has spent the last 17 years building data-driven forecasting and optimization models for companies in over 20 different industries, from tech to tourism. Robert possesses a very unique skill set including cross-disciplinary experience, advanced mathematical and analytics skills, data transformation, industry-specific knowledge and business-process improvement expertise. Robert began his career at the Walt Disney Company in Revenue Planning. Read More+


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