This article will help you understand Starbucks’ Pricing Strategy, how different products from Starbucks are priced, and more.
Starbucks uses value-based pricing and market-skimming pricing strategies for its products worldwide.
Are Starbucks products more expensive than what other businesses charge? Absolutely! I have always wondered why it is still the go-to place for a quick bite or a refreshing drink, not just for me but for many others too. This was until recently, when I delved deeper into this to find out what informs the pricing strategy and why it works. I decided to write this insight to help you understand the Starbucks pricing strategy that still works miracles even after the years. Read this article for more insights on value-based pricing strategy and market-skimming pricing strategy used by Starbucks products.
Starbucks Pricing Strategy
Starbucks mainly uses a two pronged pricing strategy to beat their competition and maximize profits while maintain their loyal customer base. Below is a deeper look into the Starbucks pricing strategy.
Which pricing strategy does Starbucks use?
As mentioned earlier, Starbucks mainly uses a market-skimming pricing strategy and value-based pricing.
The Starbucks Market skimming pricing strategy
Starbucks has branded itself as the best in the market for the moneyed middle class and upper-class busy urbanites. As a worldwide brand famous for outstanding beverages and other products, it has used a market skimming pricing strategy to sell premium products at a higher price than its competitors.
The market skimming approach involves setting a higher introductory price on a product to attract specific buyers with a strong desire and the resources to buy it. The price is then gradually reduced to cater to the subsequent layers of the market. Starbucks has perfected market skimming pricing to remain a favorite for their old and new customers in all markets they have entered. This is despite formidable competition from other providers offering the same products it offers. The approach works perfectly for market penetration.
The Starbucks Value-based pricing strategy
Value-based pricing calculates sets the price based on a calculated differentiated worth of the products that a company offers to a particular segment of customers compared to their competitors. This is the most used pricing strategy by Starbucks.
Starbucks has used value-based pricing over the years to out maneuver its competition and maximize profits. The company heavily invests in market research and customer analysis to come up with target-specific price increases that capture the maximum amount of consumers willing to pay that price without driving them off. The premium is placed on value rather than on the product.
Starbucks relies on research-backed knowledge of their customers’ buying behavior as they communicate their needs and choose products that interest them. The customer data, from these interactions, is used by Starbucks to set prices that make their customers feel what they are spending is worth what they are getting back, even if the cost is much higher than the same options from Starbucks competitors. At Starbucks, they want the customer to feel that they are getting value for what they pay for. It has worked well for the company even when times are hard, and the business environment is hostile.
The Right Customers and the Right Market
The right customer is one whose needs align with your company’s solutions. The success of the Starbucks pricing strategy is based on having the right customers and selling to the right market. The consumer of Starbucks products and the market it targets worldwide is specific and clearly defined. It serves the middle-class and the upper-class in urban areas that are willing to pay a slightly higher price for beverages as long as they are getting value for money spent.
Starbucks rarely cut prices to keep customers during tough times like their competitors. Price cuts are based on speculation rather than factual testing and analysis of the actual customer base. Starbucks uses a fact-based system where deliberate price increases leave them with the most loyal customers. They compensate for lost customers by increasing their prices when cheaper alternatives like Dunkin Donuts and others exist to reap good profits from their price-insensitive loyal customer base. Price hikes have maintained the premium image of Starbucks as a strategy instead of competing to be as cheap as the others in the market to attract customers.
Product Versioning & Price Communication
Versioning at Starbucks
Versioning is also known as quality discrimination and is popularly used by Starbucks to maximize profits and achieve higher sales of a product. Versioning is common when a product has a large fixed cost of production and small variable costs like the famous Starbucks nitro cold brews.
Versioning allows Starbucks to sell multi versions of a product in the market achieving higher returns than from a single version product with the right pricing. Offering customers a variety on the menu allows them to choose from various options while you learn their habits and preferences. Starbucks has perfected versioning allowing drink customizations at higher prices than the original drink. They also have different flavors and types of the same drink at different prices. The choice of drink size also affects purchasing behavior by accommodating a wide base of customers who can purchase the same drink at different prices based on the size of the serving leading to more earnings.
Price and value communication at Starbucks
Starbucks has used pricing to communicate that they offer better quality and more value on products compared to their competitors. Their pricing communicates that they are the best to convince their customers and the public that may be skeptical and indifferent about their company’s prices without the need to defend the pricing.
They are known to apply price increases in specific drinks and sizes instead of the whole lot to capture consumer surplus while giving more value to the customers. They expertly communicate their price increases in a way that manipulates the consumer’s perceptions. The consumer finds a fair reason to pay and adopts an accepting attitude when such increases are made because of how Starbucks communicates it to them.
What are the 4 pricing strategies?
There are four types of pricing strategies that a company can use which are:
- Profit oriented pricing
- Competitor based pricing
- Value-based pricing
- Market skimming pricing
What is Starbucks pricing policy?
The Starbucks pricing policy is based on providing high value at a moderate cost. The company strives to make people feel they got a good deal and don’t mind paying a higher cost. Starbucks knows their customers don’t mind the price but the value hence the common use of value-based pricing by the company.
Does Starbucks have pricing power?
Yes. Starbucks has the best in class pricing power. They enjoy the perfect environment that affords them the luxury to raise prices when the market demands dictate without losing their customers or affecting the business.