The Starbucks Pricing Strategy
Have you ever wondered why Starbucks can compete with cheaper franchises like Dunkin Doughnuts and Tim Hortons? Would it surprise you to hear that Starbucks latte costs 12 dollars in Russia? As Starbucks subtlety increases its price and maintains it at a level higher than the average, undaunted by any price competition, the Economist created the “Starbucks index” to measure global purchasing power parity (PPI). Replacing the original “Big Mac Index,” Starbucks took the crown of the most common global brand from McDonald. So what pricing strategies made Starbucks stand firm in the competitive coffee market and happily maximize their profits?
Earlier this year, it increased its rate from 10 to 20 cents. Showcasing the secretive manner at which Starbucks raises its prices without consumers noticing. Besides being expensive, the prices of Starbucks coffee vary around the globe. According to numerous data sources like the MarketWatch, a cup of Starbucks latte can cost up to $12 in Russia and $7 to $8 in most Asian countries. Regardless of these absurd prices, Starbucks is still very welcomed in these countries that it “opens one new store in China every 15 hours” (USA Today).
As a Starbucks-holic myself, I practically live in the coffee shop. Starbucks provides a comforting space to study and read. The white noise of the insistent beeping of the coffee machines calms me. The mellow music in the background relaxes me while I drink my hot caramel macchiato and eat chocolate loaf slices. Based on my experiences as a regular customer to Starbucks, I can’t help but agree with the comment that “buying Starbucks is more of buying the experience than just the commodity.”
Aside from inducing people into buying Starbucks to experience more than just the commodity, Starbucks employs “the premium pricing” and “price skimming” strategies to increase their profits. Starbucks targets consumers with lower price elasticity for demand. Like on the case regarding China and Russia, Starbucks is considered as luxury goods, associated with Western influence and a chic lifestyle. By creating a more loyal consumer base, Starbucks “captures consumer surplus from consumers with a willingness to pay a higher price.” The loss in sales due to the increase in price is usually a lot less than the increase in profit margin from higher rates. Also, Starbucks increases the price of a tall latte, for example, to motivate people to upgrade. This also helps increase their profit margin.
Profit Margin = Net Profits (or Income) / Net Sales (or Revenue)
= (Net Sales - Expenses) / Net Sales
= 1- (Expenses / Net Sales)
So if Starbucks increases its prices by 10 or 20 cents and suppose we keep expenses constant, then higher net sales would result in higher profit margin. Since consumers’ demand for Starbucks's price is relatively inelastic (as explained above), Net Sales or Revenue would increase significantly with an increase in price and thus lead to an increase in profit Margin.
These strategies are just some simple representation of Starbucks’ pricing game. Its actual pricing plan is more profound and sophisticated which is key to its success. According to the official Starbucks Press Releases in 2018, the company has “Consolidated net revenues of $24.7 billion, up 10% over the prior year. The company opened 604 net new stores in Q4.” As economics and finances students, we should probably also think about Starbucks’ pricing strategies while using all our money on Caramel Macchiatos.
Edited by Naomi Santiago.
Sources:
Dawson Tucker 30.July.2013 “How Starbucks Uses Pricing Strategy for Profit Maximization” Price Intelligently Kline B. Daniel Dec. 5, 2017“Starbucks opens a new store in China every 15 hours” USA Today Pettinger Tejvan 27.September.2015 “ Premium Pricing” Economics Help.
Schneider Kristen 28.Mar.2017 “Here's how much Starbucks coffee costs in 8 countries around the world” Business Insider
Morris Chris 07Jun. 2018 “Starbucks Quietly Raises Prices—Again” Fortune 500, 18 Mar.2015 “Brand Focus: Starbucks Premium Pricing Strategy”
Goodman Lantern 01Nov.2018 “Starbucks Reports Q4 and Full Year Fiscal 2018 Results” Starbucks Newsroom 21 May.2018 “Starbucks Index” Investopedia, 02.Nov. 2018 “ Net Profit Margin” Investopedia
