Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / In January 2020, Starbucks raised their beverage prices by an average of 1% across the U
|
In January 2020, Starbucks raised their beverage prices by an average of 1% across the U.S, a move that represented the company’s first significant price increase in 18 months. I failed to notice because the price change didn’t affect grande or venti (medium and large) brewed coffees and I don’t mess with smaller sizes, but anyone who purchases tall size (small) brews saw as much as a 10 cent increase. The company’s third quarter revenue rose 25% to $417.8 million from $333.1 million a year earlier, and green coffee prices have plummeted, so what gives? |
|
Starbucks claims the price increase is due to rising labor and non-coffee commodity costs, but with the significantly lower coffee costs already improving their profit margins, it seems unlikely this justification is the true reason for the hike in prices. In addition, the price hike was applied to less than a third of their beverages and only targets certain regions. Implementing such a specific and minor price increase when the bottom line is already in great shape might seem like a greedy tactic, but the Starbucks approach to pricing is one we can all use to improve our margins. As we’ve said before, it only takes a 1% increase in prices to raise revenues by an average of 11%. |
Value Based Pricing Can Boost Margins
For the most part, Starbucks is a master of employing value based pricing to maximize profits, and they use research and customer analysis to formulate targeted price increases that capture the greatest amount consumers are willing to pay without driving them off. Profit maximization is the process by which a company determines the price and product output level that generates the most profit. While that may seem obvious to anyone involved in running a business, it’s rare to see companies using a value based pricing approach to effectively uncover the maximum amount a customer base is willing to spend on their products. As such, let’s take a look at how Starbucks introduces price hikes and see how you can use their approach to generate higher profits.
An Overview of the Starbucks Pricing
Strategy:
The Right Customers and the Right Market
While cutting prices is widely accepted as the best way to keep customers during tough times, the practice is rarely based on a deeper analysis or testing of an actual customer base. In Starbucks’ case, price increases throughout the company’s history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.
Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of their brand and products. Since their loyal following isn’t especially price sensitive, Starbucks coffee maintains a fairly inelastic demand curve, and a small price increase can have a huge positive impact on their margins without decreasing demand for beverages. In addition, only certain regions are targeted for each price increase, and prices vary across the U.S. depending on the current markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same).
Product Versioning & Price Communication
They also apply price increases to specific drinks and sizes rather than the whole lot. By raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers who find more value in upgrading to Grande after witnessing the price of a small drip with tax climb over the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes.
Starbucks also expertly communicates their price increases to manipulate consumer perception. The price hike might be based on an analysis of the customer’s willingness to pay, but they associate the increase with what appears to be a fair reason. Using increased commodity costs to justify the price as well as statements that aim to make the hike look insignificant (less than a third of beverages will be affected, for example) help foster an attitude of acceptance.
on Wednesday April 8, Starbucks announced that it expects its fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets.
After reading, answer the following questions:
|
Mark/s |
|
|
What is the type of Starbucks’ market? And Why? |
1 |
|
What are the main conditions of this market compared with other different markets? |
2 |
|
What is the shape of Starbucks’ demand curve? And Why? |
1 |
|
What is the degree of price elasticity of demand of Starbucks? And Why? |
1 |
|
Did Starbucks make a good economic decision in raising the prices? Explain. |
2 |
|
What are the Starbucks’ maximum profit conditions? |
2 |
|
What are the main three items groups that contribute to Starbucks variable costs? |
3 |
|
What would happen to Starbucks’ profit if the prices of all three go down, holding other things fixed? |
2 |
|
On Wednesday April 8, Starbucks announced that it expects its fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets. What would be the right pricing strategy to maximize revenues for Starbucks in the current circumstances? |
3 |
|
If you have your own business, what do you learn From Starbucks case study? |
3 |
Starbuck's market is a monopolistc market.Profit maximization is the process by which a company determines the price and product output level that generates the most profit. That's why this market is monopolistic market.
• In this market product have differentiation because of taste , preference, quality, advertisement,etc. Advertising strategy being formulated to target section of customers. Differentiate coffee by premiums brand name .
• As monopolistic demand curve the Shape of starbucks market demand curve is inelastic demand curve due to its strategy of keeping starbucks at top level among existing competitors. Even little change in price would not affect the demand of existing customers. In short they can charge high prices.
• Starbucks demand curve degree is infinity because there is no change in price for the any number of quantity offered leaving degree be infinite.
• Yes they make good economic decision because of their profit maximizing policy which they do by customer analysis and proper feedback regarding customers choices, it's demand preferences and this product strategy helps them to attain maximum profit he had to equal his marginal revenue to the marginal cost and also they charge more with loyal and royal customers and in another part of US they make slight changes in prices as per the requirement. Means they can practice products differentiation and targeted different consumer groups.
• Main three elements are coffee beans , plastic cups and labour staff
If the prices of all three goes down then starbucks will enjoy more profit margins. As total cost goes down with constantly revenue generation.
• As per circumstances which created during pandemic period the right startegy which can be adoptee by starbucks is charging reservation prices geographically and through analysis found the places and customers where there is already good branded recognition of their product and customer loyalty and hence encourage the loyal customers. Whereas to expand their customer base . To tap more customers they can adopt discount or more offers to expand sales and hence profit margins.
• If i have my business of coffee then i will surely be following the pricing policy and more importantly is the selection of right customer and right market by their analysis policy.
