Question

Why Operating Margin is best tool to evaluate Starbucks Company? Describe on 2 Paragraphs with 1 reference.

Answer 1

Starbucks company is a consumables based organization with focus on value chain analysis. It's pricing strategy is based on value based pricing to maximize profits and they use research and customer analysis to formulate targeted price increases that captures the maximum amount a customer is willing to pay without driving them off. It also follows a profit maximization process where it compares the value and output at each level of sales to understand at which level it produces maximum sales. It's important to note that as per their pricing strategy, they never effectively uncover the maximum amount a customer base is willing to spend on their products.

Since pricing is so important in their business, operating margins are the bottom results that decide whether they're able to make optimum profits by offering value based prices to consumers. Operating margins are effectively free cash flows that keep Starbucks free in operating as well as expanding it's business. Although a price hike increases profits, Starbucks also uses it to separate itself from other competitors by reflecting itself as a premium brand above others. It maintains a fairly inelastic demand curve since it usually has a loyal customer base and a small price increase allows them to have a huge positive impact on their margins without decreasing demand for their products. It also follows a product versioning where the company can enjoy a slightly higher margin from their customers by persuding the price hike to buy larger sizes.