We are pricing $400 for $450 because customers asked us

sbux_rose_goldWhen writing about Starbucks pricing the simplest option for me is to copy and past my past articles. After all that is exactly what Starbucks does when introducing pricing changes or super-premium products. See for example here  and here. Perfectly executed price increase and almost as effectively communicated, resulting in better profits. Make no mistake, I admire and support it and there is nothing wrong with it.

This time it is the repeat of the $400 Steel gift card. Here is what I wrote last year,

That is correct. It costs you $450 to get $400 because Starbucks said it costs them a lot to make this steel card. While I called this egregious pricing, at least 5000 people did not think so. The card was sold out and worse was sold for much higher prices on eBay.

They then said, they were charging $50 more because they spent more than $50 just to make the card. And what do they say now,

“It actually costs us more than $50 to produce this card,” she said. “That’s what you’re paying for — the quality of the card itself.”

See they are actually losing money, just for you so you can exchange $450 cash that has maximum fungibility with $400 of payment that has no fungibility. They are doing you a favor so you won’t feel guilty every time you fork over $4, after all Prospect Theory says pain from single spend of $400 is almost same as pain single spend of $4 (or something like that).

Another interesting thing to observe this year are the prices in eBay. Last year a curious thing happened,

Pricing on $0 gift card provides great insight on buyer perception. It appears keeping the full $400 value of the card helped increase its value among buyers. That is, when sellers left $400 on the card buyers bid additional $600 for that $400.

We can try to explain away why anyone would pay $650 for an empty card. But nothing in rational economics can explain why someone will bid $1.5 for each additional $1.

Current highest bid is $2499 (with the $400 value retained). And don’t worry, shipping is free.

For all the jokes we make about left tail, they seem to have enough dispensable income than rest of the distribution. I wonder who really is the left tail here.

4 thoughts on “We are pricing $400 for $450 because customers asked us

  1. I mentioned this last time but the eBay prices are perfectly rational if you think of these cards as collectibles. The unused card is more valuable just like an unopened star wars figurine is more valuable. Not surprising.

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