Starbucks Price Increase Déjà vu

When it works why mess with it? Be it a product, price increases, or messaging?

I am talking about recent Starbucks price increase. You hardly even noticed that the prices went up – now or the past two times they did it.

Here is what they did four years ago - 8% increase in prices,  two years ago – 10% increase in prices and now -10% increase in prices.

The product mix they chose and the level of price increase, the markets they chose and how they are messaging it are all exactly same as their last time.

There are always other reasons for setting prices or raising prices and it is not about customer selection or pricing at what you can bear to pay.

Effective pricing is not just about understanding customers and demand curves but understanding how best to communicate that pricing to customers. And as an outsider, do not confuse this cost-driven price messaging with how exactly Starbucks sets prices. No company setting prices based on value will explicitly come out and admit that they their prices have no connection whatsoever to costs.

Recently Paul Krugman wrote about this disconnect between costs and prices in The New York Times,

To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

And as Krugman agreed in his piece, it is perfectly acceptable to have this disconnect (although he had some riders attached).

Let  us look at Starbucks case  of setting prices. Here is a point by point comparison of the last two times. It is déjà vu.

Product Mix Impacted and Level of Price Increase

Then:

the price for 12-ounce “tall” brewed coffees and latte drinks went up 10 cents.

Now:

” the price of a Tall brewed coffee is changing, the biggest rise would be 10 cents, Mr. Olson said, adding that he can’t share specific price increases of specific drinks in different markets for competitive reasons”

The reason they are going after the Tall size is highly likely it is their most popular SKU with little or no demand elasticity.  Increasing price on the lowest priced item will also help make the Grande and Venti attractive due to relative pricing.

Markets where Prices are Going Up

Then:

“Starbucks Corp (SBUX.O) raised prices by an average of about 1 percent in the U.S. Northeast and Sunbelt on Tuesday, making coffee-drinkers spend more in New York, Boston, Washington, Atlanta, Dallas, Albuquerque and other cities.”

Now:

Starbucks Corp. SBUX -0.81% plans next week to raise prices by an average of 1% on some of its beverages in the U.S. It would mark the first price change in 18 to 24 months for some markets, the company said.”

Once again they are targeting specific markets and not increasing prices across all markets. You can’t make up such identical news items. It is the likely same markets (those that have customers with higher disposable income and fewer competition). It is the same “1% average increase” message.  The 1% average is true but average is meaningless. It is done here to make  specific price increases look smaller.

Messaging

Then:

The Seattle-based chain said its pricing decisions are based on multiple factors, not just the price of coffee, which has eased lately.

Those considerations include “competitive dynamics” in individual markets as well as costs related to distribution, store operations and commodities, including fuel and ingredients for food and beverages, Olson said.

Now:

 Increasing rent, labor and non-coffee commodity costs as well as competitive dynamics are the reasons behind the new pricing, Starbucks spokesman Jim Olson said.

It is same spokesperson too. I had to pause and check I was not reading old news article. The stories are that close. I wonder if Mr. Olson even talked to press this time or the PR team simply used his quote from last time.

When it works why not repeat it? Like the movie sequels I guess.

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