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.
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.
- It only takes a 1% increase in prices to raise profits by an average of 11%.
Here’s an overview of Starbucks’ strategy:
1. The Right Customers and the Right Market:
Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of its 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.
2. Product Versioning & Price Communication:
By raising the price of the tall size brewed coffee exclusively, Starbucks can capture consumer surplus from the customers who find more value in upgrading to grande. The tall sized coffee or “grande” became the most sold one as the difference between that and medium-size was less and the taxable amount remained the same
- 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. For eg., They introduced Java Chip Frappuccino as a version of the vanilla with a cold coffee milkshake with a few additions i.e chocolate chips and cream.
To know more about Starbucks Coffee’s strategy, read the full article : https://www.priceintelligently.com/blog
