Starbucks as a Brand has an interesting thing about its prices: Ability to leverage brand value in its premium pricing strategy fascinates everyone, when Brands such as Dunkin Donuts & Mac Donald’s are trying to reduce the price of their coffee.
How High Prices for its Coffee describes Starbucks Brand Value?
Pricing and value are related to each other and reflects the Brand image to the consumer. If a brand knows that its quality is good and targeting & positioning is implemented in the correct manner, Brands must have confidence in their price and should not consider dropping their Prices for Products. It is important to remember that Goods or services cannot be Good and Cheap At the Same Time.
Starbucks is the leader of the espresso market. As an individual organization, it controls a few times more market share of the overall industry than any of its rivals. It’s ability to offer combination of Quality, Authority, and relative value to its consumer enables the company to charge Premium Prices.
The company maintains strict Quality controls in Coffee souring as well as Customer Service. Lot of time is spent on Differentiating From its Competitors by designing coffee shops in unique manner, adopting advance machinery for its coffee and providing fee Wi-Fi and allowing customers to sit Coffee Stores after they have finished their beverage. Whenever Prices are increased , Consumers don’t mind Paying extra .
How Starbucks Value Based Pricing works and Boost Margin?
Few companies are able to Maximize their Profits by using Value based Pricing Method. Starbucks is implementing this technique successfully by utilizing Customer analysis which helps to determine the maximum price consumers are willing to play. After conducting the Market research, they increase prices by 1% margin on certain products to raise profits. It is an established fact from Mckinsey and Co back in 1990’s that when Prices are increased by 1%, it leads to 8.7% increase in operating Profits without losing Volume.
Overview of the Starbucks Premium Pricing Strategy
A) The Right Customers and The Right Market
Starbucks price increases have Discouraged Price Sensitive Consumers to buy its Coffee. Leaving Higher Income Loyal Customers who consider Coffee beverages as an Affordable Luxury. It avoids going into Price war with chains like Dunkin donuts and Mac Donald’s and has established its premium brand image for their Product and Services. Because Loyal High Income Customers who are addicted to the Starbucks Coffee are not affected by the increase in Prices, The company is able to Maintain its Inelastic Demand Curve and small increments in Price has a huge effect on their Margins and also covers for the Customers who Switched to Cheap Coffee Chains.
It Represents much more Upright Curves since Little Quantity Changes occur with movement in Price unlike Elastic Demand
Furthermore, Specific Regions are selected for the Price Hike and Price vary across a Region. Price Hike is done in those Cities where People are not price sensitive to the changes and see it as a necessary luxury for Survival.
B) Product Versioning
They apply cost increments to particular beverages and sizes as opposed to the entire lot. By raising the cost of the tall size prepared espresso solely, Starbucks can capture buyer surplus from the clients who find more value in moving up to Grande or Venti. Through Product Versioning, Firms can enjoy Higher Margins from these clients who were influenced by the Price Hike.
C) Price Communication
Starbucks expertly conveys their cost increments to manipulate Consumer Perception. The Price hike may be founded on an examination of the client’s ability to pay, however they relate the expansion with what gives off an impression of being a reasonable reason such as increasing Labour Cost, Commodity Cost and increased wages to make the Price Hike insignificant.
Price approach by Starbucks’s Rivals
Pricing Strategy adopted by Dunkin Donuts and Mac Donald’s is based on Cost plus Pricing Approach.It consist of setting the price based on production Cost and wanted level of Mark up. Starbucks Rival Firms aims to capture the most of Market share by offering coffee Beverage at low price and still able to achieve Profitability and ROI And also focus on Maximize volume of sales in order to cover the production cost.
Every Pricing strategy has its advantage and Flaws, in case Of Starbucks they have higher profit margins than their competitor and cater to needs of High income segment which are less compared to middle or low income segment. On the Other hand, Dunkin Donuts and Mac Donald’s cater to needs of the segment which is more in number by giving their Coffee Beverages at low prices and reaping Profits from it by depending on the volume of coffee sold.
Companies should identify Their Marketing objecting and decide which pricing strategy is suitable for the company.
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Student Name- Sapransh Jaipuria
Student Id- 215354693