Instant Coffee Price Is About Skimming

Update 8/19/2010: Via sales stands at $100 million

Instant coffee may be a $21 billion market but Starbucks’s new instant coffee Via is definitely not about taking a share of the revenue.

A trio of single-serve Via packets will sell for $2.95 in the United States and 12 packets will sell for $9.95. Those prices are significantly higher than Nescafe’s Taster’s Choice single-serve packets that sell in Los Angeles for roughly $1.50 for six and around $4 for 20.

At $1 per serving, Via is  four times the price of the market leader, Nestle. Via is priced for profit, not for capturing market share.

Nestle’s overall margin of 12% tells us the upper bound of overall market profit is $2.4 billion. For Via, the cost per serving cannot be any more than twice the retail price of a serving of Taster’s choice (assumption). Conservatively we can assume Via has 40% margin. Starbucks will be more than happy to get just 3% or so market share. How will Via get  its 3% market share? It comes from two sources. One, there always exist a segment that wants premium instant coffee and is willing to pay premium price. Two, by bringing in new customers who have not tried instant coffee before (some of these will be ex-Starbucks customers who stopped visiting the coffee shops).

If Via gets 3% of the $21 billion market, that is $630 million in revenue and $250 million in profit. That is, at 3% market share Via will gain 10% of the market’s total profit. That is not that different from the strategy of Apple and Blackberry that have 30% of the mobile phone profit share with less than 3% of market share.

Pricing Via is about skimming profits not market share and a very prudent one.