Pricing strategy for profit maximization: Starbucks

Laura Terry, Brenda Limon, Hailey Hollas, and Tuba Qazi

Pricing strategy for profit maximization: Starbucks

Laura Terry, Brenda Limon, Hailey Hollas, and Tuba Qazi

Presentation Layout● Laura: Intro, Demographics of Users, Pricing Power, Caffeine

Statistics● Brenda: Price increase, How it works, Pricing Techniques ● Tuba: Effective techniques ● Hailey: Caffeine Concentration, Caffeine Use Disorder, Summary ● Discussion Questions

Demographics of starbucks consumers•Men and women aged 25-40 account for nearly half (49%) of its total business. These people are Starbucks primary target market. •Young adults aged 18-24 total 40 percent of Starbucks sales. Starbucks positions itself as a place college students can hangout, study, write term papers, and meet people. •Customers tend to have relatively high income, professional careers and a focus on social welfare. This target audience grows at a rate of 3 percent annually.

Why does starbucks have so much pricing power?● Starbucks has become the place to meet.● Starbucks have becomes landmarks, aka a “zone of attraction”.● Stores are everywhere and easy to spot.● Drinks and food are offered while you wait for your visitor.● Starbucks encourages customers to visit long periods, offering free WiFi and

charging stations for your smartphones and laptops.

caffeine statistics1. The United States is the country with the highest amount of caffeine consumption (971 tons) followed by Brazil (969 tons).

2. 54% of Americans over the age of 18 consume caffeine on a daily basis.

3. The majority of caffeine consumers drink approximately 3.1 cups of coffee on a daily basis.

4. 70% of consumed caffeine is in the form of coffee.

5. Coffee is certainly a national obsession. Americans drink over 400 million cups of it each day.

6. The U.S spends $40 billion dollars on coffee each year.

Why increase prices? According to Starbucks their latest price increase was a result of rising labor and non coffee commodity costs.

But… coffee costs have significantly decreased and therefore improved their profit margins.

So why did they really increase price?

Because they can.

Starbucks’ Effective TechniquesStarbucks has 3 effective techniques for increasing prices and profit margins:

Value base pricing

Product versioning

Price Communication

Value based pricing (how it works) ● They have created a loyal customer base that perceives their beverages as

an affordable luxury.● They don’t compete with cheaper chains, instead they separate themselves

and reinforce their premium image.● They increase prices only on selected items and regions, not an overall price

increase. ● The items that increase in price are not high margin items. ● Prices are based on the customer’s willingness to pay.

Product versioning:

● Apply price hikes to specific drinks and sizes● Their last price increase affected only Tall size(small drinks) pushing

consumers to upgrade their size in certain items

● This way the company enjoys a slightly higher margin than anticipated

PRICE COMMUNICATION:

● They communicate their price increase to manipulate consumer perception. They use tactics like using increased commodity cost or statements that aim to make the hike look insignificant. This helps them foster an attitude of acceptance.

concentration of caffeine

“Most widely used drug” December 2015- Johns Hopkins University released a study

Dependence on caffeine has increased by 17% in the past year

Test group of individuals exhibited increased symptoms of “Caffeine Use Disorder”

Caffeine Use DisorderA speculated substance related/ addictive disorder

Reliance on excessive use of caffeine

More prone to “Caffeine Withdrawal”

Symptoms: Headaches, increased insomnia, anxiety, can’t function without the help of caffeine

Has not been recognized as an actual disorder, but is quickly gaining ground in the scientific community

StarbucksWhat can Your Business Learn From Starbucks?

Here are some of the takeaways you can apply to your own business:

Study your customer personas

Justify the exchange rate for your product

Use product differentiation to put your company in the lead

Don’t increase the prices of the products with the highest margins

Sell something that others can get addicted to...

:

QUESTIONSWhat does Starbucks offer that other coffee brands don’t? (in other words what would you say is the greatest perceived value of this product).

Why are Starbuck’s techniques not as commonly used among other businesses if it seems to be so effective for them?

Do you believe it is a valid assumption that the product Starbucks promotes allows for them to be successful?

What other companies do you think could get away with raising their prices and it wouldn’t affect the demand?

Presentation Layout● Laura: Intro, Demographics of Users, Pricing Power, Caffeine

Statistics● Brenda: Price increase, How it works, Pricing Techniques ● Tuba: Effective techniques ● Hailey: Caffeine Concentration, Caffeine Use Disorder, Summary ● Discussion Questions

Demographics of starbucks consumers•Men and women aged 25-40 account for nearly half (49%) of its total business. These people are Starbucks primary target market. •Young adults aged 18-24 total 40 percent of Starbucks sales. Starbucks positions itself as a place college students can hangout, study, write term papers, and meet people. •Customers tend to have relatively high income, professional careers and a focus on social welfare. This target audience grows at a rate of 3 percent annually.

Why does starbucks have so much pricing power?● Starbucks has become the place to meet.● Starbucks have becomes landmarks, aka a “zone of attraction”.● Stores are everywhere and easy to spot.● Drinks and food are offered while you wait for your visitor.● Starbucks encourages customers to visit long periods, offering free WiFi and

charging stations for your smartphones and laptops.

caffeine statistics1. The United States is the country with the highest amount of caffeine consumption (971 tons) followed by Brazil (969 tons).

2. 54% of Americans over the age of 18 consume caffeine on a daily basis.

3. The majority of caffeine consumers drink approximately 3.1 cups of coffee on a daily basis.

4. 70% of consumed caffeine is in the form of coffee.

5. Coffee is certainly a national obsession. Americans drink over 400 million cups of it each day.

6. The U.S spends $40 billion dollars on coffee each year.

Why increase prices? According to Starbucks their latest price increase was a result of rising labor and non coffee commodity costs.

But… coffee costs have significantly decreased and therefore improved their profit margins.

So why did they really increase price?

Because they can.

Starbucks’ Effective TechniquesStarbucks has 3 effective techniques for increasing prices and profit margins:

Value base pricing

Product versioning

Price Communication

Value based pricing (how it works) ● They have created a loyal customer base that perceives their beverages as

an affordable luxury.● They don’t compete with cheaper chains, instead they separate themselves

and reinforce their premium image.● They increase prices only on selected items and regions, not an overall price

increase. ● The items that increase in price are not high margin items. ● Prices are based on the customer’s willingness to pay.

Product versioning:

● Apply price hikes to specific drinks and sizes● Their last price increase affected only Tall size(small drinks) pushing

consumers to upgrade their size in certain items

● This way the company enjoys a slightly higher margin than anticipated

PRICE COMMUNICATION:

● They communicate their price increase to manipulate consumer perception. They use tactics like using increased commodity cost or statements that aim to make the hike look insignificant. This helps them foster an attitude of acceptance.

concentration of caffeine

“Most widely used drug” December 2015- Johns Hopkins University released a study

Dependence on caffeine has increased by 17% in the past year

Test group of individuals exhibited increased symptoms of “Caffeine Use Disorder”

Caffeine Use DisorderA speculated substance related/ addictive disorder

Reliance on excessive use of caffeine

More prone to “Caffeine Withdrawal”

Symptoms: Headaches, increased insomnia, anxiety, can’t function without the help of caffeine

Has not been recognized as an actual disorder, but is quickly gaining ground in the scientific community

StarbucksWhat can Your Business Learn From Starbucks?

Here are some of the takeaways you can apply to your own business:

Study your customer personas

Justify the exchange rate for your product

Use product differentiation to put your company in the lead

Don’t increase the prices of the products with the highest margins

Sell something that others can get addicted to...

:

QUESTIONSWhat does Starbucks offer that other coffee brands don’t? (in other words what would you say is the greatest perceived value of this product).

Why are Starbuck’s techniques not as commonly used among other businesses if it seems to be so effective for them?

Do you believe it is a valid assumption that the product Starbucks promotes allows for them to be successful?

What other companies do you think could get away with raising their prices and it wouldn’t affect the demand?