Business Monday

Pricing lessons from a cup of joe

Adam Snitzer
Adam Snitzer

They say you can’t please all the people all the time, but the Starbucks Corporation sure does try. And with the company’s stock at an all-time high, there’s a credible argument that they come close.

Part of the company’s success is that they have a lot of locations; more than 11,000 in the United States and six within half-a-mile of my office on Lincoln Road in Miami Beach.

Another part of Starbucks’ success comes from the brilliant execution of a value-based pricing strategy, which holds important lessons for any business.

Most companies use one of two methods for pricing their products: cost plus and competitor based. With cost plus, companies calculate their costs and then add a margin that meets profitability targets set during their budgeting process. With a competitor-based approach, companies move rates up-and-down based on the prices of their direct competitors.

Starbucks has freed itself from these two pricing constraints and moved into a rare realm in which they can charge more than $6 for a cup of coffee. Here’s how they do it:

▪ They nurture a premium brand image.

▪ They “version” their products.

▪ They extend their product lines without undermining their brand identity.

Every Starbucks location reinforces the company’s image as a purveyor of premium coffee. The décor is upscale and authentic, with earthy tones, exposed wood and deep, well-worn leather chairs. Black and white photographs of coffee beans, foamy cappuccinos and rich espressos depict a timeless pursuit of coffee perfection.

They’ve even linked coffee to fine wine. Their “Reserve Coffees” from places like the Cabo Azul region of Nicaragua or Los Cantares Estate in Panama are described as exotic, rare and exquisite. Starbucks talks about these coffees the way a sommelier describes fine wines — “apricot and maple syrup notes with a chocolaty mouth feel.”

Sounds expensive, right? Well it is. A cup of coffee from the Blue Mountain Amber Estate in Jamaica sells for $4.95, which is $2.70, or 120 percent more, than a cup of the relatively pedestrian Pike’s Place brew. And guess what, on a recent visit, the Blue Mountain Amber was completely sold out.

Having established highfalutin’ coffee credentials, Starbucks goes on to offer a product version for almost every conceivable taste. Their menu offers more than a dozen versions of espresso alone. Special holiday flavors include chestnut, caramel, peppermint, gingerbread and pumpkin. Signature classics include caramel macchiato and white chocolate mocha, to say nothing of standard cappuccino and espresso.

There’s a flavor, cup size and price point to fit nearly every taste, from $1.95 all the way up to $5.15. Unless, of course, you’d care for an extra shot of espresso or an organic soymilk substitution. In that case the price goes up by another $1.40.

Starbucks is all about coffee, right? Not necessarily. Their product line extends far beyond a cup of Joe. There’s also a full tea menu and a refrigerator case filled with cold-pressed organic juice, energy drinks, apple juice for kids as well as carbonated and still bottled water.

And why stop at beverages? Starbucks also blankets food choices, from the hearty veggie and brown rice salad ($6.95) to chocolate-chip cookies ($1.95) to a chicken Santa Fe Panini ($5.75) to a bagel and cream cheese ($1.50) to fruit cups, Greek yogurt and oatmeal. There’s something for nearly every taste.

Perhaps the only thing more diverse than the Starbucks menu was the constant stream of customers — like the young woman with a Mohawk, sleeve tattoos and ear plugs. Or the businessman in navy pinstripes. The two moms in yoga-pants pushing baby strollers. The Asian tourists. And the locals, chatting on the phone and typing away on their keyboards. All of whom found the value and maximum price point they were looking for.

Adam Snitzer is a revenue strategy expert and president of Peak Revenue Performance, a consulting firm that specializes in designing and executing innovative pricing strategies. He can be reached at adam@peakrevenueperformance.com, or via the company’s website at PeakRevenuePerformance.com.

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