July 19, 2015

The Cost of a Cup of Coffee

  —A negative remark on promotions involving credit card applications.

I walked into my local coffee shop the other day. I was greeted by someone offering me two free cups of coffee (or tea) if I was willing to sign up for their credit card promotion. I was surprised how this made me feel.

I can respect the desire to extend a business through the use of an in-store promotion. It’s not exploitation. It’s just good business. My local supermarket does the same thing. They have a different credit card and coupled their promotion with chocolate chip cookies.

Coffee, tea or chocolate chip cookies in exchange for filling out a credit application and the privilege of being able to carry a credit card with that merchant’s branding embossed on it. Who benefits from this? More importantly, what’s in this for me?

This is an excellent deal for the institution holding the credit card contract and likely a good deal for the merchant. Credit card interest rates have a 18-20% annual percentage rate. At 18%, $100 translates into $18 per year for the financial institution holding the credit card contract, assuming there aren’t any fees associated with the credit card.

At my local coffee shop, $100 allows me to purchase over 52 cups of coffee annually—54 if you include the two free cups for filling in the application. At one cup of coffee each day interest payments would exceed $100 annually.

What benefit does this bring me? For consumers, debt is a means of using anticipated income and future purchasing power in the present before earning it. Of course, this credit card is usable with other merchants, so my local coffee shop or grocery store benefits whenever this credit card is used. And that is brilliant business.

So how did this make me feel? It disappointed me. I was at my local coffee shop to purchase a cup of coffee. Not to entertain the opportunity to become part of another revenue stream in their business. I was disappointed because I foolishly thought this business and I already had beneficial relationship and now they were asking if I was interested in taking a bet on my anticipated income to help grow their business model.

You’d think the additional revenue available through my credit card is worth more than two cups of coffee. Apparently not. That brought new perspective to the relationship.

This brilliant idea for creating a new revenue stream effectively made me rethink my relationship with this merchant. All of their consumer marketing went to waste the moment they asked me if I was interested in filling in their credit card application. That request put all of their previous marketing into perspective for me. It's really about the bottom line.

My local coffee shop isn’t what it wants me to believe it is. It wants me to believe that it's a familiar place where I can meet friends. In fact, it’s a business in a competitive environment and I am just participant in an income stream. That is disappointing. It’s a testament to the effectiveness of their marketing.

Their risk in developing this new income stream? Virtually nil.

Their risk in using their existing customer base? Again, virtually nil. Ok, at least one blog entry.