Loyalty Programs and Price Elasticity of Demand Case Study: Starbucks Rewards Tiers, Demand and Program Changes
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Get it written →Case Study 2: Retailer Loyalty Programs and Price Elasticity of Demand
Choose a rewards or loyalty program you belong to (for example, Starbucks, Amazon, Target or Best Buy) and develop a case study on how it influences demand and the price elasticity of demand. Include:
- How the program works, its levels and the benefits of each level.
- How demand is affected: do you demand more of certain products or services because of the program?
- Based on your readings and lecture, how the program influences price elasticity of demand.
- How positive and negative changes to the program influence elasticity, with examples of both.
More visits and bigger orders to earn rewards
Switching costs and fewer perceived substitutes
Members become more price-sensitive
Model case study
Original example for study purposes (about 900 words). Program details reflect Starbucks’ announcements through early 2026; describe your own experience as a member in the first person.
1. How Starbucks Rewards Works
Starbucks Rewards is a free program used through the Starbucks app. Members earn “Stars” on purchases and redeem them for food, drinks and merchandise. In January 2026, Starbucks announced a redesigned program, launched March 10, 2026, for its 35.5 million active U.S. members (Starbucks, 2026). The new program has three levels based on Stars earned in a 12-month period:
| Level | How to qualify | Key benefits |
|---|---|---|
| Green | Default level for all members | 1 Star per $1; birthday reward; personalized offers; one free drink modification per month (“Free Mod Mondays”); Stars expire after six months unless extended by activity |
| Gold | 500 Stars in 12 months | 1.2 Stars per $1; Stars never expire; at least four Double Star Days per year; seven-day birthday redemption window |
| Reserve | 2,500 Stars in 12 months | 1.7 Stars per $1; Stars never expire; at least six Double Star Days; 30-day birthday window; exclusive merchandise and events |
Members redeem Stars on a menu: 25 Stars for a drink customization, a new 60-Star option for $2 off any purchase, 100 Stars for brewed coffee or a bakery item, 200 Stars for a handcrafted beverage or hot breakfast item (up to $10), 300 Stars for a sandwich or packaged coffee and 400 Stars for select merchandise (Starbucks, 2026). Status lasts 12 months, so members must keep spending to keep their level.
2. How the Program Affects Demand
Starbucks Rewards increases demand, shifting my demand curve to the right, in several ways:
- More frequent visits. Because every purchase moves me closer to a free drink, I choose Starbucks over a closer or cheaper coffee shop. A cup of coffee now has two benefits: the drink and progress toward a reward.
- Larger orders. When I am close to a reward or a tier threshold, I add a pastry to reach the next Star level. Double Star Days and personalized challenges, such as “buy three drinks this week for 50 bonus Stars,” encourage me to visit on days I otherwise would not.
- Demand for related products. Rewards and offers encourage trying new seasonal drinks and food, increasing demand for complementary items.
- Mobile ordering and convenience. Ordering ahead in the app reduces wait time, which increases the value of each visit.
- Tier goals. The new Gold and Reserve levels give heavy users a reason to concentrate spending at Starbucks to reach or keep status.
3. How the Program Influences Price Elasticity of Demand
Price elasticity of demand measures how much quantity demanded responds to a change in price. Demand is more elastic when consumers have many close substitutes and the purchase is a large share of their budget, and more inelastic when there are few substitutes or high switching costs (Greenlaw et al., 2022).
Loyalty programs make demand more inelastic for members because they:
- Create switching costs. If I buy coffee elsewhere, I lose Stars, tier progress and benefits. This makes Dunkin’, McDonald’s or a local café less attractive substitutes even if their prices are lower.
- Lower the effective price. Rewards reduce the net cost of each purchase, so a small menu price increase feels less painful, especially when I am earning 1.2 or 1.7 Stars per dollar.
- Build habit and emotional loyalty. Personalized offers, birthday rewards and status recognition make the brand part of my routine, reducing price comparison.
As a result, when Starbucks raises menu prices, members’ quantity demanded tends to fall less than it would for nonmembers. This allows Starbucks to raise prices with a smaller loss in sales and use targeted offers, rather than broad price cuts, to bring back price-sensitive customers. The tiered structure also segments customers: the most loyal Reserve and Gold members likely have the most inelastic demand, while occasional Green members remain more price-sensitive.
4. How Program Changes Influence Elasticity
Negative change: the 2023 devaluation. In February 2023, Starbucks increased the number of Stars required for many rewards. A handcrafted drink rose from 150 to 200 Stars, items in the 200-Star tier rose to 300 Stars and pastries moved from 50 to 100 Stars (Axios, 2023). Because members needed to spend more to earn the same reward, the effective price of Starbucks purchases rose and the switching cost of leaving the program fell. Many members complained, and some shifted purchases to competitors. Negative changes like this make demand more elastic, because members compare Starbucks with alternatives more carefully when the reward is worth less. The 2026 relaunch also capped the 200-Star handcrafted drink reward at $10, which reduces the value for customers who order expensive customized drinks (Starbucks, 2026).
Positive change: the 2026 tiered relaunch. The new program adds faster earning for frequent customers, Stars that never expire for Gold and Reserve members, more Double Star Days, a low-threshold 60-Star reward and exclusive experiences (Starbucks, 2026). These improvements raise switching costs and the perceived value of staying, which makes demand less elastic for engaged members. Losing Gold status after 12 months is a new risk that encourages members to keep buying even after a price increase. The lower 60-Star option also gives occasional members quicker rewards, increasing their engagement.
Overall effect. Loyalty programs are tools for managing elasticity. Generous changes deepen loyalty and reduce price sensitivity, while devaluations, especially when combined with menu price increases, push members to reconsider substitutes and make demand more elastic. Starbucks’ 2026 redesign appears to be an effort to rebuild the loyalty, and inelastic demand, it weakened in 2023.
References
Axios. (2023, February 7). Why Starbucks “free” drinks will now cost more. https://www.axios.com/2023/02/07/starbucks-rewards-changes-inflation-free-drink
Greenlaw, S. A., Shapiro, D., & MacDonald, D. (2022). Principles of microeconomics (3rd ed.). OpenStax. https://openstax.org/details/books/principles-microeconomics-3e
Starbucks. (2026, January 29). Starbucks unveils reimagined loyalty program to deliver more meaningful value, personalization and engagement to members [Press release]. https://about.starbucks.com/press/2026/starbucks-unveils-reimagined-loyalty-program-to-deliver-more-meaningful-value-personalization-and-engagement-to-members/
[Your course textbook chapter on elasticity, in APA format.]
Make it yours: describe your own purchasing behavior honestly. Instructors look for specific examples, such as a purchase you made only to reach a reward or a time you switched brands after a program change.
Frequently asked questions
Do loyalty programs make demand more or less elastic?
Usually less elastic, because they create switching costs and reduce the appeal of substitutes. Devaluing rewards can make demand more elastic again.
What is a switching cost?
It is anything a customer gives up by changing brands, such as earned points, status benefits or the convenience of a saved payment method.
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