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Starbucks Pricing Strategy

Team #10 Johanna Phan, Ryan McIntire, Christina Kraft, Meagan Mikkonen, Eric Spackman

Current Pricing
Tall 12-ounce: $1.40 and $1.65
Lattes 12-ounce: $2.40 and $3.10 Tall Mocha: $2.70 and $3.40

PRICING STRATEGY
PRICE SKIMMING - Premium Price for Premium Product

Why the High Prices?

Increase pricing in Fuel/Energy Fair-trade Movement Starbucks Experience

Economic Factors

Cincinnati Enquirer

FAIR TRADE
WHY THE FAIR TRADE MOVEMENT?
Help ensure that farmers receive an equitable price for their coffee and strengthen their farms for the future.

-HOW IT WORKS? -Long term contracts -Affordable credit for farmers -Direct purchasing -Investing in social projects in coffee communities

FAIR TRADE
STARBUCKS IN NORTH AMERICAS LARGEST PURCHASER OF FAIR TRADE CERTIFIED COFFEE.
In 2005 Starbucks purchased 11.5 million pounds of Fair Trade Certified coffee. Pay $1.42 per pound

Fair Trade & the Starbucks Effect


Paying premium prices stimulates production of high quality coffee.
Allows farmers to increase income and reinvest in their farms and plan for the future. Promotes steady and sustainable growth in a market with price fluctuations. Upholds Starbucks commitment to purchase high-quality product in a socially responsible manner

EXPERIENCE

Top Competitors: McDonalds


A pit stop for customers with little time, many kids and thin wallets. McDonalds Manager: McDonalds is a lot cheaper than Starbucks coffee in general, and they have the high quality to go with it. Offers: lattes, cappuccinos and iced brews in 9,000 U.S. restaurants McDonald's has more locations and a lower price point for premium coffee.

Top Competitors: Dunkin Donuts


Cost Advantage Complements the Main Product. Faster and Cheaper Half its revenue from coffee sales

STARBUCKS
Premium Products Prominent Image Friendly Environment

PRICE ELASTICITY
If price goes up and revenue goes up, demand is inelastic. Starbucks can raise its price and help increase total revenue. Relatively inexpensive but convenient products tend to be inelastic.
2007 Revenue ($ mil.) 2006 2005

9,411.50 7,786.90 6,369.30

Price Elasticity of Target Market


Target Market: 18-34 years of age Price increase seven times since 1997 Market still willing to pay as price increases

Coffee industry
Arabica Coffee
-Grown at higher elevations and requires specific climate for optimal conditions. -requires more care in growing/harvesting

Majority traded as commodity item on the New York C market.


-greatly affected by global supply and demand -average price = 1.04/lb (2005)

Paying Premium
Starbucks purchases only the highest grade Arabica coffee.
Negotiated at higher price to compensate for farmers quality. Accounts for only 10% of worldwide coffee purchases Currently sells 23% above commodity Shields from volatile prices fluctuations

Marketing Goals
Address Increased Competition Market penetration and expand customer demographics Pricing/Utility Demographics

Whats in Store for the Future?