The Setup
Are you hankering for a soothing, cool summer drink, as you are strolling/saundering/wandering/slacking around town? Passing by a bunch of retail food chain stores but just wanting something either free-ish or relatively cheap?
The two usual suspects, approaching from two different price point levels, have got offers for you…
The Premise
Starbucks
A few weeks ago, Starbucks [SBUX] had rolled out their $2.00 (USD) summer drinks promotion: you keep your receipt from a drink before 2:00 PM, and then you use that receipt (valid only for that day) as a coupon after 2:00 PM for a cold/iced “grande” beverage of your choice for $2.00. For many drinks on the Starbucks menu, that equates to roughly a 50% discount, if not more.
McDonald’s
A couple of weeks ago, McDonald’s [MCD] has been intensifying its McCafé promotion, including posting more commercials and then… early last week, it announced its Free McCafé Mondays. The premise is that, every Monday until the end of the promotion in early August, you can get either a free 7-ounce iced mocha OR a free 8-ounce hot mocha between 7:00 AM and 7:00 PM… no purchase necessary.
Management Perspective: Starbucks
A $2.00 cold Starbucks drink, at a grande size? Not a bad deal, right? And especially since you could game the system and have a huge stack of collected receipts from that day, up until 2:00 PM.
Adding the cost of the drink that incurred that receipt, Starbucks has managed to part the patron from an additional $2.00. The question becomes, from my view at several Starbucks since the promotion began, what are these people ordering for $2.00? It appears that there seems to be almost an even split between people who are leveraging the promotion to get more of the same drink(s) that they prefer, and those who are using the opportunity to be more adventurous– in order to try drinks that they would otherwise not purchase.
Now, from a promotions standpoint, it almost makes sense to offer free samples of new beverages during a rollout or trial period. And, in fact, some Starbucks outlets have done so, in very tiny sample cups for some of their new products. However, as most customers can attest to, it is usually difficult to determine whether you really like something with a single nibble or sip. Any savvy marketer will tell you that offering teeny-tiny sips or nibbles will only garner mild amusement, at the expense of burning through supplies and labor to generate the microscopic samples, especially in the US market, where obesity unfortunately governs a lot of food purchasing decisions. This means that, to be cynically effective, you’d have to offer a mega-super-sized free “sample” in order to entice individuals who may graze ravenously at your sample stand and then leave to avoid verbal and non-verbal accusations of gluttony, in the hope that there would be at least one of them who would truly enjoy the product enough to purchase one at full price.
The better approach is to affix some value to the promoted product(s) by modifying the consumer mindset to accept a discount. If you are accustomed to getting something for free, however small, and then the seller places a premium price for the item, you are probably disinclined to purchase it. On the other hand, if you see that there is a stated “retail” price for the desired item, and you see that you’re getting the item at a significant discount, you are more likely to at least try it at the lower price. You have made it known that you perceive your goods to be at a premium level, but you are willing to “acquiesce” to consumer demand in order to build greater brand loyalty and to expand the consumer goods-substitution. Because you use the discount to gather revenue that you would otherwise NOT have received, you continue to improve profits on high-margin products and mid-mark items.
Management Perspective: McDonald’s
McDonald’s is currently not the market leader in the premium coffee beverage space in the US. While it has been gradually building its steam abroad, given its greater presence, it has a lot of resistance in the US due to its perception as a low-cost fast food purveyor. It has the reach, it has its vast franchise network, and it has its huge food research teams. What can it do to make a big splash in this new segment?
It has opted to take the free sample approach on a couple of items that may have a greater impact than the others in its coffee beverage portfolio. Once again, it really is nonsense to offer such tiny samples that the consumers are unable to decide whether the items in question are worth purchasing at full price, so a true product size has to be provided. Unfortunately, it would run into the same issue mentioned above concerning the food moochers; so a valid way to control the inventory-and-labor bleed is to limit availability of the free samples.
Unfortunately, product availability limitations would require the additional factor of greater advertising: thus, McDonald’s recent advertising campaign promoting the McCafé experience AND the free samples. But control over the availability introduces yet another variable: what is the availability scheduling? Should a lull in business be used, or should a high-traffic timeframe be used, or merely something that is moderate in nature? Both business lulls and moderate traffic timeframes will help cause momentary spikes in traffic, as consumers weigh the convenience of obtaining the free sample and potentially their regular food purchases, against any other time commitments, and then opt to risk the visit. High-traffic timeframes present fantastic, built-in promotional opportunities without impacting or cannibalizing the other timeslots: while there may be a dramatic inventory depletion, you would be assured that the samples would statistically make a greater impression on your consumer base… once again, the convenience and availability factors coincide to improve your odds.
Since timing is important for availability-limited promotions, it must be decided whether this should be considered a test run, or an aggressive push. Aggressive push campaigns tend to prosper with a large shotgun effect (‘natch), so targeting your most dense, high-traffic timeframes would be the timing objective. For continued research and a more gradual investment in shifting your traffic across less dense timeframes, take advantage of the promotion on your significantly less busy timeframes: this is particularly important for new product rollouts that have a heavy labor component, where training makes a significant difference toward the customer experience.
Reaching potential customers who would otherwise never try your specialty products is tricky, so offering free samples with the objective of diverting the revenue away from the competition definitely represents an opportunity. For items such as coffee beverages, a lot of marketers frequently forget that there is, in fact, a limit to how much of these items an average consumer can– well, let’s face it– consume. The average maximum limit will, paradoxically, be a bit lower for the obese population, based on the fact that many of them suffer from gastritis or acid reflux disease or chronic gastroenteritis or other similar GI disorders. So, while the sample sizes must be significantly large to attract them, the number of samples dispensed will tend to reflect the number of interested individuals (as opposed to a n:1 ratio of samples-to-persons).
Upscale-Downscale: Which Are You?
It all comes down to: the consumers. Availability (everyday until an expiration date, or once a week until an expiration date?), cost (free with no obligations, or discounted after meeting a prior requirement?), selection (all cold beverages on your menu, or a couple of items you’d like to heavily promote?), brand perception (which is the more desirable brand?), consumer self-perception (do they prefer to appear elite, or populist… or do they even care?)… They all factor in.
Take your pick. Or try them both. The competition ultimately helps both companies. 
N.B.
Yeah, you knew that this post would eventually become available for public reading, didn’t you? 
But you’re probably wondering, based upon some of the private chatter… what happened to the analysis about Starbucks’ less-than-stellar ice cream offering, right? Don’t worry: more on that a bit later… It’s an interesting subject that deserves separate coverage.
