Starbucks is an American multinational coffeehouse that was founded in 1971 and thriving ever since. Currently, Starbucks has over 33 thousand stores in 80 countries. People have been loving their coffees for the last five decades. Their pricing strategies have been able to keep their consumer base consistent.
Types of Pricing Strategy Applied by the Company
Starbucks uses multiple strategies, among which value-based pricing has been their go-to choice for profit maximization. Before determining a suitable strategy for the organization, they analyze their consumer’s behavior thoroughly and then formulate the prices according to their target audience. This helps to keep the consumers connected to the brand. They also believe in profit maximization where they determine the price according to their production level to generate the maximum amount of profit. The value-based pricing method is not so common among firms as it’s quite difficult to implement this approach. But Starbucks has been successful with this method.
Details Discussion on the Pricing Strategy of Starbucks
Starbucks is very calculative when it comes to its pricing strategy. When it comes to their branding and promotional activities, they take on the premium approach. But their pricing and branding are quite target-oriented. Their brand identity is very exquisite which helps to boost their sales even though their products are not inexpensive. They focus a lot on their promotional activities, especially during different events and holiday seasons. Here are some of the pricing strategies that are taken by Starbucks.
Menu-based Pricing Strategy
Starbucks offers a specialized menu on which their pricing depends a lot. All the items on their menu are correlated to their pricing strategy. One great thing is, they provide the same menu in every store. As a result, they can supply their raw materials in bulk which eventually reduces their operating cost. They have quite a good number of options for their consumers. All of these products are sold at a reasonable price compared to the other restaurants. As the menu is quite diverse, everyone would be able to find something of their likings.
Selling the Brand
Starbucks has been able to maintain its profitability ratio by keeping its services and menu consistent. The scale of their branding is quite large and they have placed all of their stores strategically looking at the demographic of their target audience.
The amount that Starbucks spends on promotional activities is comparatively less than other existing brands in the market. Even though their prices fall into the premium category, they have still managed to increase the volume of their sales. One of the major reasons behind this is the wide range of their menu. They offer something or the other for every consumer. For instance, recently the popularity of organic products has increased at a significant level. The coffee shop that offers organic cups, costs around $7 whereas Starbucks ‘ large cup of coffee is less the $5. Still, Starbucks is known as a premium brand because a lot of brands offer good coffee at a much lower price. One can say, that the extra pennies are for the brand value. Another important fact is, there has been a time where Starbucks has increased the price of their items when the actual price of coffee has decreased. Therefore, it shows that Starbucks prices their items according to the demand not based on the prices of their raw materials.
Promotional Pricing Strategy
Starbucks doesn’t spend a lot on promotional activities compared to the other brands but their promotions are very strategic. For example, they always bring special drinks during the holiday season. They also add seasonal items to their menu. For example, their pumpkin spiced latte is an all-time favorite of consumers which they only add to their menu during the fall. These seasonal items add extra value to their brand. Items like these don’t need any extra cost as they already have the machines for making a latte. The only additional item they need is the pumpkin spices. Because they only bring this item during the fall, this eliminates the additional cost as pumpkin is widely available during the fall. Their promotional style has certainly increased their brand value without affecting their operating cost.
Demand Strategy
Starbucks also follows a demand-based pricing strategy. They increase the price of certain items according to the demand of the consumers. For instance, when the price of the coffee beans decreased, a lot of coffee shops had decreased their prices in order to increase their sales. But Starbucks had not decreased its prices. This proves that their pricing strategy doesn’t depend on the supply of the raw materials rather it solely depends on the demand of the consumers. Starbucks has created a premium brand value among its consumers. Even if Starbucks increases the price of their americano from $2.25 to $3, people will still buy it for the brand value. Hence, Starbucks doesn’t change its pricing by looking at the prices of its raw materials.
Pricing Strategy of the Competition
The coffeehouse business is not that competitive as the market is quite oligopolistic. 5 different pricing strategies are followed by the existing brands. These are:
- Menu strategy: under this strategy, the pricing is set according to the food offered by the brand. So once a café decides its menu, it can calculate the cost and decide the price accordingly.
- Flexible pricing strategy: some companies prefer this strategy as it gives them the scope to change the pricing of their products according to the situation.
- Bundling strategy: this is one of the common strategies where two or three items are bundled and sold as a combo meal. This is a great way of increasing sales.
Along with these, two other popular strategies are the complimentary strategy and the discounting strategy.
Recommendation
Starbucks can provide occasional bundle offers to consumers. This will increase their sales to a further extend. Recently a lot of people have switched to different coffee shops due to an increase in prices. Offers like holiday discounts, bundle offers, promo codes, etc. will help Starbucks to regain its consumers and increase its sales.
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Nishat Tarannum Mridula is a contributing writer at The Strategy Watch. She has been contributing for last two years.
Nishat is currently studying at the University of Dhaka. Even though her major is in Banking, she enjoys writing on diverse topics, starting from appliances to blogposts. She is in the middle of completing her BBA from University of Dhaka. Alongside that, she writes different types of business articles for The Strategy Watch.