“To say Starbucks purchases and roasts high-quality whole bean coffees is very true. That’s the essence of what we do- but it hardly tells the whole story…(Starbucks, 2013, pg 1)” Starbucks is known for not only their high quality products but also their great efforts in social responsibility. They give back to the community while striving to have genuine service and an inviting atmosphere. Their mission statement is as follows, “It has always been, and will always be, about quality. We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We care deeply about all of this; our work is never done (Starbucks, 2013, pg 1).” They have done a tremendous job at having their mission statement hold true to their regular consumers while keeping them paying the higher costs of their product.
Starbucks, in 2009, used economic analysis on elasticity in order to increase sales of their famous coffee drinks and use its reputation and premium brand drinks to take away sales from McDonalds which introduced a new line of lower priced espresso drinks that have proved to be popular. Starbucks has decided to increase the cost of some of their drinks like the Frappuccinos and caramel Macchiatos by an average of 10 cents to 15 cents. In some cases they are raising costs as mush as 30 cents which is about an 8 percent increase. Consumers that were regulars of Starbucks considered this beverage product to be in-elastic and were willing to pay anything because they need this product. An example of an in-elastic demand product would be anything that would be considered a necessity. For example, “the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for diabetics (Gillespie, 2007, pg 28).” These regular consumers of Starbucks would be willing to pay top dollar for before purchasing the similar low priced product at their competitors. They know that competitors like McDonald’s does not offer all of the flavors or drinks that they offer so they know they will keep their regulars. To offset this increase, their strategy was to lower the price of their most popular beverages by 5 cents to 15 cents. This would include their popular 12 ounce lattes and their brewed coffees. This was the first time Starbucks lowered the price of any of its drinks since it began. The plan to reduce prices of their basic drinks like the latte falls on the fact that their competitors McDonalds is capturing some of the consumers that are less interested in the premium brands that Starbucks offers. By lowering the price of these coffees might bring some of those customers back. These consumers consider their beverage elastic and are willing to change the brand for a lower price.
McDonalds was running a huge advertising campaign on the same sugary, creamy drinks that now at Starbucks will be more expensive but according to Kenneth Davids, editor of Coffee Review who states “Starbucks is safe raising the prices of specialty drinks because they are where the company best differentiates itself (Miller, 2009, pg 1).” The consumers who value a great tasting coffee at Starbucks are consumers who are willing to pay more. Taste test comparing espresso drinks between Starbucks and McDonalds have proven that Starbucks drinks are favored over the same McDonalds drink. The difference between the standard lattes was not as noticeable then the advantage Starbucks has over McDonalds for their syrupy and whipped cream style drinks. Some of McDonalds drinks actually taste terrible. So a consumer that expects the best tasting specialty drinks are will be willing to pay more. Like one always says, “you get what you pay for” and here it means a better tasting drink then any of Starbucks competitors.
References: Boyes, W. (2012). Managerial economics: Markets and the firm. (2nd ed.). Independence, KY: South-Western Cengage Learning. ISBN: 978-0-618-98862-4.
Gillespie, A. (2007). Foundations of Economics. Oxford University Press. ISBN 978-0-19-929637-8.
Perloff, J. (2008). Microeconomic Theory & Applications with Calculus. Pearson. ISBN 978-0-321-27794-7.
Miller, Claire Cain (2010). Will the hard-core Starbucks customers pay more? The Chain plans to find out. The New York Times, August 20, 2009. Retrieved from http://www.nytimes.com/2009/08/21/business/21sbux.html?_r=0
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