As a worldwide famous brand, Starbucks has been using market-skimming pricing strategy for a long time, which means that Starbucks charges high price for premium products. However, in 2009, during the economic downturn, Starbucks announced a new pricing strategy: it lowers prices of its lower-end products such as brewed coffee and charges more on specialty drinks like Frappuccinos.
The first part of the new pricing strategy, which is cutting prices on lower-end drinks, makes sense. It can be categorized as promotional pricing strategy. In recession, Starbucks was facing a weakened economy and strong price competition. Therefore, offering customers discounts makes its products more affordable and helps to maintain its market share and prevent price sensitive consumers from switching to competitors such as McDonald, who just launched a new line of lower-priced espresso drinks.
The second part of this pricing strategy, which is raising prices of its high-end products, might seems odd. Why did Starbucks choose to raise prices in recession when consumers’ budgets are tight? I think there are two major reasons. First, as blogger Rafi Mohammed argued in his blog “Starbucks’ New Pricing Strategy: The Beginning of the End?” (http://www.pricingforprofit.com/pricing-strategy-blog/starbucks-new-pricing-strategy-beginning.htm), Starbucks differentiates itself from competitors through its high quality specialty drinks, which are “in the cash cow phase of the Growth Share Matrix”. There is less competition in high-end products comparing to that of the crowed low-end coffee drinks market. Second, Starbucks is confident in its brand. It believes their products are delivering higher value to consumers through premium drinks, relaxing environment and so on. High price justifies high value. Starbucks tries to remain a premium brand by charging high prices since many buyers perceive brand image and prices as negatively correlated. Of course, different buyers reacted to the raise in price differently. Some consumers might think they are ripped off, whereas other loyal buyers, who value Starbucks’ premium drinks and enjoy the experience/atmosphere, are willing to pay more. For them, it is not simply buying a product; Starbucks becomes part of their lifestyle.
The new pricing strategy suggests that Starbucks is trying to take two roles; it wants to become both a premium brand and an affordable brand in its consumers’ eyes. I think it is not quite realistic. Price-conscious consumers are easily turned to other brands that offer similar products at lower price. Although Starbucks tried to retain these consumers by lowing prices of lower-end drinks and introducing a line of instant coffee in grocery stores, it still might not beat MacDonald’s free small premium coffee campaign. I think it should not be so greedy trying to make all consumers happy. Instead, it should focus on segmenting its consumer markets based on user rates and loyalty status, providing high value to their loyal, heavy users who are profitable to the company in the long run.