Republic of the Philippines

BATANGAS STATE UNIVERSITY

The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

STARBUCKS

A Pricing Plan
Presented to the Faculty of
College of Accountancy, Business, Economics and
International Hospitality Management
Batangas State University TNEU JPLPC-Malvar
Malvar, Batangas

In Partial Fulfillment
Of the Requirements for the Degree
Bachelor of Science in Marketing Management

Submitted By:
Casupang, Angel B.
Centeno, Aira Jean A.
Cristobal, Fatima
Cortez, R-bhen
Cuevas, Camille

Lecturer:
Mrs. Ruth Largo

December 2022

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 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

Table of Content

Introduction 3

Market Segmentation 4

Estimate Demand 5

The Market Share 9

The Marketing Mix 10

Estimate Cost 14

Pricing Policies 16

Pricing Strategies 17

The Price Structure 20

References 25

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 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

I. STARBUCKS

Starbucks begins in 1971 along the cobblestone streets of Seattle’s historic Pike Place
Market. It was there where Starbucks opened its first store, offering fresh-roasted coffee
beans, tea, and spices from around the world for our customers to take home. The name was
inspired by the classic tale, “Moby-Dick,” evoking the seafaring tradition of the early coffee
traders.
Ten years later, a young New Yorker named Howard Schultz would walk through
these doors and become captivated by Starbucks coffee from his first sip. After joining the
company in 1982, a different cobblestone road would lead him to another discovery. On a
trip to Milan in 1983, Howard first experienced Italy’s coffeehouses, and he returned to
Seattle inspired to bring the warmth and artistry of its coffee culture to Starbucks. By 1987,
they swapped the brown aprons for green ones and embarked on the next chapter as a
coffeehouse.
Starbucks would soon expand to Chicago and Vancouver, Canada, and then on to
California, Washington, D.C., and New York. By 1996, they would cross the Pacific to open
the first store in Japan, followed by Europe in 1998 and China in 1999. Over the next two
decades, they would grow to welcome millions of customers each week and become a part
of tens of thousands of neighborhoods worldwide. In everything they do, they are always
dedicated to the Our Mission: to inspire and nurture the human spirit – one person, one cup,
and one neighborhood at a time. (starbucks.com)
According to its former CEO, Howard Schultz, a coffee house is not just a place to
satisfy people’s craving for a coffee fix every morning. Starbucks is designed to be a Third
Place, a homey get-together where customers can hang out, relax, work, and study.
Therefore, each location is customized to be a welcoming concept where customers can
spend hours enjoying the best specialty coffee, food, and dessert rather than a takeaway.
Starbucks has also introduced a policy where everyone can share the atmosphere without

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 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

purchasing anything. As of January 2, 2022, Starbucks had 34,317 open stores across the
world

II. MARKET SEGMENTATION OF STARBUCKS

The market segmentation of Starbucks is typically divided into four variables -

demographic, geographic, behavioral, and psychographic. These variables will be the basis
for specifying a company's target market. Every company has various variables for its
marketing strategy; however, since Starbucks is a global company, it is proper to tackle
several categories with its marketing plan.
The elements under Starbucks' targeting section typically answer and specify the
four variables mentioned in the market segmentation section. Starbucks' diverse customers
can still be broken down into more specific aspects. (EdrawMind.com)

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 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

III. ESTIMATE DEMAND

Determinants of demand consist of 1) price, 2) the incomes of consumers, 3) the

prices of related goods and services, 4) the tastes of preferences patterns of consumers, 5)

the expected price of the product in future periods and 6) the number of consumers in the

market. These variables change the quantity demanded at each price and determine where

the demand curve is located.

Price - with all other things remaining constant, as the price rises, the demand will fall and

inversely, as the price falls, the demand will rise. As the price of Starbucks coffee increases,

the demand for that brand of coffee will decrease. In this event, many people may choose

not to drink Starbucks coffee and decide to switch to a less costly alternative such as

frequenting a lower-cost coffeehouse, purchasing coffee at a gas station, or perhaps even

brewing their coffee at home. Other alternatives to coffee, such as tea, energy drinks, or

any caffeinated beverage may also take the place of coffee. As the price of Starbucks coffee

falls, consumers will demand more of the coffee because it will be more affordable.

For example, if the price of a cup of coffee went up by $0.25, consumers could replace

their morning caffeine with a cup of tea. However, if the price of caffeine were to go up,

we would probably see little change in the consumption of coffee or tea because there are

few substitutes for caffeine. Most people are not willing to give up their morning cup of

caffeine no matter what the price.

v
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

Income - as income increases the demand for a product will increase as well. As income

declines, the demand for goods will go down as well. In today’s economy, many people

have been losing their jobs or have had their income reduced. As a result, consumers have

had to cut back on non-essential items such as higher-end coffees like Starbucks. Many

people will no longer be able to afford the $4-5.00 specialty beverage. When income

increases, people have more disposable income and therefore can treat themselves to a

specialty beverage.

Complements - If the price of the complement rises, the demand for the product falls. If

prices of the complements, go down there will be a higher demand for the product.

Complements of Starbucks coffee can be milk, cream, sugar, sugar substitutes, and

flavored syrups. For example, if the price of sugar should increase, many consumers may

be unwilling or unable to purchase it and opt for another alternative, which would decrease

the demand for coffee. On the other hand, if the price of sugar goes down, consumers will

be able to use it for many more things including sweetening their coffee.

Substitutes - As the price of the substitute rises, the demand for the product rises. As the

price of the substitutions goes down, the demand for them will increase. Substitutes for

Starbucks coffee could include cheaper coffees, teas, hot cocoa, water, energy drinks, soda,

and caffeine pills. If the price of any of these substitutes should rise, the demand for coffee

will rise because consumers will be unable or unwilling to pay the additional price and

switch back to coffee.

vi
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

Tastes - As preferences for a particular good or service change, so will the demand for the

item. If people enjoy drinking and develop a preference for stronger-tasting Starbucks

coffee, they will want more of it. If consumers do not like the stronger-tasting Starbucks

coffee, they will want less of it. Income changes and lower-priced substitutions could affect

their tastes and a cheaper-priced alternative could become a new preference.

Expected price - If a consumer expects that a price of a certain commodity will rise then

they may opt to stock up on the product at the lower price before it goes up. Inversely,

consumers may believe that a price of a good will be reduced, and they will hold off on

purchasing the product until the price goes down to the lower rate. Many consumers may

stock up on Starbucks coffee beans if they know that the price is going to be increasing

soon. On the other hand, consumers may wait to make their Starbucks purchases if they

know the prices are going to drop soon.

The number of consumers - If there are more buyers then there must be more of market

demand. The more consumers, the more demand. The higher the demand for a good the

higher the prices will rise.

State technology - Producers will search for advanced, economical technology so the cost

of producing Starbucks coffee will decrease. The lower cost of the production of coffee

results in a higher supply due to the cost-effectiveness of the production. According to

Starbucks 10k report, Starbucks relies heavily on information technology systems across

its operations, including for management of its supply chain, point-of-sale processing in its

vii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

stores, and various other processes and transactions. The Company’s ability to effectively

manage its business and coordinate the production, distribution, and sale of its products

depends significantly on the reliability and capacity of these systems. The failure of these

systems to operate effectively, problems with transitioning to upgraded or replacement

systems, or a breach in the security of these systems could cause delays in product sales

and reduced efficiency of the Company’s operations, which results in higher production

costs.

The expected price of the good - Producers may withhold production of Starbucks coffee

in the current period if they expect the price of coffee to rise. They will be more willing to

sell the coffee at a higher price rather than selling and producing at a lower price.

A number of firms - The higher the number of coffee suppliers in the industry the higher

the supply of coffee in the industry. There will be more coffee to go around for the

consumers. If there are more buyers, then there must be more market demand. The more

consumers, the more the demand. The higher the demand for a good the higher the prices

will rise.

viii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

IV. THE MARKET SHARE

With such a huge impact on the economy, Starbucks accounted for 36.7% market

share in the United States alone, competing with other heavyweights such as Dunkin’

Donuts and McCafé. Market share is defined by the percentage of a certain market earned

by an individual company, which can be measured by either units or revenue. In the case

of Starbucks, in 2020, Starbucks still maintained the highest share of the US coffee market

measured by the number of opened stores. It accounted for 40 percent of the market share

with 15,337 stores even though the company was pulling back by closing about 600 stores

in its home nation.

The decline in the number of operated locations is part of the brand’s tactics to

refocus on its asset base. In the future, you will see more Starbucks opened in urban areas

through take-out, drive-thru units, and mobile orders.

In the same year of 2020, Starbucks was followed by one of its significant competitors,

Dunkin, with approximately nine thousand stores.

According to a report by Nithin Geereddy about the Strategic Analysis of Starbucks

Corporation, the retail coffee and snacks store industry in the US is forecasted to grow at

an annualized rate of 3.9% in the next five years. With Starbucks and Dunkin being the top

two brands in their home nation, both account for over 60% of the market share.

ix
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

V. THE MARKETING MIX

As one of the best coffee houses globally, Starbucks provides coffee and pastry

products since 1971. If you are into coffee, you indeed have visited Starbucks chains in

your area. Thanks to effective marketing to keep the brand consistent for more than four

decades, the company has remained at its peak. Following how Starbucks does its

marketing strategy can take up a lot of effort and a whole lot of funding. Surely, not

everyone who opens a business has a multi-million-dollar budget for its marketing plans;

however, there are some fundamental principles and strategies behind Starbucks that any

brand can use. Starbucks has a marketing mix that supports the company's industry position

as one of the leading coffeehouses in the world.

The marketing mix will identify the primary elements of a company's marketing

strategy, namely, product, price, place, and promotion (4Ps). Starbucks Marketing Mix

(4Ps) Analysis Mind Map To categorize and classify each section, here's what Starbucks'

marketing mix looks like when in a mind map/diagram made by (EdrawMind).

In this business analysis case, Starbucks uses its 4Ps to develop its brand image and

ensure profitability. With the strongest brand in the coffeehouse industry, the company

shows how an effective marketing mix supports brand development and multinational

business growth. The corporation occasionally changes its 4P mixture to respond to

strategic challenges in the market, including competitive forces involving firms like

Dunkin’, Tim Hortons, McDonald’s, Burger King, Subway, and Wendy’s. These

x
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

competitors challenge the company’s market position, as explained in Porter’s Five Forces

analysis of Starbucks Corporation. In this regard, the marketing mix functions as a strategic

approach to counteract competition against the coffee business.

The marketing mix or 4P is a strategic tool for establishing a unified and systematic

approach to bringing Starbucks Corporation’s products to food and beverage markets

around the world. Based on its 4Ps, the coffeehouse company applies a combination of

market strategies and tactics to promote the right products at the right places at the right

price. The success of the marketing mix contributes to operational effectiveness and

supports Starbucks’s corporate mission statement and corporate vision statement.

Products

This component of the marketing mix focuses on what the coffee business offers to

customers. Starbucks Corporation innovates its product mix (and its 4Ps) to capture more

of the market. The company modifies food and beverage product lines with the aim of

expanding its market reach and growing its market share. The following are the main

categories in Starbucks’s product mix:

• Coffee

• Tea

• Baked goods

• Frappuccino

• Smoothies

xi
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

• Other foods and

• beverages

• Merchandise (mugs, instant coffee, etc. Communications Mix)

Promotion

In the marketing mix, promotions, also known as the marketing communications mix, refer

to communication strategies and tactics for the goal of improving Starbucks’s brand,

revenues, and market share. For example, promotional activities can focus on persuading

consumers to buy the company’s tea and instant coffee products. Starbucks’s marketing

mix includes the following promotional mix:

Word-of-mouth marketing Advertising Sales promotions Public relations Word-of-

mouth marketing is the most significant promotional strategy in Starbucks’s marketing

mix. The company focuses on high-quality customer experience to encourage people to

spread positive reviews that promote the coffeehouse business. Howard Schultz’s emphasis

on high quality through Starbucks Corporation’s organizational culture helps create such

good experiences for customers. In addition, advertising is an integral part of the coffee

company’s 4Ps. For example, the company’s coffee and tea ads reach target customers

through the Internet and print media. Moreover, the marketing mix involves sales

promotions as a communications strategy to persuade consumers to buy more of the

company’s foods and beverages. For example, the Starbucks Rewards program provides

freebies for customers. In this approach, consumers buy more of the company’s products

xii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

while expecting freebies, such as free coffee. Furthermore, the company uses public

relations to promote its brand and coffee products. In the 4P context, the Starbucks

Foundation functions as a part of a public relations strategy. The Foundation helps

organizations and communities while promoting the coffeehouse company in the process.

Starbucks’s stakeholder management and corporate social responsibility strategy relate to

public relations in this marketing mix.

Place

In Starbucks’s Marketing Mix, the component determines the venues where

customers access the company’s foods, beverages, and merchandise. Starbucks offers most

of its products at cafés or coffeehouses. However, other places or channels of distribution

are included in this 4P component. This marketing case shows that Starbucks Corporation

distributes its products through the following venues or places to reach target consumers:

Coffeehouses/Cafés Retailer’s Website and mobile apps Coffeehouses or cafés are the most

noticeable distribution venues in Starbucks’s marketing mix. These places are strategically

located in areas that have high pedestrian traffic, such as malls and commercial centers.

Starbucks Corporation’s organizational structure facilitates the management of franchising

and licensing operations for these locations. Retailers are also included in the coffeehouse

company’s 4Ps, as channels for maximizing distribution and market reach. These places

enable the company to distribute coffee products, such as VIA Ready Brew instant coffee,

and other merchandise. In addition, online venues are in Starbucks’s marketing mix. The

xiii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

company’s website and mobile apps provide easy access for customers who want to check

available products or place their orders for pickup or for delivery through third-party

service providers. The information technology used in this 4P component addresses the

sociocultural and technological trends described in the PESTEL/PESTLE analysis of

Starbucks Corporation. Thus, the company’s marketing mix involves strategies and tactics

that use different types of locations to optimize the distribution of food and beverage

products. The high visibility and accessibility of these places contribute to a positive brand

image, which is one of the strengths assessed in the SWOT analysis of the Starbucks Coffee

Company.

VI. ESTIMATE COST

Common Cost allocation is used for the determination of the cost of products and

services that must be incurred by a company. It excludes the price of the service and only

service costs incurred are considered. For the cost allocation purpose, the common cost

incurred by different departments is divided according to a certain percentage.

The recasting of the common cost allocation of the Starbucks Company reveals that a major

portion of the common cost of the company is on account of wages and salaries of

employees. It accounts for about 45 % of the total common cost incurred for the operations.

Electricity is another major cost that increases the operating costs of the organization. The

xiv
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

common cost allocation should help the company to measure the percentage of different

cost elements on the total common cost of the operations.

A cup of Starbucks coffee costs around PHP 140 in the Philippines, depending on

the size and type of drink ordered. The price of a cup of coffee at Starbucks is more

expensive than the average price of a cup of coffee in the Philippines, which is PHP 100.

Starbucks has decided to raise prices on average by 3.8% because of the current

labor crisis and rising goods and labor costs. The company says it must do so to cover

increased labor and supply costs. According to a study cited in the New York Times

article, barista wages have increased by only 2% since 2008, while the cost of living has

increased by more than 8%. Many people have had to make difficult choices because of

the increase in prices, such as deciding whether to go out for dinner or cut back on other

expenses. Some have criticized Starbucks for its handling of the labor dispute. (Linda)

Starbucks' cost is $0.36 for coffee and milk

The retail cost for Starbucks coffee, milk, and sweetener is $0.36. That is how much

you would spend if you do it at home, using the proper ratios of coffee on a proper ceramic

cup.

Starbucks' cost is $1 including Direct labor

The total cost for the barista, cashier, and support staff including taxes and benefits

is $0.56. Add 8 cents for the cost of a paper cup, stir, and lid. Thus, the total marginal cost

for Starbucks to make a cappuccino is $1.00.

xv
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

Starbucks' overhead expenses are $0.64 per coffee

From the 2018 Annual Report, we see that SG&A expenses at Starbucks are 15% of sales

or $0.64 per cappuccino. This includes advertising, administrative (headquarters),

depreciation, amortization, R&D, and all other operating expenses. (George Benaroya)

VII. PRICING POLICIES

Starbucks raised their beverage prices by an average of 1% across the U.S., a move

that represented the company’s first significant price increase in 18 months. The price

change didn’t affect Grande or venti (medium and large) brewed coffees and they don’t

mess with smaller sizes, but anyone who purchases tall size (small) brews saw as much as

a 10-cent increase. The company’s third-quarter net income rose 25% to $417.8 million

from $333.1 million a year earlier, and green coffee prices have plummeted, so what gives?

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.

xvi
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

As we’ve said before, it only takes a 1% increase in prices to raise profits by an

average of 11%. 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, it’s 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, let’s look at how

Starbucks introduces price hikes and see how you can use its approach to generate higher

profits. (Tucker Dawson)

VIII. PRICING STRATEGIES

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 company’s 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. To

compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks

raises prices to maximize profits from price-insensitive customers who now depend on

xvii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

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 its brand and products.

Since their loyal following doesn’t especially price sensitive, Starbucks coffee

maintains an 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 can 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 its price increases to

manipulate consumer perception.

The price hike might be based on an analysis of the customer’s 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

xviii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

insignificant (less than a third of beverages will be affected, for example) helps foster an

attitude of acceptance. The profit-maximizing tactics Starbucks implements in its 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 most of its customer

base is insensitive to price and uses small price increases that everyday consumers barely

notice to boost margins. Quantifying 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 Starbuck’s 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 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 don’t value your

service the way they value a delicious cup of coffee, then a decrease in demand is

xix
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

inevitable. Build a service or product that consumers can’t live without, and you’ll be able

to implement price hikes without turning off your customers.

4. Don’t 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 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 toward your most profitable product.

IX. THE PRICE STRUCTURE

Starbucks' Pricing Structure

Starbucks is a large corporate coffeehouse chain based in the United States that was

founded in 1971 and has been successful ever since. Starbucks currently has over 33,000

stores in 80 countries. For the last five decades, people have been obsessed with coffee.

Their pricing models have enabled them to maintain a consistent consumer base.

1. Types of Pricing Strategy Applied by the Company

Starbucks employs a variety of profit-maximizing strategies, the most prominent of

which is value-based pricing. Before deciding on an appropriate strategy for an

organization, they thoroughly analyze their consumers' behavior and then formulate prices

xx
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

based on their target audience. This serves to maintain customers engaged with the brand.

They also believe in profit maximization, which means setting the price based on their

production level to produce the most profit. The value-based premium pricing is not widely

used by businesses because it is hard to implement. However, Starbucks has had success

with this method.

2. Details Discussion on the Pricing Strategy of Starbucks

When it comes to pricing, Starbucks is very calculated. When it comes to

advertising and marketing events, they go the extra mile. However, their pricing and

corporate identity are very targeted. Their brand identity is delightful, which helps to boost

sales even though their products are not cheap. They place a high priority on promotional

activities, particularly during various events and holiday seasons. The following are some

of Starbucks' pricing strategies.

2.1 Menu-based pricing strategy

Starbucks provides highly specialized meals on which their pricing is heavily

dependent. Every item on their menu is linked to their pricing model. One great feature is

that they offer the same menu in each location. As a result, they could also provide raw

materials in bulk, lowering their operating costs. They offer a wide range of options to their

customers. All these items are reasonably priced in comparison to other restaurants.

Because the menu is so varied, everyone will be able to locate something to their

preference.

xxi
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

2.2 Selling the Brand

Starbucks has been able to keep its net profit by maintaining consistency in its

services and menu. Their advertising is rather large, and they have carefully located all of

their stores based on the target audience of their intended audience.

Starbucks spends significantly less on promotional activities than other established

brands in the market. Even though their prices are premium, they have managed to improve

the volume of their revenues. One of the main reasons for this is the variety of their menu.

They have something for every type of customer. For example, the prominence of organic

products has recently increased significantly.

The organic coffee shop costs around $7, whereas Starbucks' large cup of coffee

costs less than $5. Nonetheless, Starbucks is known as a premium brand, even though many

products offer great coffee at a much lower price. One could argue that the extra cents are

for. Another significant fact is that Starbucks has raised the prices of their items when the

actual price of coffee has been reduced. As a result, it demonstrates that Starbucks price

increases their items based on demand rather than raw material prices.

2.3 Promotional Pricing Strategy

Starbucks does not spend as much money on promotional activities as other brands,

but its advertisements are very strategic. During the holiday season, for illustration, they

usually bring special drinks. Seasonal items increase the value of their brand. These items

do not require any additional costs because they already have the machines for making a

xxii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

latte. The only thing they're missing is the pumpkin spices. When they only bring this item

during the fall, the additional cost is eliminated because pumpkin is widely available during

the fall. Their promotional strategy has undoubtedly increased the value of their brand

while lowering their operating costs.

2.4 Demand Strategy

Starbucks uses a demand-based pricing structure as well. They raise the prices of

certain items in response to consumer demand. For example, when the demand for coffee

beans fell, many coffee shops reduced their price increases to make sales. However,

Starbucks' prices had not been reduced. This demonstrates that their business model is not

dependent on raw material supply, but rather solely on consumer demand. Starbucks has

established a luxury brand value with its customers. Even if Starbucks raises the price of

an espresso shot from $2.25 to $3, individuals will still purchase it because of the brand

value. As a result, Starbucks does not alter its pricing based on the cost of its raw resources.

3. Pricing Strategy of the Competition

The coffeehouse industry is not very competitive because the market is oligopolistic.

Menu strategy: The pricing for the food that the brand provides is determined by this

strategy. As a result, once a café has decided on its recipe, it can consider the cost and set

the price accordingly.

xxiii
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

Flexible pricing strategy: Some businesses prefer this strategy because it allows them to

modify the price of their product situationally.

Bundle strategy: This is a common strategy in which two or more products are packaged

and managed to sell as a combo meal. This is an excellent method of increasing sales.

xxiv
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

X. REFERENCE

Starbucks.com (n/d) starbucks.com/about us/

About Us: Starbucks Coffee Company

EdrawMind (n/d) Wondershare EdrawMing

Starbucks Market Segmentation, Targeting, and Positioning | EdrawMind

Linda (November 11, 2022) The Cost of A Cup Of Starbucks Coffee In The

Philippines

The Cost of A Cup Of Starbucks Coffee In The Philippines –

TheCommonsCafe

George Benaroya (September 3, 2019) It costs Starbucks $1 to make your coffee.

Or over $10 when you sit.

It costs Starbucks $1 to make your coffee. Or over $10 when you sit

(linkedin.com)

Assinment point (n/d) Case study on Starbucks Coffee

Case study on Starbucks Coffee - Assignment Poin

xxv
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
The National Engineering University
JPLPC-Malvar Campus
G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233
Tel Nos.: (+63 43) 416-0350 local 206; (+63 43) 416-0068
E-mail Address: [email protected]
Website Address: http://www.batstate-u.edu.ph

College of Accountancy, Business, Economics and International Hospitality Management

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