PRICING STRATEGY
PRICING STRATEGY
A business can use a variety of
A business can use a variety of pricing strategiespricing strategies when selling a when selling a product product or or serviceservice. The. The Price can be set to maximize profitability for each unit sold or from the market overall. It can Price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an ex
be used to defend an existing market from new entranisting market from new entrants, to increase market share withts, to increase market share within ain a market or to enter a new market. usinesses may benefit from lowering or raising prices, market or to enter a new market. usinesses may benefit from lowering or raising prices, depending on the needs and behaviors of customers and clients in the particular market. depending on the needs and behaviors of customers and clients in the particular market. !inding the right pricing strategy is an important element in running a successful business. !inding the right pricing strategy is an important element in running a successful business.
Models of pricing Models of pricing
Absorption pricing Absorption pricing
Types of pricing in which all costs are recovered. The price of the product includes the Types of pricing in which all costs are recovered. The price of the product includes the variable cost
variable cost of each item plus a proportionate amount of the of each item plus a proportionate amount of the fixed costsfixed costsand is a form of cost"and is a form of cost" plus pricing
plus pricing
Contribution margin-based pricing Contribution margin-based pricing
#ontribution margin"based pricing maximizes the profit derived from an individual product, #ontribution margin"based pricing maximizes the profit derived from an individual product, based on the difference be
based on the difference between the product$s price tween the product$s price and variable costs %thand variable costs %the product$se product$s
contribution margin per unit&, and on one's assumptions regarding the relationship between the contribution margin per unit&, and on one's assumptions regarding the relationship between the product's price and the number of units tha
product's price and the number of units that can be sold at that price. The produt can be sold at that price. The product$sct$s
contribution to total firm profit %i.e. to operating income& is maximized when a price is chosen contribution to total firm profit %i.e. to operating income& is maximized when a price is chosen that maximizes the following( %contribution margin per unit& ) %number of units sold&.
that maximizes the following( %contribution margin per unit& ) %number of units sold&.
In cost"plus pricing, a company first determines its break"even price for the product. This is In cost"plus pricing, a company first determines its break"even price for the product. This is done by calculating all the costs involved in the production, marketing and distribution of the done by calculating all the costs involved in the production, marketing and distribution of the product. Then a markup is set for each
product. Then a markup is set for each unit, based on the profit unit, based on the profit the company needs to make, itsthe company needs to make, its sales ob*ectives and the price it believes customers will pay.
Creaming or simming Creaming or simming
In most skimming, goods are sold at higher prices so that fewer sales are needed to break In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. +elling a product at a high price, sacrificing high sales to gain a high profit is therefore even. +elling a product at a high price, sacrificing high sales to gain a high profit is therefore skimming the market. +kimming is usually employed to reimburse the cost of investment of skimming the market. +kimming is usually employed to reimburse the cost of investment of the original research into the product( commonly used in electronic markets when a new
the original research into the product( commonly used in electronic markets when a new range, such as
range, such as ---- players, are firstly dispatched into the market a players, are firstly dispatched into the market at a high price. Thist a high price. This strategy is often used to target early adopters of a product or service. /arly adopters strategy is often used to target early adopters of a product or service. /arly adopters
generally have a relatively lower price"sensitivity " this can be attributed to( their need for the generally have a relatively lower price"sensitivity " this can be attributed to( their need for the product outweighing th
product outweighing their need to economizeeir need to economize0 a greater understand0 a greater understanding of the product$s ving of the product$s value0alue0 or simply having a higher disposable income.
or simply having a higher disposable income.
This strategy is employed only for a limited duration to recover most of the investment made This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.
at a high price against the competition.
!eco" pricing !eco" pricing
1ethod of pricing where the seller offers at least three products, and where two of them have a 1ethod of pricing where the seller offers at least three products, and where two of them have a similar or e2ual price. The two products with the similar prices should be the most expensive similar or e2ual price. The two products with the similar prices should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make ones, and one of the two should be less attractive than the other. This strategy will make people compare the optio
people compare the options with similar prices, and as ns with similar prices, and as a result sales of the most attraa result sales of the most attractivective choice will increase.
choice will increase.
#reemium #reemium
!reemium is a business model that works by offering a product or service free of charge !reemium is a business model that works by offering a product or service free of charge %typically digital offerings such as software, content, games, web services or other& while %typically digital offerings such as software, content, games, web services or other& while charging a premium for advanced features, functionality, or related products and services. The charging a premium for advanced features, functionality, or related products and services. The word freemium is a portmanteau combining the two aspects of the business model( free word freemium is a portmanteau combining the two aspects of the business model( free and premium. It has become a highly popular model, with notable success.
$ig%-lo& pricing
1ethod of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as
well as the regular higher priced products.
'imit pricing
1ain article( 3imit price
A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or *ust low enough to make entering not profitable. The 2uantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.
The problem with limit pricing as a strategy is that once the entrant has entered the market, the 2uantity used as a threat to deter entry is no longer the incumbent firm$s best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce
a certain 2uantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain %high& level of labor for a long period of time. In this strategy price of the product becomes the limit according to budget.
'oss leader
A loss leader or leader is a product sold at a low price %i.e. at cost or below cost& to stimulate other profitable sales. This would help the companies to expand its market share as a whole.
Marginal-cost pricing
In business, the practice of setting the price of a product to e2ual the extra cost of producing an extra unit of output. y this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. usinesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of 45.66 and a normal selling price is 47.66, the firm selling the item might wish to lower the price to 45.56 if demand has waned. The business would choose this approach because the incremental profit of 56 cents from the transaction is better than no sale at all.
Maret-oriented pricing
+etting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. !or instance if the competitors are pricing their products at a lower price, then it$s up to them to either price their goods at an above price or below, depending on what the company wants to achieve.
(dd pricing
In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the buyers8consumers no gap for bargaining as the prices seem to be less and yet in an actual sense are too high, and takes advantage of human psychology. A good example of this can be noticed in most supermarkets where instead of pricing at 456, it would be written as 49.99. This pricing policy is common in economies using the free market policy.
Pa" &%at "ou &ant
Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum %floor& price may be set, and8or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity.
:iving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. ;hile most uses of pay what you want
have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use.
Predator" pricing
Predatory pricing, also known as aggressive pricing %also known as undercutting&, intended to drive out competitors from a market. It is illegal in some countries.
Premium pricing
Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The
practice is intended to exploit the %not necessarily *ustifiable& tendency for buyers to assume that expensive items en*oy an exceptional reputation, are more reliable or desirable, or
represent exceptional 2uality and distinction.
Price discrimination
Price discrimination is the practice of setting a different price for the same product in different segments to the market. !or example, this can be for different classes, such as ages, or for different opening times.
Price leaders%ip
An observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers.
Ps"c%ological pricing
Pricing designed to have a positive psychological impact. !or example, selling a product at 4<.9= or 4<.99, rather than 4>.66. There are certain price points where people are willing to buy a product. If the price of a product is 4566 and the company prices it as 499, then it is
called psychological pricing. In most of the consumers mind 499 is psychologically ?less' than 4566. A minor distinction in pricing can make a big difference in sales. The company that succeeds in finding psychological price points can improve sales and maximize revenue. This pricing strategy makes the customer thinks that, the highest price of a product is the best or
2uality product.
Target pricing
Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
Time-based pricing
A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. y responding to market fluctuations or large amounts of data gathered from customers " ranging from where they live to what they buy to how much they have spent on past purchases " dynamic pricing allows online companies to ad*ust the prices of identical goods to correspond to a customer's willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the techni2ue so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
)alue-based pricing
Pricing a product based on the value the product has for the customer and not on its costs of production or any other factor. This pricing strategy is fre2uently used where the value to the
producing a software #- is about the same independent of the software on it, but the prices vary with the perceived value the customers are expected to have. The perceived value will depend on the alternatives open to the customer. In business these alternatives are using competitors software, using a manual work around, or not doing an activity. In order to employ value"based pricing you have to know your customer$s business, his business costs, and his perceived alternatives.It is also known as Perceived"value pricing.
Starbucs Coffee Compan"
Introduction *
+tarbucks #orporation is an American global coffee company and coffeehouse chain based in +eattle, ;ashington. +tarbucks is the largest coffeehouse company in the world, with 76,@95 stores in 7 countries, including 5<,7B9 in the Cnited +tates, 5,<7> in #anada, 9@9 in Dapan, @=5 in #hina, and @6 in the Cnited Eingdom. In addition, +tarbucks is an active member of the ;orld #ocoa !oundation.
+tarbucks locations serve hot and cold beverages, whole"bean coffee, micro ground instant coffee, full"leaf teas, pastries, and snacks. 1ost stores also sell pre"packaged food items, hot and cold sandwiches, and items such as mugs and tumblers. +tarbucks /venings locations also offer a variety of beers, wines, and appetizers after >pm.Through the +tarbucks /ntertainment division and Fear 1usic brand, the company also markets books, music, and film. 1any of the company$s products are seasonal or specific to the locality of the store. +tarbucks"brand ice
cream and coffee are also offered at grocery stores.
!rom +tarbucks$ founding in 59B5 as a +eattle coffee bean roaster and retailer, the company has expanded rapidly. +ince 59@B, +tarbucks has opened on average two new stores every day. +tarbucks had been profitable as a local company in +eattle in the early 59@6s but lost money on its late 59@6s expansion into the 1idwest and ritish #olumbia. Its fortunes did not reverse until the fiscal year of 59@9"5996, when it registered a small profit of 4@57,666. y the time it expanded into #alifornia in 5995 it had become trendy. The first store outside the Cnited
+tates or #anada opened in Tokyo in 599, and overseas stores now constitute almost one third of +tarbucks$ stores. The company planned to open a net of 966 new stores outside of the Cnited +tates in 7669, but has announced <66 store closures in the Cnited +tates since 766@. esides from selling premium coffee, +tarbucks has expanded its product line to include various warm and cold beverages, pastries, salads, breakfast, merchandise8accessories, gift items, books etc. In addition, +tarbucks' products are available in supermarkets and other retail stores. +tarbucks is an established brand and a market leader within coffee and other blend" drinks. Its mission is Gto inspire and nurture the human spirit H one person, one cup and one neighborhood at a time %www.starbucks.com&. +tarbucks has incorporated this statement into its overall strategy and is continuously striving at complying with it H partly through its
engagement in various #+J activities. This is highly evident throughout its corporate website where the company's #+J activities are not comprised into one separate report, but rather integrated into the entire website, hence the entire representation of the company. +tarbucks first entered the corporate responsibility paradigm in 7666, when it developed a partnership with #onservation International with whom +tarbucks created its ethical coffee"sourcing guidelines. +ince then, +tarbucks has expanded its #+J partnership with several different organizations, as well as it has founded its own +tarbucks !oundation. +tarbucks has also received acknowledgement for its efforts via public recognition. !rom this, it is evident that +tarbucks is engaged in several #+J activities and is recognized as a ma*or #+J conscious corporation at the macro level in the corporate world. The following sections will provide an in"depth analysis of how +tarbucks communicates these different activities to its various stakeholders through its corporate website.
$istor" *
#ounding
The first +tarbucks opened in +eattle, ;ashington, on 1arch <6, 59B5 by three partners who met while students at the Cniversity of +an !rancisco( /nglish teacher Derry aldwin, history teacher Kev +iegl, and writer :ordon owker. The three were inspired to sell high"2uality coffee beans and e2uipment by coffee roasting entrepreneur Alfred Peet after he taught them his style of roasting beans. Lriginally the company was to be called Pe2uod, after a whaling ship from 1oby"-ick, but this name was re*ected by some of the co"founders. The company was instead named after the chief mate on the Pe2uod, +tarbuck.
The first +tarbucks cafe was located at 7666 ;estern Avenue from 59B5H59B. This cafe was later moved to 5957 Pike Place 1arket0 never to be relocated again. -uring this time, the company only sold roasted whole bean coffees and did not yet brew coffee to sell. The only brewed coffee served in the store were free samples. -uring their first year of operation, they purchased green coffee beans from Peet$s, then began buying directly from growers.
Sale and e+pansion
In 59@>, the original owners of +tarbucks, led by Derry aldwin, purchased Peet$s. -uring the 59@6s, total sales of coffee in the C+ were falling, but sales of specialty coffee increased, forming 56M of the market in 59@9, compared to <M in 59@<. y 59@ the company operated six stores in +eattle and had only *ust begun to sell espresso coffee.
In 59@B, the original owners sold the +tarbucks chain to former employee Foward +chultz, who rebranded his Il :iornale coffee outlets as +tarbucks and 2uickly began to expand. In the same year, +tarbucks opened its first locations outside +eattle at ;aterfront +tation in
ancouver, ritish #olumbia, #anada and #hicago, Illinois, C+. y 59@9 > stores existed across the Northwest and 1idwest and, annually, +tarbucks was roasting over 7,666,666 pounds %96B,5@= kg& of coffee.
At the time of its initial public offering %IPL& on the stock market in Dune 5997, +tarbucks had grown to 5>6 outlets, with a revenue of C+4B<.= million, up from C+45.< million in 59@B. The company$s market value was C+47B5 million by this time. The 57M portion of the
company that was sold raised around C+47= million for the company, which would facilitate a doubling of the number of stores over the next two years. y +eptember 5997, +tarbucks$
share price had risen by B6M to over 566 times the earnings per share of the previous year. In Duly 765<, over 56M of in store purchases were made on customer$s mobile devices using the +tarbucks app. The company once again utilized the mobile platform when it launched the Tweet"a"#offee promotion in Lctober 765<. Ln this occasion, the promotion also involved Twitter and customers were able to purchase a C+4= gift card for a friend by entering both Otweetacoffee and the friend$s handle in a tweet. Jesearch firm Eeyhole monitored the progress of the campaign and a -ecember , 765< media article reported that the firm had
found that 7B,666 people had participated and C+45@6,666 of purchases were made to date.
E+pansion to ne& marets and products
The first +tarbucks location outside North America opened in Tokyo, Dapan, in 599.
+tarbucks entered the C.E. market in 599@ with the 4@< million C+- ac2uisition of the then ="outlet, CE"based +eattle #offee #ompany, re"branding all the stores as +tarbucks. In +eptember 7667, +tarbucks opened its first store in 3atin America, at 1exico #ity. In 5999, +tarbucks experimented with eateries in the +an !rancisco ay area through a restaurant chain called #ircadia. These restaurants were soon outed as +tarbucks establishments and converted to +tarbucks cafes.
In Lctober 7667, +tarbucks established a coffee trading company in 3ausanne, +witzerland to handle purchases of green coffee. All other coffee"related business continued to be managed from +eattle.
In April 766<, +tarbucks completed the purchase of +eattle$s est #offee and Torrefazione Italia from A!# /nterprises for 4B7m. The deal only gained 5=6 stores for +tarbucks, but according to the +eattle Post"Intelligencer the wholesale business was more significant. In +eptember 766, rival -iedrich #offee announced that it would sell most of its company" owned retail stores to +tarbucks. This sale includes the company"owned locations of the Lregon"based #offee People chain. +tarbucks converted the -iedrich #offee and #offee People locations to +tarbucks, although the Portland airport #offee People locations were excluded from the sale.
In August 766<, +tarbucks opened its first store in +outh America in 3ima, Peru. In 766B, the company opened its first store in Jussia, ten years after first registering a trademark there.
In 1arch 766@ they purchased the manufacturer of the #lover rewing +ystem. They began testing the fresh"pressed coffee system at several +tarbucks locations in +eattle, #alifornia, New ork and oston.
In early 766@, +tarbucks started a community website, 1y +tarbucks Idea, designed to collect suggestions and feedback from customers. Lther users comment and vote on suggestions. Dournalist Dack +chofield noted that 1y +tarbucks seems to be all sweetness and light at the moment, which I don$t think is possible without 2uite a lot of censorship. The website is powered by the +ales force software.
In 1ay 766@, a loyalty program was introduced for registered users of the +tarbucks #ard %previously simply a gift card& offering perks such as free ;i"!i Internet access, no charge for soy milk Q flavored syrups, and free refills on brewed drip coffee or tea.
Ln November 5>, 7657, +tarbucks announced the purchase of Teavana for C+476 million in cash and the deal was formally closed on -ecember <5, 7657.
Ln !ebruary 5, 765<, +tarbucks opened its first store in Fo #hi 1inh #ity, ietnam, and this was followed by an announcement in late August 765< that the retailer will be opening its inaugural store in #olombia. The #olombian announcement was delivered at a press
conference in ogota, where the company$s #/L explained, +tarbucks has always admired and respected #olombia$s distinguished coffee tradition.
Starbucs mareting strateg" *
/very business can learn from another, especially if a particular business is one that has displayed tremendous success over the years. The +tarbucks #orporation and its successful marketing strategies are definitely something that anyone interested in business can learn about. ;hat sort of techni2ues did the company use, and how were these able to reach out and attract millions of people worldwideR +ome of their best strategies are outlined below.
S ,Perfect Cup of Coffee . +tarbucks history has shown that they place a huge emphasis on product 2uality. Their coffee, even if priced slightly more expensive than expected, is
notorious for satisfying customers with its rich, delicious taste and aroma.
S ,T%ird Place . !rom the very beginning, the +tarbucks marketing strategy has focused on creating the Gthird place for everyone to go to between home and work. #reating this uni2ue and relaxing Gexperience and Gatmosphere for people has been very important for the
company as they have realized that this is one of the strongest concepts attached to the company, to which customers have been strongly attracted.
S ,Customer Satisfaction . #ustomer satisfaction is a very important issue with +tarbucks. !rom entrance to the store to the very last drop of their coffees, it is a must that customers feel the uni2ueness of en*oying their +tarbucks coffee experience. ;ithout a doubt, +tarbucks #offee #ompany knows the answer to the 2uestion, ;hy is customer service important. S ,Creating a Starbucs Communit" . The +tarbucks marketing strategy has even expanded
to create a community around their brand. Ln their website, individuals are encouraged to express their experiences with +tarbucks history, and the company strives to Gpersonally *oin in the discussions. This techni2ue was cleverly pointed out by ;ebolutions( The +trategic 1arketing Agency in their G+tarbucks 1arketing Lbservations article.
S ,Smart Partners%ips . +tarbucks #offee #ompany has been known to create strategic partnerships that demonstrate the fact that another way to grow your business is to partner
smart. Lver the years, the +tarbucks #orporation has greatly increased sales *ust by using this strategy.
S ,Inno/ation . Through the years, the +tarbucks #offee #ompany has been known to think up creative and innovative ideas to add to their products or services. They've added different flavors to their coffee, more food on their menu, and even became one of the firsts to offer internet capability in their stores.
,0rand Mareting . The +tarbucks marketing strategy has always focused on Gword"of" mouth advertising and letting the high 2uality of their products and services speak for themselves. !or years, this has been uni2uely +tarbucks, and it has played a huge part in making +tarbucks #offee #ompany a success. The definition of viral marketing speaks to this new word of mouth that +tarbucks has run with, and made their own.
G;e have no patent on anything we do and anything we do can be copied by anyone else. ut you can't copy the heart and the soul and the conscience of the company H Foward +chultz, #/L of +tarbucks #offee.
This 2uote from +chultz could be the Gmagic that has separated +tarbucks from the every other coffee shop0 an attitude of marketing which is inspired by the company's commitment. The successful marketing strategies which +tarbucks employs are definitely of interest to anyone interested in business marketing can learn about. +erving coffee is a common part of any restaurant business, but a successful marketing mix will cause a common product to become uncommon and uni2ue to the consumer.
A marketing strategy for a company re2uires commitment from the company with all departments and employees working together towards the same goal. This should be a
philosophy which is applied to the entire organization, not simply an idea that is applied to the marketing department. The two main functions of the marketing strategy are to identify the target market, and develop a successful marketing mix for that target market. ;ithin the
marketing mix are four essential components( product, place, promotion, and price. +tarbucks #offee #ompany has developed a marketing mix which has proven to be exceptionally
successful for over >6 years.
+tarbucks opened in 59B5 by owners who developed a passion for dark roast coffee, and that was basically the main product that was sold in the stores. After about a decade of selling coffee beans, the owners allowed Foward +chultz to *oin the company as the firm's -irector of Jetail Lperations and 1arketing.
;hile on a trip to Italy, +chultz came across the Italian Gcoffee culture which intrigued his interest0 a caf where people would gather, socialize and spend time in leisure. +chultz believed this Gcoffee culture could be replicated in the Cnited +tates serving the +tarbucks
brand of dark roasted coffee and adding espresso drinks to the menu.
This concept was re*ected by the founders of +tarbucks, and eventually +chultz bought the company, and proceeded to build it into the largest retail coffee shop chain in the world. The product line of coffee was expanded to include espresso drinks such as lattes and cappuccinos0
and as the company grew, the drink choices also grew to meet the consumer's needs.
+tarbucks is known for having store locations everywhere in the world0 even to the point of shops across the street from one another. eginning in neighborhoods or in rural areas, and expanding to high traffic areas such as New ork #ity0 a +tarbucks #offee +hop may be found in or very near any city in the Cnited +tates.
;ithin the Gplace of the marketing mix, one considers the type of stores as important as the location. The ma*ority of Americans have two main Gplaces where time is spent, either at work or at home. ;ith +chultz's vision of the coffee shops that inspire the customers to consider +tarbucks his or her Gthird place, all of the shops have the brand of ease and
comfort. -esigned to be cozy and comfortable, the store decor of every shop is similar, if not identical( big easy chairs and sofas, tables for customers to gather at, high top counters with plenty of electrical outlets for those who take advantage of the free internet, and music playing
which adds to the ambiance. +ome locations actually have a burning fireplace to warm the atmosphere during the winter months.
It is very rare for one to see a promotional advertisement for +tarbucks #offee in a magazine, newspaper, billboard, television commercial, or any other typical advertising campaign. +tarbucks used the marketing strategy of Gword"of"mouth advertising0 allowing the high 2uality of products and the legendary service promote the brand. This tactic has played a huge part in making +tarbucks #offee #ompany a success.
The front line arista %coffee artist& has been trained not only to prepare specialty coffee drinks, but to include the art of providing Glegendary service to the customer. This strategy includes promotion of personalized service by learning customer's names, specific drink preferences, customer's occupations, and often personal information concerning the
In the beginning, the company's mission statement was( GTo establish +tarbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. Now, +tarbucks has added to the mission statement( GTo inspire and
nurture the human spirit H Lne person, Lne cup, and Lne Neighborhood at a time. ;ith all employees working with the company's mission in mind, the brand is promoted on a daily basis.
In no way, shape, or form has +tarbucks offered a competitive pricing for the products sold in the stores. Lne may consider the Gexperience of the +tarbucks brand to be included in the price of the products. As stated above, with all front line aristas working with the company's
mission statement as a guideline, the consumer is purchasing a cup of coffee with the experience of personalized legendary service.
;hile the descriptions of +tarbucks #offee #ompany's marketing mix did not include the target marketing ob*ective, +tarbucks' target market includes anyone who is willing to pay a premium price for the G+tarbucks /xperience. This decision was made with extensive
strategic planning, and with the knowledge that using a uni2ue marketing program such as this was a huge risk in being successful.
A good summary about the marketing success of +tarbucks is this 2uote by Foward +chultz, #/L of +tarbucks(
;e establish the value of buying a product at +tarbucks by our uncompromising 2uality and by building a personal relationship with each customer.
The marketing mix that +tarbucks #offee #ompany developed is uni2ue, unconventional, somewhat risky, but most importantly, extremely successful for over >6 years.
S1(T Anal"sis
Strengt%s
+trength 5( -eveloped a niche in the market as a high"end brand of coffee, offering rich, exotic coffee blends
+trength 7( The atmosphere in their coffee bars provides customers with a feeling of sophistication, style and a sense of knowledge. This has turned into a +tarbucks culture.
+trength <( Fave attracted employees who are well educated and eager to communicate the message of their product.
$o& do t%ese strengt%s enable t%e firm to meet customers2 needs3
These strengths enable the firm to meet customer's needs because they allow the customer to experience a rich, exotic blend of coffee, and a way of life. They focus on the 2uality of their product so that the customer can taste the difference between their gourmet cup of coffee and
the traditional, cheap cup of black li2uid found in convenient stores. 1oreover, they provide customers with feeling of sophistication, style, and a sense of knowledge when they walk into their coffee bars. In doing so, they replicated authentic, Italian"style coffee bars to allow
customers to experience a way of life when they visit their store. They are successful with this because they hire employees who are well educated and eager to express the +tarbucks
culture.
$o& do t%ese strengt%s differentiate t%e firm from its competitors3
These strengths differentiate the firm from its competitors because +tarbucks has developed a niche in the market as a high"end brand of coffee. This is different from the traditional cup of coffee found in convenient stores or at home because +tarbucks focuses on the 2uality of their coffee by using the finest coffee beans and maintaining freshness with their !lavor 3ock ags. !urthermore, the atmosphere inside a +tarbucks coffee bar provides customers a feeling of sophistication, style, and a sense of knowledge. This is characteristics of their store that cannot be matched by other competitor's locations such as 1c-onalds. Also, +tarbucks has gained
loyal and dedicated employees. This has transitioned into excellent customer service.
1eanesses
;eakness 5( 1any people believe that coffee is a substitute product. This means that people are willing to find other means of consumption if price increases or availability is diminished.
;eakness 7( Although +tarbucks provides excellent customer service due to their loyal and dedicated employees, they do this at a cost. They pay their employees more than restaurants and retailers. !urthermore, they offer benefits to full"time and part"time employees. This results in high costs for the company.
$o& do t%ese &eanesses pre/ent t%e firm from meeting customers2 needs3
The most important reason that these weaknesses prevent the firm from meeting the
customer's needs is because in the event that prices should rise at +tarbucks, or the economy should experience a recession, people are likely to spend more conservatively. This is because many people treat coffee as a substitute product. If consumers are not loyal coffee drinkers and they choose to spend conservatively, they might prefer a cheap cup of coffee over the premium price that +tarbucks charges for its gourmet coffee.
$o& do t%ese &eanesses negati/el" differentiate t%e firm from its competitors3
These weaknesses differentiate this firm from its competitors because other competitors are not getting hit as hard during this economic recession. This is because +tarbucks most
significant competitors are low"price operators such as 1c-onalds. ;hile +tarbucks operates as a high"end, higher priced product, consumers are likely to turn to these competitors if they are spending more conservatively.
(pportunities 4e+ternal situations independent of t%e firm5not strategic options6
Lpportunity 5( /merging international markets.
$o& are t%ese opportunities related to ser/ing customers2 needs3
These opportunities are related to serving customer needs because +tarbucks will be able to satisfy the desire for their coffee Halong with the experienceH in other countries. /merging international markets allow +tarbucks to expand while our country is experiencing and economic recession. !urthermore, technological advancements allow +tarbucks to increase 2uality and decrease waiting time. Technology is continuously improving, making things 2uicker, faster and better. It most certainly will make its way towards the coffee business.
1%at is t%e time %ori7on of eac% opportunit"3
+tarbucks has already begun flourishing in these emerging international markets, beginning in #hina. +pecifically, they have opened >76 stores and consider it a great opportunity because of the large number of people in this area. !urthermore, the company has considered buying
high"end brewing machines that will allow baristas to act more easily with customers, providing an even better experience.
T%reats 4e+ternal situations independent of t%e firm6
Threat 5( /conomy experiencing a recession.
Threat 7( /mergence of competitors.
Threat <( Jise in the cost of coffee Q dairy products.
$o& are t%ese t%reats related to ser/ing customers2 needs3
These threats are related to serving customer's needs because they impact the price the
consumers pay for a cup of coffee. ;hile our economy is experiencing a recession, consumers who are not loyal coffee drinkers are likely to look for substitute products. This is because substitute products, such as coffee from 1c-onalds are less expensive. These competitors are emerging and flourishing during this economy because gourmet coffeehouses like +tarbucks are having trouble lowering prices while the cost of coffee beans and dairy products are rising.
1%at is t%e time %ori7on of eac% t%reat3
Time can only tell when the economy will turn around. +igns point to stability in the near future, but until this happens, +tarbucks will be under pressure to compete with low"cost operators such as 1c-onalds. Although +tarbucks has always competed against low"cost operators, the emergence and flourishing of these competitors during this economic recession will continue to act as a threat.
T%e S1(T Matri+
+trengths(
S-eveloped a niche in the market as a high"end brand of coffee
S The atmosphere in their coffee bars provides customers with a feeling of sophistication, style and a sense of knowledge.
S Fave attracted employees who are well educated and eager to communicate the message of their product.
Lpportunities(
S /merging international markets. S Technological advancements.
;eaknesses(
S 1any people believe that coffee is a substitute product. S Although +tarbucks provides excellent customer service due to their loyal and dedicated employees, they do this at a cost.
Threats(
S /conomy experiencing a recession. S /mergence of competitors.
S Jise in the cost of coffee Q dairy products.
PRICING STRATEGY AT STAR08C9S
+tarbucks 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 *ustification 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 +tarbucks approach to pricing is one we can all use to improve our margins. As we've said before, it only takes a 5M increase in prices to raise profits by an average of 55M.
+tarbucks is the leader of the coffee market. As an individual company, it controls several times more market share than any of its competitors. 1ore than *ust a high"priced coffee shop, +tarbucks offers a combination of 2uality, authority and relative value.
:ualit"
+tarbucks sets its prices on a simple idea( high value at moderate cost. ;hen people feel like they are getting a good deal for their money, they are more likely to pay a higher cost. Uuality is key. +tarbucks has to maintain strict 2uality controls in its coffee sourcing as well as in its customer service and peripheral products to *ustify its costs.
!ifferentiation
+tarbucks also spends a lot of time and energy differentiating itself from the competition. ou can see this in the design of its coffee shops, the music played there and the types of products it sells, such as coffee"brewing e2uipment and *azz #-s. +tarbucks makes sure to keep current on the latest technology, often times being the first to introduce the newest advancements to its customers. !or example, +tarbucks was one of the first companies to adopt location"based promotions and mobile payments.
T%e )alue of Aut%orit"
+tarbucks$ pricing strategy has a lot to do with how it positions itself as an authority on coffee, allowing the company to charge premium prices. Thus, when +tarbucks introduces new
products at higher prices, consumers are willing to pay extra without even having tried the products because they associate the +tarbucks name with high 2uality.
+tarbucks also uses relative pricing. It offers premium items, like its espresso drinks or its +tarbucks brand whole"bean coffees sold in grocery stores, along side lower"cost items, like its drip coffees or its +eattle's est line. ;hile the risk exists that more customers will choose the lower"priced items, by offering higher"priced items along side lower"cost alternatives, +tarbucks is *ustifying the higher price through comparison.
)alue 0ased Pricing Can 0oost Margins
!or the most part, +tarbucks 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
ma+imi7ation is the process by which a company determines the price and product output level that generates the most profit. ;hile 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 +tarbucks introduces price hikes and see how you can use their approach to generate higher profits.
An (/er/ie& of t%e Starbucs Pricing Strateg"
T%e Rig%t Customers and t%e Rig%t Maret
;hile 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
+tarbucks' 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 -unkin -onuts, +tarbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.
separate itself from the pack and reinforce the premium image of their brand and products. +ince their loyal following isn't especially price sensitive, +tarbucks 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 C.+. depending on the current markets in those areas %the most recent hike affects the Northeast and +unbelt regions, but !lorida and #alifornia prices remain the same&.
Product )ersioning ; Price Communication
They also apply price increases to specific drinks and sizes rather than the whole lot. y raising the price of the tall size brewed coffee exclusively, +tarbucks 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 47 mark. y versioning the
product in this way, the company can en*oy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes.
+tarbucks 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. Csing increased
commodity costs to *ustify 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.
1%at pricing strategies "ou can lern from Starbucs3
The profit maximizing tactics +tarbucks implements in their pricing strategy are vital
components of a process anyone can use. Fere are some of the takeaways you can apply to your own business(
<= Stud" "our customer personas=
+tarbucks understands that the ma*ority of their customer base is fairly insensitive to price, and uses small price increases that everyday consumers barely notice to boost margins. Uuantify your buyer personas and the demand for your product or service will help you choose a price that captures the maximum amount your customers are willing to pay.
>= ?ustif" t%e e+c%ange rate for "our product=
#ommunicating price increases effectively is crucial to a successful price hike, and managing customer perception is a key part of the +tarbucks strategy. +upport your price increases using changes in the market such as higher commodity costs and ease the pain on the consumer by finding an attractive way to publicize the new prices. +tarbucks said their beverage prices were increasing by an average of 5M, but that low average probably stemmed from including all of their beverages in the e2uation, including ones that remained at the same prices.
@= 8se product differentiation to put "our compan" in t%e lead=
ou can *ustify maximizing your profits using the fairest of reasons, but if the customers don't value your service the way they value a delicious cup of coffee, then a decrease in demand is inevitable. uild a service or product that consumers can't live without, and you'll be able to implement price hikes without turning off your customers.
= !on2t increase t%e prices of t%e products &it% t%e %ig%est margins=
Jaise the prices of the products surrounding them. As mentioned earlier, +tarbucks raised the price of the tall size brew exclusively in order to persuade customers to purchase larger sizes
%with slightly higher margins&. Price hikes for your lower margin products can entice customers to upgrade to more expensive options, especially with respect to products and
services that are tiered based on time usage and features. The goal is to use the price increases to guide the customer towards your most profitable product.
Conclusion*
Lverall +tarbucks has maintained a competitive advantage since creating its original blue ocean of bringing 2uality, bistro"style coffee choices to the masses. In order to stay current it will need to focus on its core competencies and avoid spreading themselves to thin. To avoid competitors such as 1c-onalds and other coffee chains, they will need to create new value innovation by enhancing the customer experience by investing in online content and
interactivity. Jather than creating more new products, I think their strength lies in their brand and by enhancing the con" nection to their loyal customers, they will separate themselves from 1c-onalds and others.
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