Rafi Mohammed

The Rumble in the Coffee Drink Jungle

Posted on January 23th, 2008 (2 Comments)

The new low cost coffee shop is (drum roll please)…Starbucks! Yes my friends, according to Janet Adamy of the Wall Street Journal, Starbucks has joined the coffee drink pricing fray with a price war like initiative. According to Janet, Starbucks is test marketing a new low price of $1 for a cup of drip coffee and pouring free refills. This is a great deal compared to what key rivals like McDonald’s and Dunkin Donuts are charging for their drip coffee.

While such a large price drop seems over-reactive, Starbucks is clearly getting the message: it needs to offer lower priced drink alternatives for the following reasons:

  1. Remain Competitive. Lower priced alternatives help Starbucks keep customers from defecting to rivals offering discount coffee drinks. For example, McDonald’s claims its prices are 60 – 80 cents below Starbucks.
  1. Generate Growth. Can we agree that there’s not much room to boost prices for its current customers. Short of creating a hyper-premium priced coffee laced with flakes of gold, Starbucks needs to look for new customers to generate growth. Offering a value priced menu can generate growth. For example, 23% of McDonald’s revenues comes from its dollar menu items while 25% of Wendy’s top line comes from its Super Value Menu items. And while your first impulse may be that a value line will damage Starbuck’s premium brand…many chi chi restaurants offer value meal prices…they call them “pre-theater prices.”
  1. Cultivate Future Premium Price Customers. Both Mercedes and BMW offer starter models, why not Starbucks? A low priced “starter” drink may induce customers to purchase extra products (like a Danish) as well as trade up to higher priced drinks.
  1. Hedge Against a Possible Recession. With consumers cutting back on their discretionary spending because of recession fears, lower priced drinks offer Starbucks loyalists a revenue saving alternative to bypassing its premium drinks in favor of lower priced rival coffee purveyors.

Let me run my new pricing idea by you. I think Starbucks ought to consider offering a discount for takeout drinks and hike prices for drinks consumed in the store. It all goes back to value. If I’m getting a coffee to sip in my car or in the office, visiting a McDonald’s or Dunkin Donuts is a credible alternative to paying a premium to pop in and out of a Starbucks. However, there’s higher value in catching up with a close friend over a cup of coffee in the warm environment of a Starbucks’ store relative to a McDonald’s storefront. Why not capitalize on this additional value? Love to hear your thoughts on my idea…

Starbucks' pricing strategy is shaping up to be a Superbowl pricing story for 2008.

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Readers' Comments on This Blog Entry

From Steve Smith on January 23th, 2008
Great idea. Timed perfectly for the recession and their new competition. I ONLY get drip coffee at Starbucks, so this is perfect for me.
From Peter Grandstaff on February 19th, 2008
Your suggestion for increasing prices for in-house drinks versus to-go drinks is actually quite common in Italy. If you sit down at a table in a cafe there you will be served by a waiter, and your drinks will cost more. If you approach the bar and make your order you receive a lower price. Espresso was invented in Italy after all.