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A business can use a variety of pricing strategies when selling a product or service. The
Price can be set to maximize profitability for each unit sold or from the market overall. It can
be used to defend an existing market from new entrants, to increase market share within a
market or to enter a new market. Businesses may benefit from lowering or raising prices,
depending on the needs and behaviors of customers and clients in the particular market.
Finding the right pricing strategy is an important element in running a successful business.
Models of pricing
Absorption pricing
Types of pricing in which all costs are recovered. The price of the product includes the
variable cost of each item plus a proportionate amount of the fixed costs and is a form of costplus pricing
Contribution margin-based pricing
Contribution margin-based pricing maximizes the profit derived from an individual product,
based on the difference between the product's price and variable costs (the product's
contribution margin per unit), and on ones assumptions regarding the relationship between the
products price and the number of units that can be sold at that price. The product's
contribution to total firm profit (i.e. to operating income) is maximized when a price is chosen
that maximizes the following: (contribution margin per unit) X (number of units sold).
In cost-plus pricing, a company first determines its break-even price for the product. This is
done by calculating all the costs involved in the production, marketing and distribution of the
product. Then a markup is set for each unit, based on the profit the company needs to make, its
sales objectives and the price it believes customers will pay.
Creaming or skimming
In most skimming, goods are sold at higher prices so that fewer sales are needed to break
even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore
"skimming" the market. Skimming is usually employed to reimburse the cost of investment of
the original research into the product: commonly used in electronic markets when a new
range, such as DVD players, are firstly dispatched into the market at a high price. This
strategy is often used to target "early adopters" of a product or service. Early adopters
generally have a relatively lower price-sensitivity - this can be attributed to: their need for the
product outweighing their need to economize; a greater understanding of the product's value;
or simply having a higher disposable income.
This strategy is employed only for a limited duration to recover most of the investment made
to build the product. To gain further market share, a seller must use other pricing tactics such
as economy or penetration. This method can have some setbacks as it could leave the product
at a high price against the competition.
Decoy pricing
Method of pricing where the seller offers at least three products, and where two of them have a
similar or equal price. The two products with the similar prices should be the most expensive
ones, and one of the two should be less attractive than the other. This strategy will make
people compare the options with similar prices, and as a result sales of the most attractive
choice will increase.
Freemium
Freemium is a business model that works by offering a product or service free of charge
(typically digital offerings such as software, content, games, web services or other) while
charging a premium for advanced features, functionality, or related products and services. The
word "freemium" is a portmanteau combining the two aspects of the business model: "free"
and "premium". It has become a highly popular model, with notable success.
High-low pricing
Method of pricing for an organization where the goods or services offered by the organization
are regularly priced higher than competitors, but through promotions, advertisements, and or
coupons, lower prices are offered on key items. The lower promotional prices are designed to
bring customers to the organization where the customer is offered the promotional product as
well as the regular higher priced products.
Limit pricing
Main article: Limit price
A limit price is the price set by a monopolist to discourage economic entry into a market, and
is illegal in many countries. The limit price is the price that the entrant would face upon
entering as long as the incumbent firm did not decrease output. The limit price is often lower
than the average cost of production or just low enough to make entering not profitable. The
quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than
would be optimal for a monopolist, but might still produce higher economic profits than would
be earned under perfect competition.
The problem with limit pricing as a strategy is that once the entrant has entered the market, the
quantity used as a threat to deter entry is no longer the incumbent firm's best response. This
means that for limit pricing to be an effective deterrent to entry, the threat must in some way
be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce
a certain quantity whether entry occurs or not. An example of this would be if the firm signed
a union contract to employ a certain (high) level of labor for a long period of time. In this
strategy price of the product becomes the limit according to budget.
Loss leader
A loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate
other profitable sales. This would help the companies to expand its market share as a whole.
Marginal-cost pricing
In business, the practice of setting the price of a product to equal the extra cost of producing
an extra unit of output. By this policy, a producer charges, for each product unit sold, only the
addition to total cost resulting from materials and direct labor. Businesses often set prices
close to marginal cost during periods of poor sales. If, for example, an item has a marginal
cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower
the price to $1.10 if demand has waned. The business would choose this approach because the
incremental profit of 10 cents from the transaction is better than no sale at all.
Market-oriented pricing
Setting a price based upon analysis and research compiled from the target market. This means
that marketers will set prices depending on the results from the research. For instance if the
competitors are pricing their products at a lower price, then it's up to them to either price their
goods at an above price or below, depending on what the company wants to achieve.
Odd pricing
In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is
done so as to give the buyers/consumers no gap for bargaining as the prices seem to be less
and yet in an actual sense are too high, and takes advantage of human psychology. A good
example of this can be noticed in most supermarkets where instead of pricing at $10, it would
be written as $9.99. This pricing policy is common in economies using the free market policy.
Pay what you want
Pay what you want is a pricing system where buyers pay any desired amount for a given
commodity, sometimes including zero. In some cases, a minimum (floor) price may be set,
and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select
an amount higher than the standard price for the commodity.
Giving buyers the freedom to pay what they want may seem to not make much sense for a
seller, but in some situations it can be very successful. While most uses of pay what you want
have been at the margins of the economy, or for special promotions, there are emerging efforts
to expand its utility to broader and more regular use.
Predatory pricing
Predatory pricing, also known as aggressive pricing (also known as "undercutting"), intended
to drive out competitors from a market. It is illegal in some countries.
Premium pricing
Premium pricing is the practice of keeping the price of a product or service artificially high in
order to encourage favorable perceptions among buyers, based solely on the price. The
practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume
that expensive items enjoy an exceptional reputation, are more reliable or desirable, or
represent exceptional quality and distinction.
Price discrimination
Price discrimination is the practice of setting a different price for the same product in different
segments to the market. For example, this can be for different classes, such as ages, or for
different opening times.
Price leadership
An observation made of oligopolistic business behavior in which one company, usually the
dominant competitor among several, leads the way in determining prices, the others soon
following. The context is a state of limited competition, in which a market is shared by a small
number of producers or sellers.
Psychological pricing
Pricing designed to have a positive psychological impact. For example, selling a product at
$3.95 or $3.99, rather than $4.00. There are certain price points where people are willing to
buy a product. If the price of a product is $100 and the company prices it as $99, then it is
called psychological pricing. In most of the consumers mind $99 is psychologically less than
$100. A minor distinction in pricing can make a big difference in sales. The company that
succeeds in finding psychological price points can improve sales and maximize revenue. This
pricing strategy makes the customer thinks that, the highest price of a product is the best or
quality product.
Target pricing
Pricing method whereby the selling price of a product is calculated to produce a particular rate
of return on investment for a specific volume of production. The target pricing method is used
most often by public utilities, like electric and gas companies, and companies whose capital
investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according
to this formula, the selling price will be understated. Also the target pricing method is not
keyed to the demand for the product, and if the entire volume is not sold, a company might
sustain an overall budgetary loss on the product.
Time-based pricing
A flexible pricing mechanism made possible by advances in information technology, and
employed mostly by Internet based companies. By responding to market fluctuations or large
amounts of data gathered from customers - ranging from where they live to what they buy to
how much they have spent on past purchases - dynamic pricing allows online companies to
adjust the prices of identical goods to correspond to a customers willingness to pay. The
airline industry is often cited as a dynamic pricing success story. In fact, it employs the
technique so artfully that most of the passengers on any given airplane have paid different
ticket prices for the same flight.
Value-based pricing
Pricing a product based on the value the product has for the customer and not on its costs of
production or any other factor. This pricing strategy is frequently used where the value to the
customer is many times the cost of producing the item or service. For instance, the cost of
producing a software CD is about the same independent of the software on it, but the prices
vary with the perceived value the customers are expected to have. The perceived value will
depend on the alternatives open to the customer. In business these alternatives are using
competitors software, using a manual work around, or not doing an activity. In order to
employ value-based pricing you have to know your customer's business, his business costs,
and his perceived alternatives.It is also known as Perceived-value pricing.
Introduction :
Starbucks Corporation is an American global coffee company and coffeehouse chain based in
Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 20,891
stores in 62 countries, including 13,279 in the United States, 1,324 in Canada, 989 in Japan,
851 in China, and 806 in the United Kingdom. In addition, Starbucks is an active member of
the World Cocoa Foundation.
Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground instant
coffee, full-leaf teas, pastries, and snacks. Most stores also sell pre-packaged food items, hot
and cold sandwiches, and items such as mugs and tumblers. Starbucks Evenings locations also
offer a variety of beers, wines, and appetizers after 4pm.Through the Starbucks Entertainment
division and Hear Music brand, the company also markets books, music, and film. Many of
the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice
History :
Founding
The first Starbucks opened in Seattle, Washington, on March 30, 1971 by three partners who
met while students at the University of San Francisco: English teacher Jerry Baldwin, history
teacher Zev Siegl, and writer Gordon Bowker. The three were inspired to sell high-quality
coffee beans and equipment by coffee roasting entrepreneur Alfred Peet after he taught them
his style of roasting beans. Originally the company was to be called Pequod, after a whaling
ship from Moby-Dick, but this name was rejected by some of the co-founders. The company
was instead named after the chief mate on the Pequod, Starbuck.
The first Starbucks cafe was located at 2000 Western Avenue from 19711976. This cafe was
later moved to 1912 Pike Place Market; never to be relocated again. During this time, the
company only sold roasted whole bean coffees and did not yet brew coffee to sell. The only
brewed coffee served in the store were free samples. During their first year of operation, they
purchased green coffee beans from Peet's, then began buying directly from growers.
share price had risen by 70% to over 100 times the earnings per share of the previous year.
In July 2013, over 10% of in store purchases were made on customer's mobile devices using
the Starbucks app. The company once again utilized the mobile platform when it launched the
"Tweet-a-Coffee" promotion in October 2013. On this occasion, the promotion also involved
Twitter and customers were able to purchase a US$5 gift card for a friend by entering both
"@tweetacoffee" and the friend's handle in a tweet. Research firm Keyhole monitored the
progress of the campaign and a December 6, 2013 media article reported that the firm had
found that 27,000 people had participated and US$180,000 of purchases were made to date.
In early 2008, Starbucks started a community website, My Starbucks Idea, designed to collect
suggestions and feedback from customers. Other users comment and vote on suggestions.
Journalist Jack Schofield noted that "My Starbucks seems to be all sweetness and light at the
moment, which I don't think is possible without quite a lot of censorship". The website is
powered by the Sales force software.
In May 2008, a loyalty program was introduced for registered users of the Starbucks Card
(previously simply a gift card) offering perks such as free Wi-Fi Internet access, no charge for
soy milk & flavored syrups, and free refills on brewed drip coffee or tea.
On November 14, 2012, Starbucks announced the purchase of Teavana for US$620 million in
cash and the deal was formally closed on December 31, 2012.
On February 1, 2013, Starbucks opened its first store in Ho Chi Minh City, Vietnam, and this
was followed by an announcement in late August 2013 that the retailer will be opening its
inaugural store in Colombia. The Colombian announcement was delivered at a press
conference in Bogota, where the company's CEO explained, "Starbucks has always admired
and respected Colombia's distinguished coffee tradition."
Perfect Cup of Coffee Starbucks history has shown that they place a huge emphasis on
product quality. Their coffee, even if priced slightly more expensive than expected, is
notorious for satisfying customers with its rich, delicious taste and aroma.
Third Place From the very beginning, the Starbucks marketing strategy has focused on
creating the third place for everyone to go to between home and work. Creating this unique
and relaxing experience and atmosphere for people has been very important for the
company as they have realized that this is one of the strongest concepts attached to the
company, to which customers have been strongly attracted.
Creating a Starbucks Community The Starbucks marketing strategy has even expanded
to create a community around their brand. On their website, individuals are encouraged to
express their experiences with Starbucks history, and the company strives to personally join
in the discussions. This technique was cleverly pointed out by Webolutions: The Strategic
Marketing Agency in their Starbucks Marketing Observations article.
Smart Partnerships Starbucks Coffee Company has been known to create strategic
partnerships that demonstrate the fact that another way to grow your business is to partner
smart. Over the years, the Starbucks Corporation has greatly increased sales just by using this
strategy.
Innovation Through the years, the Starbucks Coffee Company has been known to think
up creative and innovative ideas to add to their products or services. Theyve added different
flavors to their coffee, more food on their menu, and even became one of the firsts to offer
internet capability in their stores.
Brand Marketing The Starbucks marketing strategy has always focused on word-ofmouth advertising and letting the high quality of their products and services speak for
themselves. For years, this has been uniquely Starbucks, and it has played a huge part in
making Starbucks Coffee Company a success. The definition of viral marketing speaks to this
new word of mouth that Starbucks has run with, and made their own.
We have no patent on anything we do and anything we do can be copied by anyone else. But
you cant copy the heart and the soul and the conscience of the company Howard Schultz,
CEO of Starbucks Coffee.
This quote from Schultz could be the magic that has separated Starbucks from the every
other coffee shop; an attitude of marketing which is inspired by the companys commitment.
The successful marketing strategies which Starbucks employs are definitely of interest to
anyone interested in business marketing can learn about. Serving coffee is a common part of
any restaurant business, but a successful marketing mix will cause a common product to
become uncommon and unique to the consumer.
A marketing strategy for a company requires commitment from the company with all
departments and employees working together towards the same goal. This should be a
philosophy which is applied to the entire organization, not simply an idea that is applied to the
marketing department. The two main functions of the marketing strategy are to identify the
target market, and develop a successful marketing mix for that target market. Within the
marketing mix are four essential components: product, place, promotion, and price. Starbucks
Coffee Company has developed a marketing mix which has proven to be exceptionally
successful for over 40 years.
Starbucks opened in 1971 by owners who developed a passion for dark roast coffee, and that
was basically the main product that was sold in the stores. After about a decade of selling
coffee beans, the owners allowed Howard Schultz to join the company as the firms Director
of Retail Operations and Marketing.
While on a trip to Italy, Schultz came across the Italian coffee culture which intrigued his
interest; a caf where people would gather, socialize and spend time in leisure. Schultz
believed this coffee culture could be replicated in the United States serving the Starbucks
brand of dark roasted coffee and adding espresso drinks to the menu.
This concept was rejected by the founders of Starbucks, and eventually Schultz bought the
company, and proceeded to build it into the largest retail coffee shop chain in the world. The
product line of coffee was expanded to include espresso drinks such as lattes and cappuccinos;
and as the company grew, the drink choices also grew to meet the consumers needs.
Starbucks is known for having store locations everywhere in the world; even to the point of
shops across the street from one another. Beginning in neighborhoods or in rural areas, and
expanding to high traffic areas such as New York City; a Starbucks Coffee Shop may be found
in or very near any city in the United States.
Within the place of the marketing mix, one considers the type of stores as important as the
location. The majority of Americans have two main places where time is spent, either at
work or at home. With Schultzs vision of the coffee shops that inspire the customers to
consider Starbucks his or her third place, all of the shops have the brand of ease and
comfort. Designed to be cozy and comfortable, the store decor of every shop is similar, if not
identical: big easy chairs and sofas, tables for customers to gather at, high top counters with
plenty of electrical outlets for those who take advantage of the free internet, and music playing
which adds to the ambiance. Some locations actually have a burning fireplace to warm the
atmosphere during the winter months.
It is very rare for one to see a promotional advertisement for Starbucks Coffee in a magazine,
newspaper, billboard, television commercial, or any other typical advertising campaign.
Starbucks used the marketing strategy of word-of-mouth advertising; allowing the high
quality of products and the legendary service promote the brand. This tactic has played a huge
part in making Starbucks Coffee Company a success.
The front line Barista (coffee artist) has been trained not only to prepare specialty coffee
drinks, but to include the art of providing legendary service to the customer. This strategy
includes promotion of personalized service by learning customers names, specific drink
preferences, customers occupations, and often personal information concerning the
customers family and life events.
In the beginning, the companys mission statement was: To establish Starbucks as the
premier purveyor of the finest coffee in the world while maintaining our uncompromising
principles as we grow. Now, Starbucks has added to the mission statement: To inspire and
nurture the human spirit One person, One cup, and One Neighborhood at a time. With all
employees working with the companys mission in mind, the brand is promoted on a daily
basis.
In no way, shape, or form has Starbucks offered a competitive pricing for the products sold in
the stores. One may consider the experience of the Starbucks brand to be included in the
price of the products. As stated above, with all front line Baristas working with the companys
mission statement as a guideline, the consumer is purchasing a cup of coffee with the
experience of personalized legendary service.
While the descriptions of Starbucks Coffee Companys marketing mix did not include the
target marketing objective, Starbucks target market includes anyone who is willing to pay a
premium price for the Starbucks Experience. This decision was made with extensive
strategic planning, and with the knowledge that using a unique marketing program such as this
was a huge risk in being successful.
A good summary about the marketing success of Starbucks is this quote by Howard Schultz,
CEO of Starbucks:
We establish the value of buying a product at Starbucks by our uncompromising quality and
by building a personal relationship with each customer.
The marketing mix that Starbucks Coffee Company developed is unique, unconventional,
somewhat risky, but most importantly, extremely successful for over 40 years.
SWOT Analysis
Strengths
Strength 1: Developed a niche in the market as a high-end brand of coffee, offering rich,
exotic coffee blends
Strength 2: The atmosphere in their coffee bars provides customers with a feeling of
sophistication, style and a sense of knowledge. This has turned into a Starbucks culture.
Strength 3: Have attracted employees who are well educated and eager to communicate the
message of their product.
How do these strengths enable the firm to meet customers needs?
These strengths enable the firm to meet customers needs because they allow the customer to
experience a rich, exotic blend of coffee, and a way of life. They focus on the quality of their
product so that the customer can taste the difference between their gourmet cup of coffee and
the traditional, cheap cup of black liquid found in convenient stores. Moreover, they provide
customers with feeling of sophistication, style, and a sense of knowledge when they walk into
their coffee bars. In doing so, they replicated authentic, Italian-style coffee bars to allow
customers to experience a way of life when they visit their store. They are successful with this
because they hire employees who are well educated and eager to express the Starbucks
culture.
How do these strengths differentiate the firm from its competitors?
These strengths differentiate the firm from its competitors because Starbucks has developed a
niche in the market as a high-end brand of coffee. This is different from the traditional cup of
coffee found in convenient stores or at home because Starbucks focuses on the quality of their
coffee by using the finest coffee beans and maintaining freshness with their Flavor Lock Bags.
Furthermore, the atmosphere inside a Starbucks coffee bar provides customers a feeling of
sophistication, style, and a sense of knowledge. This is characteristics of their store that cannot
be matched by other competitors locations such as McDonalds. Also, Starbucks has gained
loyal and dedicated employees. This has transitioned into excellent customer service.
Weaknesses
Weakness 1: Many people believe that coffee is a substitute product. This means that people
are willing to find other means of consumption if price increases or availability is diminished.
Weakness 2: Although Starbucks provides excellent customer service due to their loyal and
dedicated employees, they do this at a cost. They pay their employees more than restaurants
and retailers. Furthermore, they offer benefits to full-time and part-time employees. This
results in high costs for the company.
How do these weaknesses prevent the firm from meeting customers needs?
The most important reason that these weaknesses prevent the firm from meeting the
customers needs is because in the event that prices should rise at Starbucks, or the economy
should experience a recession, people are likely to spend more conservatively. This is because
many people treat coffee as a substitute product. If consumers are not loyal coffee drinkers and
they choose to spend conservatively, they might prefer a cheap cup of coffee over the premium
price that Starbucks charges for its gourmet coffee.
How do these weaknesses negatively differentiate the firm from its competitors?
These weaknesses differentiate this firm from its competitors because other competitors are
not getting hit as hard during this economic recession. This is because Starbucks most
significant competitors are low-price operators such as McDonalds. While Starbucks operates
as a high-end, higher priced product, consumers are likely to turn to these competitors if they
are spending more conservatively.
Opportunities (external situations independent of the firmnot strategic options)
Opportunity 1: Emerging international markets.
Opportunity 2: Technological advancements.
Opportunities:
coffee
Technological advancements.
Threats:
Emergence of competitors.
a cost.
unlikely this justification is the true reason for the hike in prices. In addition, the price hike
was applied to less than a third of their beverages and only targets certain regions.
Implementing such a specific and minor price increase when the bottom line is already in great
shape might seem like a greedy tactic, but the Starbucks approach to pricing is one we can all
use to improve our margins. As weve said before, it only takes a 1% increase in prices to raise
profits by an average of 11%.
Starbucks is the leader of the coffee market. As an individual company, it controls several
times more market share than any of its competitors. More than just a high-priced coffee shop,
Starbucks offers a combination of quality, authority and relative value.
Quality
Starbucks sets its prices on a simple idea: high value at moderate cost. When people feel like
they are getting a good deal for their money, they are more likely to pay a higher cost. Quality
is key. Starbucks has to maintain strict quality controls in its coffee sourcing as well as in its
customer service and peripheral products to justify its costs.
Differentiation
Starbucks also spends a lot of time and energy differentiating itself from the competition. You
can see this in the design of its coffee shops, the music played there and the types of products
it sells, such as coffee-brewing equipment and jazz CDs. Starbucks makes sure to keep current
on the latest technology, often times being the first to introduce the newest advancements to its
customers. For example, Starbucks was one of the first companies to adopt location-based
promotions and mobile payments.
The Value of Authority
Starbucks' pricing strategy has a lot to do with how it positions itself as an authority on coffee,
allowing the company to charge premium prices. Thus, when Starbucks introduces new
products at higher prices, consumers are willing to pay extra without even having tried the
products because they associate the Starbucks name with high quality.
Relative Value
Starbucks also uses relative pricing. It offers premium items, like its espresso drinks or its
Starbucks brand whole-bean coffees sold in grocery stores, along side lower-cost items, like
its drip coffees or its Seattles Best line. While the risk exists that more customers will choose
the lower-priced items, by offering higher-priced items along side lower-cost alternatives,
Starbucks is justifying the higher price through comparison.
the greatest amount consumers are willing to pay without driving them off. Profit
maximization is the process by which a company determines the price and product output
level that generates the most profit. While that may seem obvious to anyone involved in
running a business, its rare to see companies using a value based pricing approach to
effectively uncover the maximum amount a customer base is willing to spend on their
products. As such, lets take a look at how Starbucks introduces price hikes and see how you
can use their approach to generate higher profits.
separate itself from the pack and reinforce the premium image of their brand and products.
Since their loyal following isnt especially price sensitive, Starbucks coffee maintains a fairly
inelastic demand curve, and a small price increase can have a huge positive impact on their
margins without decreasing demand for beverages. In addition, only certain regions are
targeted for each price increase, and prices vary across the U.S. depending on the current
markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but
Florida and California prices remain the same).
Conclusion:
Overall Starbucks has maintained a competitive advantage since creating its original blue
ocean of bringing quality, bistro-style coffee choices to the masses. In order to stay current it
will need to focus on its core competencies and avoid spreading themselves to thin. To avoid
competitors such as McDonalds and other coffee chains, they will need to create new value
innovation by enhancing the customer experience by investing in online content and
interactivity. Rather than creating more new products, I think their strength lies in their brand
and by enhancing the con- nection to their loyal customers, they will separate themselves from
McDonalds and others.
BIBLIOGRAPHY
http://pearsonblog.campaignserver.co.uk/?p=5433
http://smallbusiness.chron.com