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PRICING STRATEGY

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.

Starbucks Coffee Company

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

cream and coffee are also offered at grocery stores.


From Starbucks' founding in 1971 as a Seattle coffee bean roaster and retailer, the company
has expanded rapidly. Since 1987, Starbucks has opened on average two new stores every day.
Starbucks had been profitable as a local company in Seattle in the early 1980s but lost money
on its late 1980s expansion into the Midwest and British Columbia. Its fortunes did not reverse
until the fiscal year of 1989-1990, when it registered a small profit of $812,000. By the time it
expanded into California in 1991 it had become trendy. The first store outside the United
States or Canada opened in Tokyo in 1996, and overseas stores now constitute almost one
third of Starbucks' stores. The company planned to open a net of 900 new stores outside of the
United States in 2009, but has announced 300 store closures in the United States since 2008.
Besides from selling premium coffee, Starbucks has expanded its product line to include
various warm and cold beverages, pastries, salads, breakfast, merchandise/accessories, gift
items, books etc. In addition, Starbucks products are available in supermarkets and other retail
stores. Starbucks is an established brand and a market leader within coffee and other blenddrinks. Its mission is to inspire and nurture the human spirit one person, one cup and one
neighborhood at a time (www.starbucks.com). Starbucks has incorporated this statement into
its overall strategy and is continuously striving at complying with it partly through its
engagement in various CSR activities. This is highly evident throughout its corporate website
where the companys CSR activities are not comprised into one separate report, but rather
integrated into the entire website, hence the entire representation of the company. Starbucks
first entered the corporate responsibility paradigm in 2000, when it developed a partnership
with Conservation International with whom Starbucks created its ethical coffee-sourcing
guidelines. Since then, Starbucks has expanded its CSR partnership with several different
organizations, as well as it has founded its own Starbucks Foundation. Starbucks has also
received acknowledgement for its efforts via public recognition. From this, it is evident that
Starbucks is engaged in several CSR activities and is recognized as a major CSR conscious
corporation at the macro level in the corporate world. The following sections will provide an
in-depth analysis of how Starbucks communicates these different activities to its various
stakeholders through its corporate website.

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.

Sale and expansion


In 1984, the original owners of Starbucks, led by Jerry Baldwin, purchased Peet's. During the
1980s, total sales of coffee in the US were falling, but sales of specialty coffee increased,
forming 10% of the market in 1989, compared to 3% in 1983. By 1986 the company operated
six stores in Seattle and had only just begun to sell espresso coffee.
In 1987, the original owners sold the Starbucks chain to former employee Howard Schultz,
who rebranded his Il Giornale coffee outlets as Starbucks and quickly began to expand. In the
same year, Starbucks opened its first locations outside Seattle at Waterfront Station in
Vancouver, British Columbia, Canada and Chicago, Illinois, US. By 1989 46 stores existed
across the Northwest and Midwest and, annually, Starbucks was roasting over 2,000,000
pounds (907,185 kg) of coffee.
At the time of its initial public offering (IPO) on the stock market in June 1992, Starbucks had
grown to 140 outlets, with a revenue of US$73.5 million, up from US$1.3 million in 1987.
The company's market value was US$271 million by this time. The 12% portion of the
company that was sold raised around US$25 million for the company, which would facilitate a
doubling of the number of stores over the next two years. By September 1992, Starbucks'

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.

Expansion to new markets and products


The first Starbucks location outside North America opened in Tokyo, Japan, in 1996.
Starbucks entered the U.K. market in 1998 with the $83 million USD acquisition of the then
65-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks. In
September 2002, Starbucks opened its first store in Latin America, at Mexico City.
In 1999, Starbucks experimented with eateries in the San Francisco Bay area through a
restaurant chain called Circadia. These restaurants were soon "outed" as Starbucks
establishments and converted to Starbucks cafes.
In October 2002, Starbucks established a coffee trading company in Lausanne, Switzerland to
handle purchases of green coffee. All other coffee-related business continued to be managed
from Seattle.
In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione
Italia from AFC Enterprises for $72m. The deal only gained 150 stores for Starbucks, but
according to the Seattle Post-Intelligencer the wholesale business was more significant. In
September 2006, rival Diedrich Coffee announced that it would sell most of its companyowned retail stores to Starbucks. This sale includes the company-owned locations of the
Oregon-based Coffee People chain. Starbucks converted the Diedrich Coffee and Coffee
People locations to Starbucks, although the Portland airport Coffee People locations were
excluded from the sale.
In August 2003, Starbucks opened its first store in South America in Lima, Peru.
In 2007, the company opened its first store in Russia, ten years after first registering a
trademark there.
In March 2008 they purchased the manufacturer of the Clover Brewing System. They began
testing the "fresh-pressed" coffee system at several Starbucks locations in Seattle, California,
New York and Boston.

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."

Starbucks marketing strategy :


Every business can learn from another, especially if a particular business is one that has
displayed tremendous success over the years. The Starbucks Corporation and its successful
marketing strategies are definitely something that anyone interested in business can learn
about. What sort of techniques did the company use, and how were these able to reach out and
attract millions of people worldwide? Some of their best strategies are outlined below.

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.

Customer Satisfaction Customer satisfaction is a very important issue with Starbucks.


From entrance to the store to the very last drop of their coffees, it is a must that customers feel
the uniqueness of enjoying their Starbucks coffee experience. Without a doubt, Starbucks
Coffee Company knows the answer to the question, "Why is customer service important."

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 for Starbucks Coffee Company

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.

How are these opportunities related to serving customers needs?


These opportunities are related to serving customer needs because Starbucks will be able to
satisfy the desire for their coffee along with the experience in other countries. Emerging
international markets allow Starbucks to expand while our country is experiencing and
economic recession. Furthermore, technological advancements allow Starbucks to increase
quality and decrease waiting time. Technology is continuously improving, making things
quicker, faster and better. It most certainly will make its way towards the coffee business.
What is the time horizon of each opportunity?
Starbucks has already begun flourishing in these emerging international markets, beginning in
China. Specifically, they have opened 420 stores and consider it a great opportunity because of
the large number of people in this area. Furthermore, the company has considered buying
high-end brewing machines that will allow baristas to act more easily with customers,
providing an even better experience.
Threats (external situations independent of the firm)
Threat 1: Economy experiencing a recession.
Threat 2: Emergence of competitors.
Threat 3: Rise in the cost of coffee & dairy products.

How are these threats related to serving customers needs?


These threats are related to serving customers needs because they impact the price the
consumers pay for a cup of coffee. While our economy is experiencing a recession, consumers
who are not loyal coffee drinkers are likely to look for substitute products. This is because
substitute products, such as coffee from McDonalds are less expensive. These competitors are
emerging and flourishing during this economy because gourmet coffeehouses like Starbucks
are having trouble lowering prices while the cost of coffee beans and dairy products are rising.

What is the time horizon of each threat?


Time can only tell when the economy will turn around. Signs point to stability in the near
future, but until this happens, Starbucks will be under pressure to compete with low-cost
operators such as McDonalds. Although Starbucks has always competed against low-cost
operators, the emergence and flourishing of these competitors during this economic recession
will continue to act as a threat.
The SWOT Matrix
Strengths:

Opportunities:

Developed a niche in the market as a high-end brand of

Emerging international markets.

coffee

Technological advancements.

The atmosphere in their coffee bars provides customers


with a feeling of sophistication, style and a sense of
knowledge.
Have attracted employees who are well educated and
eager to communicate the message of their product.
Weaknesses:

Threats:

Many people believe that coffee is a substitute product.

Economy experiencing a recession.

Although Starbucks provides excellent customer service

Emergence of competitors.

due to their loyal and dedicated employees, they do this at

Rise in the cost of coffee & dairy products.

a cost.

PRICING STRATEGY AT STARBUCKS


Starbucks claims the price increase is due to rising labor and non-coffee commodity costs, but
with the significantly lower coffee costs already improving their profit margins, it seems

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.

Value Based Pricing Can Boost Margins


For the most part, Starbucks is a master of employing value based pricing to maximize profits,
and they use research and customer analysis to formulate targeted price increases that capture

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.

An Overview of the Starbucks Pricing Strategy


The Right Customers and the Right Market
While cutting prices is widely accepted as the best way to keep customers during tough times,
the practice is rarely based on a deeper analysis or testing of an actual customer base. In
Starbucks case, price increases throughout the companys history have already deterred the
most price sensitive customers, leaving a loyal, higher-income consumer base that perceives
these coffee beverages as an affordable luxury. In order to compensate for the customers lost
to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from
these price insensitive customers who now depend on their strong gourmet coffee.
Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to

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).

Product Versioning & Price Communication


They also apply price increases to specific drinks and sizes rather than the whole lot. By
raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture
consumer surplus from the customers who find more value in upgrading to grande after
witnessing the price of a small drip with tax climb over the $2 mark. By versioning the
product in this way, the company can enjoy a slightly higher margin from these customers who
were persuaded by the price hike to purchase larger sizes.

Starbucks also expertly communicates their price increases to manipulate consumer


perception. The price hike might be based on an analysis of the customers willingness to pay,
but they associate the increase with what appears to be a fair reason. Using increased
commodity costs to justify the price as well as statements that aim to make the hike look
insignificant (less than a third of beverages will be affected, for example) help foster an
attitude of acceptance.
What pricing strategies you can lern from Starbucks?
The profit maximizing tactics Starbucks implements in their pricing strategy are vital
components of a process anyone can use. Here are some of the takeaways you can apply to
your own business:
1. Study your customer personas.
Starbucks understands that the majority of their customer base is fairly insensitive to price,
and uses small price increases that everyday consumers barely notice to boost margins.
Quantify your buyer personas and the demand for your product or service will help you
choose a price that captures the maximum amount your customers are willing to pay.
2. Justify the exchange rate for your product.
Communicating price increases effectively is crucial to a successful price hike, and managing
customer perception is a key part of the Starbucks strategy. Support your price increases using
changes in the market such as higher commodity costs and ease the pain on the consumer by
finding an attractive way to publicize the new prices. Starbucks said their beverage prices
were increasing by an average of 1%, but that low average probably stemmed from including
all of their beverages in the equation, including ones that remained at the same prices.

3. Use product differentiation to put your company in the lead.


You can justify maximizing your profits using the fairest of reasons, but if the customers dont
value your service the way they value a delicious cup of coffee, then a decrease in demand is
inevitable. Build a service or product that consumers cant live without, and youll be able to
implement price hikes without turning off your customers.
4. Dont increase the prices of the products with the highest margins.
Raise the prices of the products surrounding them. As mentioned earlier, Starbucks raised the
price of the tall size brew exclusively in order to persuade customers to purchase larger sizes
(with slightly higher margins). Price hikes for your lower margin products can entice
customers to upgrade to more expensive options, especially with respect to products and
services that are tiered based on time usage and features. The goal is to use the price increases
to guide the customer towards your most profitable product.

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