According to a piece in the Wall Street Journal, Starbucks (NASDAQ: SBUX) is thinking outside-of-the-cup. The company is experimenting with new pricing strategies in Seattle, such as selling short drip coffee for $1.00 a cup (8 ounces). What's more, there are even free refills.
With increasing competition – such as from Dunkin' Donuts and McDonald's (NYSE: MCD) – and the slowing economy (as well as higher supplier costs), it seems that Starbucks has no choice.
To get some perspective on things, I interviewed Rafi Mohammed, a pricing expert and author of The Art of Pricing. He recently wrote a piece on how McDonald's represents a real threat to the Starbucks' franchise. Simply put, there are many consumers who prefer steep discounts on coffee – even if the quality is not pristine.
However, by playing ball, Starbucks can get some benefits by using a discounted pricing strategy. According to Rafi:
"Pricing plans targeted towards new customer segments can create growth. For example, low-priced dollar menu items account for 23% of McDonald's revenues, and items from Wendy's Super Value Meals account for 25% of its revenues. Starbucks' $1 coffee is its start to using price to generate growth and remain competitive with new entrants (mainly McDonald's).
"Also, with 80% of U.S. orders consumed outside of the store, I believe that Starbucks' next pricing move should be to offer discounts on its takeout prices. This will help make it more competitive with rivals and offer prices that are more in line with the value it provides."
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements
. He also operates DealProfiles.com.











Reader Comments (Page 1 of 1)
1-23-2008 @ 1:10PM
Kevin said...
Starbucks will need more than price promotions to work itself out of the mess it's in.
http://lairigmarketing.blogspot.com/2008/01/hey-starbucks-show-me-marketing.html
1-24-2008 @ 6:28AM
Douglas said...
The problem is, that we have become so dependent on fashion and trends. I make my coffee at home now, as I put the hard earned dollar in my account which well be there for me when I need it most in the future. Now, $4.00 for a cup coffee is a joke, but these big companys are looking for jokes or jokers to enter their business's or drive throughs to give even bigger profits and they have the last laugh all the way to the bank. Make up your coffee the night before, set it and wal-la, fresh brewed coffee. .Put hot water in your cup, dump it out, now fill it with your fresh brewed coffee and your on your way to work. SIMPLE and cost effective. Self pride. I spend my money wisely now, how do you?
1-23-2008 @ 3:11PM
doug said...
Having had a cup of MCD's $2.58 Latte (+$.30 for flavor) I can tell you that SBUX has nothing to worry about. The "Latte" from the 7-11 machine is better and people who drink at SBUX will not switch to MCD's brew. Also, just try to get a Decaf, Non-Fat, Extra Hot, Sugar-Free Cinnamon Dolce Latte at MCD.
1-23-2008 @ 5:44PM
jack said...
Well, now I don't have to fight the barristas anymore. All I ever wanted was a short cup (the kids' cup) of the day's brew.
I always win, but it is always a fight and/or a detailed explanation of my request. It's not difficult: just 8 oz, hot. I am never charged the same amount among different locations.
Yee-haw! Now they will have a short cup button on the register!
1-29-2008 @ 4:54PM
emily carlson said...
At select Starbucks stores in Seattle, you can buy a cup of joe for a buck.
Ssssshhhh.
It's a new initive by ex-CEO-just-recently-unretired-because-of-falling-stock-prices Howard Schultz. Starbucks is hurting, and something needs to be done.
But who goes to Starbucks because of it's "cheap" prices??
A year ago, Schultz wrote a bitter memo to his executives about what he calls "the watering down of the Starbucks experience." He complained that the soul of Starbucks was gone, and urged the higher ups to bring back customer service.
So he's back in action, determined to change the coffee giant's luck.
There's no question Starbucks is in trouble. In the past year and a half, stock prices have fallen nearly 50%, from a high of $39.63 in May 2006, to closing at $19.66 today. Schultz blames the company's out of control growth. Also ailing are skyrocketing milk prices, the troubling economy, and pressure from McDonald's.
But why dollar coffee?
Isn't that the turf of McDonald's?
But the answer is...not really.
Mickey D's recently announced plans to open "McCafe's." In other words, coffee bars featuring cappuccinos, lattes, and mochas whipped up by baristas, a la Starbucks.
This, after Starbucks added drive-thru windows and hot breakfast sandwiches.
It seems the two mega chains are going after each other... by coping each other.
McDonald's is upgrading, while Starbucks seems to be.. well, downgrading.
The dollar cupajoe seems to be an effort to get crowds in the door, but in the move Starbucks is moving away from it's brand.
Starbucks is the king of $6 cups of coffee. They survived the economic downturn of 2001, when analysts feared the worst for a company who prides itself on hoity-hoity coffee. Starbucks customers LIKE that they shelled out bug bucks for their latte. The well known siren laden white cup is almost a status symbol, recognized in all corners of the world.
Starbucks needs to go back to the "third place." Howard, get rid of the drive-thrus, the expensive merchandise, and the cookie cutter stores. You don't need to sell your coffee for a dollar.
More on Starbucks:
More on Starbucks:
http://emily-carlson.com
http://emilycarlson.org
http://emilycarlson.info
http://emilycarlsonchristmas.blogspot.com/
http://eacarlson3.bravejournal.com/
3-22-2008 @ 8:29PM
smkd trky chitlins said...
STARBUCKS IS THE WORST TASTING SWILL OF ALL, INCLUDING THE REST STOP MACHINES ON I-95.