Starbucks and Smart Pricing

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It's basically the business question of the decade: how did Starbucks convince us all to buy $4 lattes, when every deli in America sells coffee for less than a buck a cup? I had dinner with a pair of brand experts last night, one of whom said Starbucks was the best brand built in recent years because it popularized the notion of affordable luxury all the while creating a warm community atmosphere that customers wanted to be part of. (The other guy, by the way, said Apple was the brand of the last five or ten years.)

I agree that savvy brand building accounts for much--maybe even most--of Starbucks' success. But I read an interesting article today, which makes another point. Writing for the online magazine Slate, Tim Harford argues that part of Starbucks' brilliance is smart pricing. The company, he says, hides cheaper versions of its products in plain sight. According to Harford, you can order a "short" cappuccino or latte in any Starbucks in any city, and they'll gladly provide you with one. He says the espresso taste is even better in the smaller dosage. And yet, the lion's share of Starbucks customers blindly order at least a "tall" coffee--if not a "venti." (Disclosure: I am a venti iced man.)

The benefits, to the company anyway, are obvious: Starbucks still serves customers for whom their coffee is too big or too pricy, but it avoids leaving any cash on the table. Consumers who aren't tempted to buy a tall aren't tempted to switch to a cheaper drink, even though one exists (sort of). Harford draws parallels to the pricing of private-label "store" brands, railroad tickets a century ago, and airplane tickets today--other instances where companies compel consumers to buy similar products or services at much different prices.

All of which reiterates a point that we all know, but seldom discuss, which is that pricing is one of the most sensitive business decisions a company can make, and also one of the toughest to make. For more on that subject, I'd recommend that you read this pricing article, which Alison Stein Wellnar wrote for the June 2005 issue of Inc.

Last updated: Jan 6, 2006




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