Pricing Strategy

Starbucks positions itself as a specialty premium coffee retailer and has a strong and
well known brand image. As Starbucks is a premium coffee brand, its target market
has always been middle and upper class with the disposable income needed to
frequent the coffeehouse. One of the main reasons Starbucks has been so successful
is because they focus on quality and experience rather than price.  The Starbucks’
image and experience has been one of the key elements to their success.  Starbucks
has succeeded in giving coffee a new cachet and established themselves as a price
setter through product differentiation. Consumers have been willing to pay for what
they consider an elite lifestyle and many believe that the higher the price, the better
the quality. Although premium brand coffee makers have some market power to set
prices above the generic value brands, Starbucks operates under monopolistic
completion where there are many small firms that sell similar products, therefore they
do not exert complete market power in the industry.
Starbucks has, up until now, been able to take advantage of premium pricing but
according to an article in Business week, “Starbucks is looking to rebound from dismal
US sales as more consumers cut back on spending. In its first-quarter report last
week, same-store sales – a key indicator of a retailer’s performance – dropped 10
percent. That’s worse than the 8 percent decline in the fiscal fourth quarter.”
Because there are a lot of options for the more cost conscious consumer looking to
save money on coffee purchases, Starbucks felt the need to make a price change.
After all McDonald’s Corp is offering new, lower-priced specialty coffee drinks and
Dunkin’ Donuts is advertising value-minded deals.  So when Starbucks founder
,Howard Schultz, decided to offer a $1 cup of coffee in certain stores to compete with
McDonald’s and to increase existing store sales, some critics thought it may have
done more harm than good. Their thoughts were that the decrease in price may have
implied that there is nothing more to Starbucks than coffee. By offering a cheap cup of
coffee, Schultz may be reducing the company to commodity status, and the natural
result being a price war. No longer is buying a cup of Starbucks coffee an experience.
But because coffee is an elastic product in which price controls demand, Starbucks
may want to consider a small decrease in their price to increase demand which will
increase revenue and allow them to be more competitive.
Pricing decisions also serve as a marketing tool and is one of the most compelling
attributes of product positioning. It makes a very clear statement about how a
consumer should perceive a product. Starbucks cannot become the low price leader;
it takes away from the brand image and ambience that they are known for.
When Starbucks became a major competitor, it was because the company’s
environment was like none other and focuses on the benefit of the customer.  People
considered Starbucks as a “third place” after home and work.  Howard Schultz’s
vision was not to build a coffee shop, but instead build a company that treats people
with dignity and respect.  He wanted to establish a place where you can go relax and
have a delicious coffee and smother yourself in a comfortable seat that makes you
feel like you’re sitting on your living room couch.  Ear pleasuring music will be
consuming your background and make a customer feel as if they are at their home
away from home.  Or a place where you can bring your laptop and get some work
done if there were any distractions at home or work.  Starbucks is also the type of
place where you can meet a friend, stay and talk for hours, and feel like you’re the
only two people in the place.
Customers and employees as well receive an experience for Starbucks, in which
Starbucks constantly strives to pleasure everyone around them.  The environment is
so inviting, relaxed, and probably trendier than most people’s living room, and at the
same time, quick paced if you need a coffee to-go.  Starbucks has set an environment
where the relationship between customers and employees sets the company apart
from other coffee shops.  Starbucks sets a different type of trend than any other
coffee house that seems to be contagious to customers and even other companies.
One area of business that Starbucks spends the least amount of their money on is its
advertisements compared to competitors.  Schultz believes that experience beats
ads.  In an article from [Link] “Starbucks: Keeping the Brew Hot”,
explains that given that philosophy of experience beats ads, conventional advertising
has been no real significance to the growth of the Starbucks brand.  Rather, it has
been the store experience that has defined the brand.  This begins with the quality
and intense flavor of the coffee.  But equally influential are the store design and
ambiance as well as the recruitment and training of the “baristas,” the counter staff
whom Schultz regards as his brand ambassadors.
Instead of putting millions into image-building campaigns, Starbucks has chosen to
spend its money on employee benefits.  Starbucks was one of the first companies to
offer part-time employees equity and health benefits, unlike its competitors in which
it’s hard for them to imitate.
Starbucks has also created projects that have given back to the community, created
recyclable products, and has branched off into different brands, which has brought the
company to another level.  Starbucks constantly strives to be different and better than
everyone else and if they stick to their core competencies, the company will continue
to be successful.
Since Dunkin Donuts is a privately held company, no financial information is available
to determine its share of the market. But based on the amount of stores that Dunkin
Donuts has, it would be safe to assume that they have captured much of the market.
And because McDonalds serves many more products than the other key competitors,
it may be extremely difficult to report accurate market share information.
Based on the information that is available, McDonald is the market leader. Starbucks
market share has been increasing steadily over the last couple years, but Panera
Bread has the largest increase in market share over the past year.  Meanwhile,
McDonalds, Krispy Kreme, and Caribou Coffee have been decreasing.
There are four ways that companies can do to improve market share.  Make a better
product than that of the competitors, change the price or offer special incentives for
buyers, such as discounts or sales, find new distribution channels to reach more
consumers, advertise and promote the products. Although the price appears to be
higher than most of their competitors, the fact that the coffee contains more caffeine
per cup, that one cup may be enough for the entire day.  This could actually save both
time and money opposed to having to buy more than one cup.
Starbucks relies on its relationships with coffee producers, outside trading companies,
and exporters for its supply of green coffee.  The company is dedicated to selling only
the finest whole bean coffees and coffee beverages therefore it purchases green
coffee beans from coffee-producing regions around the world.  Because the supply
and price of coffee are subject to significant unpredictability, the company tends to
trade on a negotiated basis at a significant premium above commodity coffee prices. 
The amount negotiated depends on the supply and demand at the time of purchase. 
Supply and price can also be affected by other factors in the producing countries,
including weather, political and economic conditions.  Agreements establishing export
quotas or by restricting coffee supplies have also affected price.  Due to
unpredictability in the prices, the company has largely used fixed-price purchase
commitments to be sure they have enough of a supply of quality green coffee and
control the price.  This contract states the quality, quantity, and delivery of the coffee.