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For example, Starbucks developed its own point system where customers can collect them and get a free drink. Pretty sure there is a way to make money from it. Or is it just a marketing strategy to attract more customers?

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    Starbucks points system probably works in a manner similar to credit card mileage points. They are definitely non-transferable. All points systems are marketing strategies. – RonJohn Jul 27 at 2:02
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    "Pretty sure there is a way to make money from it" Of course, if you are Starbucks. – void_ptr Jul 27 at 3:53
  • @RonJohn thank you very much for your time and answer! – Anton Sergeyev Jul 27 at 4:12
  • "Pretty sure there is a way to make money from it" - Anton, do you mean that you think a person might somehow barter points? By 'make money', you're referring to someone outside the company, right? – JTP - Apologise to Monica Jul 29 at 11:20
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    Sign up for Starbucks rewards if you haven't already and the marketing aspect will become very clear. They put a lot of effort into behavior modification via the awards system - it's not just a straight "get a point for every dollar" thing, it's heavily gamified and personalized (extra points today only if you order something you've never tried before, extra points this week if you buy something 3 days in a row, bonus points for trying this new drink, etc.) – dwizum Jul 29 at 17:31
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Coffee beans are apparently about 18 cents per cup, or about $2 to $5 at Starbucks. Let's use 20c and $2.20 for ease of calculation, ignoring other costs (or amortize them into the rounding).

Suppose you sell 100 cups of coffee a day. Cost of 100 cups-worth of coffee beans: $20. Revenue from selling 100 cups of coffee: $220. Profit: $200.

Say you entice people to buy more by giving them points each time they do something you like, such as when they buy your widgets. Say you end up selling 120 a day, but 10 of them are given away as people redeem their points. Cost/Revenue/Profit: $24/$242/$218

So you've made an extra $18 profit even though you've given away 10 cups of coffee.

That’s the foundation of how point systems work.

If the system is sufficiently popular and people are willing to pay for points, you can then build derivatives off this platform.

Many loyalty-point systems are tied to a single provider - you redeem the points at the place you earned them. But in Australia, there is a consortium that allows you to earn points from different restaurants and redeem them elsewhere. There are probably such consortia elsewhere globally. Some systems such as Frequent Flyer miles allow redemptions on behalf of others (even if just family members). Some credit card point systems allow donation of points to charitable causes.

Even with all the derivative action going on, you don't care, so long as the points are doing what they’re supposed to - increase paid volume. If they don’t, you take the points back or revamp the system to benefit your business, subject to whatever you’ve already agreed with the points holders.

As far as you are concerned, you're just giving up a bit of extra revenue to make more. That is, point systems are basically a form of marketing.

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    Note that this is especially true when the cost to make the widget (coffee ingredients) is very small and the selling price of the widget (coffee) is pretty high. – DJClayworth Jul 27 at 13:08
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    Thank you for the answer! – Anton Sergeyev Jul 27 at 20:18
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    Something doesn't add up. Fine, 100 widgets cost $400 to make and sell for $600, giving $200 profit. Then it gets confusing -- neither reasonable interpretation of the second paragraph works. (1) You make 120 of which you sell 110 at full price and give away 10 for points. Cost $480, revenue $660, profit $180. (2) You make 130 of which you sell 120 at full price and give away 10 for points. Cost $520, revenue $720, profit $200. How did you get the profit of $220? – nanoman Jul 27 at 23:18
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    In what sense is a consumer who sells 100 points for $5 "keeping $1 for themselves"? It seems they are losing $1 of value in exchange for getting cash rather than using the points to save $6 of spending. Also, it's worth noting that many (most?) points programs specifically prohibit buying and selling of points between consumers. That flexibility would make points too valuable (cannibalizing sales). They want people to think the points are valuable but then sometimes end up with no good use for them (spoilage). – nanoman Jul 27 at 23:27
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    Larry - see this article - at 50pts, $100 spent, the reward is worth about $4 (let's call it the same as 2 regular coffees), at a cost of $0.40. To the customer, it's feels like 4% back, but as you note, it's a small fraction to the Company. – JTP - Apologise to Monica Jul 29 at 14:22
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Or is it just a marketing strategy to attract more customers?

Attracting new customers is not the main goal. Keeping frequent customers and getting them to be more frequent (spend more) is the goal. Most of the money is made from frequent customers.

When I am an infrequent customer, I am sometimes annoyed, I feel like I am being cheated, why not just lower the price and not have an awards system. But, the company doesn't care too much, they are not making their money from me.

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Points are marketing. Sometimes the points systems are revamped because they become too popular and the benefits that people collect exceed the benefits of increased sales that the company was expecting. Sometimes the benefits are too hard to collect, and the public recognizes it and doesn't participate; so they have to be improved.

Some things like airline miles, gift cards, and points earned in online gaming, have an underground market. The risk is that the exchange of points and money in that unsanctioned market is risky. One side can ripoff the other. There is also a risk that the company discovers the points were bought and cancels their account. Thus they are out the money, and any points in their account that were legitimate are now gone.

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    Thank you for your time and answer sir – Anton Sergeyev Jul 27 at 20:19
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In addition to encouraging consumer spending, there is another way in which reward points systems (often called loyalty programs) make money for their originators: they allow vendors to tie each purchase to an individual. Combined with program members' demographic data, which they willingly provide when they subscribe, this helps vendors to analyze their customers' behaviour in greater detail and subsequently develop more efficient marketing strategies targeted at specific groups (segments) of customers.

Sometimes loyalty program owners also sell their customer analytic data to (non-competing) third parties.

This works much like Google tracking your web site visits via individualized cookies.

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