- Offering free or discounted coffee can help attract new customers
- Luckin and Tostao Café y Pan racked up debts of several billion by undercutting competitors
- Specialty coffee shops must ensure their promotions are premium in the eyes of consumers
PROFIT MARGINS for coffee shops have never been so tightly squeezed. Sky-high energy costs, coupled with soaring inflation and historically expensive arabica, have left the lucky ones struggling and those less fortunate with little choice but to close down for good.
Yet despite the treacherous conditions, the offer of “free coffee” to reel in customers has remained a fixture for coffee shops around the world – and, in some cases, even been ramped up.
Indeed, if you step into almost any coffee shop, you’re still likely to find a loyalty card perched on the counter offering a free coffee after a certain number of purchases. Or, for larger chains, a custom mobile app that gives away a free coffee when you sign up. Or even just a free coffee with a regular order of food.
To an outsider, this might seem reckless. Surely, giving away free cups of coffee at a time when every penny (or cent) counts is a surefire way to drive a company into the ground. But with competition in the coffee shop sector still as fierce as ever, it might be a more astute move than it seems.
Perfect business sense
Mark Ritson is a marketing professor and a columnist for Marketing Week. He explains that at a time when coffee shops are still rebounding from the impact of Covid-19 lockdowns, giving away free coffee makes perfect sense for bringing in customers.
“[By offering free coffee], you get your hopefully amazing product into the hands of the target consumer,” he says. “For many products – especially those that are experiential and divisible – this is the ultimate way to recruit new consumers.”
It’s for that reason that new brands typically roll out free coffee schemes to generate a buzz around their arrival and gain a foothold in a new market.
The goal, in this case, is to drive publicity so that as many people as possible come to try the products – similar to a “free trial”. Brands then hope that once customers have been lured in by a freebie, they will develop a taste for the coffee and come back – this time willing to pay.
But established names have also taken a similar approach, particularly in the specialty coffee sector. Incentives such as loyalty or discount schemes are leveraged to attract new customers, while also helping to soften the blow that higher-than-average drink prices can cause.
George Hood, who works as general manager at London-based Colombian Coffee Company, says his coffee shop’s offer of a free drink for every eight purchases has been crucial to their success, both for new and existing locations.
“Last year we opened a new shop and the loyalty cards were pivotal in becoming established there,” he says. “We’re pretty confident that once someone starts having their morning flat white with us we’re going to be able to make them a return customer. And the loyalty card is a big part of that.”
However, according to George, it is vital to get the style and feel of the card right. Loyalty cards especially are physical marketing tools that should stand out as a reminder every time someone opens their wallet or purse.
“We try to create a very rich experience [at our stores] in terms of smell, materials, and furniture,” he explains. “So it was important to have a loyalty card that stood out both in terms of colours [the Colombian flag] and texture – we used the thickest paper we could get.”
The freemium approach
Like any marketing campaign, coffee shops that offer free coffees to attract customers are generally taking a calculated risk. Although the purpose is to increase footfall and brand awareness, they are not giving away more coffee than they can afford.
If a single free coffee is enough to acquire a repeat customer, then the marketing spend is small and the long-term prospect considerably more valuable.
However, as VC-funded coffee chains such as Luckin Coffee in China and Tostao Café y Pan in Colombia proved, this approach can quickly spiral if clear boundaries are not set. Looking to capture a massive share of their respective markets at breakneck speed, both companies burned through investor cash by, among other things, offering free and discounted coffees.
The result was near-total collapse. Tostao and Luckin were forced to restructure debts to the tune of several million dollars each having operated at a loss in an attempt to undercut competitors. At the time, many pointed to similarities with companies in industries such as ride-hailing, where Uber burned through $25bn in just over a decade to ward off competition. One of their chief marketing tools was the offer of free rides.
George is well aware of the consequences that free coffee can have and says his coffee shop had to cut back when footfall increased after Covid-19.
“When business was low during national lockdowns, we upped our loyalty scheme so that customers were rewarded with a free drink after only six purchases,” he says. “But once lockdowns ended, it was unsustainable. It was a hard time for retail. All our costs were going up.”
Despite some negative feedback from customers who were also feeling the squeeze, Colombia Coffee Company had no choice but to return to a free drink after eight purchases to balance the books.
Mark also warns the way the offer is presented is also important. “You start your relationship with the consumer from a zero place,” he says. “Rather than the long, lustful building of desire that also drives price insensitivity, your first touchpoint is free and accessible. Depending on your brand position. it doesn’t always give the right first impression.”
Indeed, there is always a slight danger of building your market share based on giving away freebies or selling drinks below market price, which can be a problem for brands that want to convey a sense of being “premium”.
That said, George believes from experience that a loyalty scheme can be invaluable in developing and sustaining a customer base that supports a business’s core values – such as direct trade with producers – and is willing to pay a little more for that. “Reward loyalty, so customers are part of the overall project,” he says. “It makes the whole thing less transactional.”