ADVERTISEMENT

Starbucks Price Action: Bloggers Respond Negatively, Will Customers Also?

September 2009 Pricing

In late August, Starbucks (SBUX) raised their prices on several more complex beverages while lowering them for more basic drinks.  Responses from bloggers have been overwhelming negative.  Did Starbucks misjudge their pricing power or are the pundits punching thin air?

In response to an article running in the Wall Street Journal Online, reader comments ranged from calling Starbucks out of touch with “adding insult to absurdity, Starbucks just doesn’t get it,” to announcements of brand defection with “goodbye, Starbucks” or “that will push even more customers over to McDonalds.”  Only one commenter out of 21 comments had anything positive to state about Starbucks, and even that pundit didn’t make a strong defense of the price move.  Judging from the responses of these readers, it appears the popular sentiment of even the informed readers of the Wall Street Journal is against these developments.

Before we evaluate the overwhelming negative responses of the bloggers, let’s look at the facts through the lens of strategic pricing.

Pricing Strategies at Starbucks

Consider a basic cup of coffee.  Nothing fancy.  Just straight coffee.  What you would get if you ordered, with these exact words, “Extra large cup of coffee please”?  At Dunkin Donuts on Wabash in downtown Chicago, you will pay $2.10 for 20 ounces of coffee.  At Starbucks also located on Wabash in downtown Chicago you will pay $1.95 for 20 ounces of coffee.  Same volume of decent quality coffee, but slightly cheaper at Starbucks.

Brewed Coffee in a Hot CupAt the bottom end of the market, Starbucks is executing a mark-to-market pricing strategy.  Basic coffee at Starbucks may be somewhat more expensive than the watered down swill they call coffee at a low end diner, but it is priced competitively within its peer category.

Alternatively consider some of the fancier concoctions of Starbucks.  Frappuccino, Vivanno, or Macchiato.  They have over 87,000 different drink combinations customized to the desires of its customers.  At this end of the market, Starbucks extracts prices north of $4 on a regular basis.  In the announcement, some of these blends are being raised by up to an additional quarter.

At the top end of the market, Starbucks is executing a differentiated-value pricing strategy.  In this category, the competition is weaker and Starbucks does have stronger pricing power.  They can price in proportion to the value customers place on having a high quality and highly customized product.  Customers who perceive that adding caramel to a 20 ounce macchiata is of higher value than other beverages can upgrade to this level.  Those that don’t are free to purchase at another, preferably Starbucks, product.

Differentiated pricing is just that, pricing different products at differently in proportion to the value different customers place on the products.  No one product nor price is optimal for all customers.  Customers are diverse.  And, companies which meet the diverse needs of its customers better are those which are most likely to prosper.

From this strategic pricing viewpoint, Starbuck’s price moves are an appropriate marginal improvement on its pricing practices, not a radical shift.  They do not imply a pricing practice that is absurd, out of touch with its market, nor designed to drive customers to competitors.  Rather, they appear to be a means of capturing marginal customers who are price conscious at the low end while improving margins earned from the more utility conscious customers at the high end.

Positioning

Appropriately, Starbucks has positioned their price increases as being related to the cost of doing business in labor and ingredients.  Whether it is or not is a separate question since, from a strategic pricing perspective, costs are a secondary issue to willingness to pay.  The facts are, many customers are willing to pay that price and Starbucks should wisely capture its fair share of the value they create for their customers.
As for their price cuts, Starbucks has said little to say.  Hence, one is left to suspect that Starbucks is having a marketing communications and public relations dilemma.

On one hand, it makes little sense for a premier leader to highlight prices during the normal course of business from a marcom perspective.  Talking about prices makes customers more price sensitive.  Talking about benefits and differentiators makes customers more utility sensitive.  Companies can capture higher prices by heightening utility sensitivity, not price sensitivity, so premium quality leaders should communicate utility focused messages to their market.

On the other hand, we are not in a normal business cycle.  We are just barely coming out of the worst recession in our lifetime, we hope.  Moreover, Starbucks has been facing a new set of challenges from Nescafe on the instant coffee side to McCafe on the premium fast coffee side.  All of Starbucks’ competitors are commenting on their prices as being to high.  Eventually, as the comments on the Wall Street Journal Online indicate, people start believing these attacks.

It might be time for George Schultz of Starbucks to respond to these attacks.  Businesses are not a democracy, but they sure better listen to the grumblings of the market.

References

Julie Jargon, “Starbucks Raises Some Prices,”  The Wall Street Journal (August 21, 2009).



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
More by Tim J. Smith, PhD