Rafi Mohammed

What Business Strategy is Starbucks Counting on to Regain its Mojo? Pricing...of Course

Posted on March 5th, 2009 (2 Comments)

According to Claire Cain Miller of the New York Times (Starbucks Addresses the Price Issue, and Breakfast), Starbucks is tired of being thought of as a place that just sells $4 specialty drinks. That said, unlike the scores of companies that are slashing prices on their products and services, Starbucks is holding steady on the price of its $4 lattes.

I like the way that Starbucks is thinking. Of course, the economy is taking its toll on most businesses, especially those with premium prices. Suppose your business goes down by 20%...that sounds pretty devastating, doesn’t it? I see this scenario a little differently. Instead of focusing on the negative, I prefer to keep in mind that 80% of your customers are still willing to pay full price for your product. Instead of offering across the board discounts in hopes of getting that lost 20% back – at the expense of giving margin eroding discounts to the 80% who are content paying full price – I vote for maintaining your prices and implementing discount tactics to reclaim lost as well as attract new price sensitive customers. This is exactly what Starbucks is doing.

Starbucks is using a series of pricing techniques to retain/attract price sensitive customers as well as increase its check size. For example, on Tuesday it started offering value (i.e., discounted) breakfast combos. $3.95 gets you a tall drip coffee and an egg sandwich or a tall latte and coffee cake or oatmeal. This new bundle entices current customers to purchase more than they normally would. The $3.95 price point (which represents a $1.20 in savings over the cost of each item) is lower than breakfast combos offered at rivals such as Dunkin Donuts and McDonald’s, thus enticing customers from these fast food outlets.

Additionally Starbucks sells a $25 loyalty card that offers a 10% discount on all food and beverages for a year. So if you expect to spend over $250 a year, you have the option to invest in this card – a nice volume discount only offered to those who care enough about price to pay $25 upfront. Over the summer, it also offered one of my favorite discount strategies with its $2 after 2 PM promotion. If you made a purchase at Starbucks in the morning and came back with your receipt after 2 PM, you were entitled to purchase an iced grande beverage for $2 (normal price: $4). This promotion had all the hallmarks of a great pricing strategy: (1) Discounts are offered only to those who want them (and bring in a receipt) and (2) The discount encourages customers to purchase more than they normally would (i.e., visit Starbucks twice a day). Finally, the specialty coffee maker is emphasizing lower prices by highlighting its $2 brewed and ice teas instead of its expensive specialty drinks.

So as you are reviewing your revenues and brainstorming ideas to recoup lost customers, my advice is to “think like Starbucks.” Be grateful for the customers who are paying full price and create pricing tactics that will keep and attract new price sensitive customers.

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Readers' Comments on This Blog Entry

From Trabbit on April 22nd, 2009
your essay and your ideas are really useful for me. Because I'm doing the Advanced Managerial Economic report as i choose Starbucks, then I have to analyze the pricing strategies on Starbucks. So thank you a lot for your essay. You can guide me some ideas and help me a lot. Hope that you will keep going to hav the really good essay like this.
From MASTERWann on April 28th, 2009
Very useful for my Business Project! Thank you ;)