Have you ever heard of profit maximization due to price hike? Yes! It is possible to increase the revenue with an increase in price and create the strong brand image. There is one such company which has mastered into pricing strategy through Value-based pricing.
Value-based pricing uses customers’ perceptions of value, not the seller’s cost, as the key to pricing. The company uses the non-price variables in the marketing mix to build perceived value in customers’ minds. Price is set to match the customer’s perceived value.
For the most part, Starbucks is a master of employing value-based pricing to maximize profits, and they use market research and customer behavior analysis to formulate targeted price increases that imprison 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 take a look at how Starbucks introduces price hikes and see how you can use their approach to generating higher profits.
An Overview of the Starbucks Pricing Strategy
1) The Right Customers and the Right Market
- While cutting down the prices will help to retain the customers in hard times, this practice is rarely based on the actual customer base. In Starbucks’ case, price increases throughout the company have already discouraged 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, 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, Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of their brand and products. Since their loyal following isn’t 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.
2) Product Versioning & Price Communication
- The price hike is applied to specific beverage and size instead of the whole set. By raising the price of tall size brewed coffee alone by 10 cents, Starbucks’ 3rd quarter net income rose 25% .Starbucks is able to gather the consumer surplus from the customers finds value in upgrading to grande after witnessing the price of a small drip with tax climb over the $2 mark.
- Starbucks skillfully communicates their price increase as a reason for increased commodity price to the consumer which creates the sense of acceptance for the price hike.
So what can a Business learn from Starbucks’ pricing strategy?
- Understanding the customer base of your business and demand for your product will help to decide a price that captures maximum amount your customers are willing to pay.
- Communicating price hike effectively is vital to a successful price hike strategy, and managing customer perception is a key part of it. Support the price increases using external factors such as higher commodity costs and ease the pain on the consumer by finding an attractive way to publicize the new prices.
- Use product differentiation to place your company ahead in the race.
- Don’t increase the prices of the products with the highest margins.
I hope these tricks from Starbucks will help the business to maximize their profits. What do you think??
- Iacobucci, D. (2014) Marketing Management (MM), 4th Edition, South-Western, Cenage Learning, Mason, Chapter 9, Pricing.
- Homburg, C., Totzek, D., Krämer, M. (2014) How price complexity takes its toll, Journal of Business Research, 67 (6), 1114-1122.
- Tucker Dawson, 2013, “How Starbucks Uses Pricing Strategy for Profit Maximization,” Price Intelligently, Weblog post, 30 July, 2013.