HOW STARBUCKS USES PRICING

STRATEGY FOR PROFIT

MAXIMIZATION

In January 2020, Starbucks raised their beverage prices by an average of 1% across the U.S, a move that represented the company’s first significant price increase in 18 months. I failed to notice because the price change didn’t affect grande or venti (medium and large) brewed coffees and I don’t mess with smaller sizes, but anyone who purchases tall size (small) brews saw as much as a 10 cent increase. The company’s third quarter revenue rose 25% to $417.8 million from $333.1 million a year earlier, and green coffee prices have plummeted, so what gives?

Starbucks claims the price increase is due to rising labor and non-coffee commodity costs, but with the significantly lower coffee costs already improving their profit margins, it seems unlikely this justification is the true reason for the hike in prices. In addition, the price hike was applied to less than a third of their beverages and only targets certain regions. Implementing such a specific and minor price increase when the bottom line is already in great shape might seem like a greedy tactic, but the Starbucks approach to pricing is one we can all use to improve our margins. As we’ve said before, it only takes a 1% increase in prices to raise revenues by an average of 11%.

Value Based Pricing Can Boost Margins

For the most part, Starbucks is a master of employing value based pricing to maximize profits, and they use research and customer analysis to formulate targeted price increases that capture the greatest amount consumers are willing to pay without driving them off. Profit maximization is the process by which a company determines the price and product output level that generates the most profit. While that may seem obvious to anyone involved in running a business, it’s rare to see companies using a value based pricing approach to effectively uncover the maximum amount a customer base is willing to spend on their products. As such, let’s take a look at how Starbucks introduces price hikes and see how you can use their approach to generate higher profits.

An Overview of the Starbucks Pricing

Strategy:

The Right Customers and the Right Market

While cutting prices is widely accepted as the best way to keep customers during tough times, the practice is rarely based on a deeper analysis or testing of an actual customer base. In Starbucks’ case, price increases throughout the company’s history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.

Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of their brand and products. Since their loyal following isn’t especially price sensitive, Starbucks coffee maintains a fairly inelastic demand curve, and a small price increase can have a huge positive impact on their margins without decreasing demand for beverages. In addition, only certain regions are targeted for each price increase, and prices vary across the U.S. depending on the current markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same).

Product Versioning & Price Communication

They also apply price increases to specific drinks and sizes rather than the whole lot. By raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers who find more value in upgrading to Grande after witnessing the price of a small drip with tax climb over the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes.

Starbucks also expertly communicates their price increases to manipulate consumer perception. The price hike might be based on an analysis of the customer’s willingness to pay, but they associate the increase with what appears to be a fair reason. Using increased commodity costs to justify the price as well as statements that aim to make the hike look insignificant (less than a third of beverages will be affected, for example) help foster an attitude of acceptance.

on Wednesday April 8, Starbucks announced that it expects its fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets.

After reading, answer the following questions:

5- Did Starbucks make a good economic decision in raising the prices? Why?

6- What are the Starbucks’ maximum profit conditions?

7- What are the main three items groups that contribute to Starbucks variable costs?

8-What would happen to Starbucks’ profit if the prices of all three go down, holding other things fixed?

9- On Wednesday April 8, Starbucks announced that it expects its fiscal second-quarter earnings to be cut nearly in half as the coronavirus pandemic causes sales to plunge in its two largest markets. What would be the right pricing strategy to maximize revenues for Starbucks in the current circumstances?

10- If you have your own business, what do you learn From Starbucks case study

Q1: Consider the following scenario.

A company operating in the airline sector has been experiencing a brand crisis following a video posted in social media showing rude behavior of staff. A brand crisis has significant impact on customers’ intention to buy from the brand, or to recommend it to family/friends.

Propose a qualitative research strategy to assess the impact of this brand crisis on the company’s revenue. Ensure to detail and motivate your recommended strategy including potential limitations of qualitative research in this case.

A manager must decide how many machines of a certain type to purchase.

Each machine can process 101 customers per day.

One machine will result in a fixed cost of $2,038 per day, while two machines will result in a fixed cost of $3,836 per day.

Variable cost will be $22 per customer and revenue will be $49 per customer.

Determine the break-even point in units for TWO machines.

*Round your answers to 3 decimal places in your calculation if necessary.

Using the Google Draw tool, create a marginal revenue and demand for a monopolist graph.

Then answer the following questions:

1. What is the relationship between Marginal Revenue (MR), and Demand (D) for a monopolist?
2. For a non-price discriminating monopolist (a monopolist who charges only one price), if the cost for producing one extra unit of a product where $0, what point on your curve should the monopolist produce? (Hint: think Marginal Benefit/Revenue = Marginal Cost or MB=MC)

Make sure to label each axis and line appropriately.

Stolte Trimble Corporation (STC) uses a perpetual inventory system. At the beginning of May, STC had 30 units of inventory, of which 10 units were purchased in March for $60 per unit and 20 units were purchased in April for $66 per unit. STC uses its perpetual inventory system to account for the following transactions.

Required:
Assume STC uses FIFO in its perpetual inventory system. Prepare the journal entry for each transaction.

Quantitative Methods in BUSN

Solve this problem using Excel Solver

1. Devos Inc. is building a hotel. It will have 4 kinds of rooms: suites where customers can smoke, suites that are non-smoking, budget rooms where the customers can smoke, and budget rooms that are non-smoking. When we build the hotel, we need to plan for how many rooms of each type we should have. The following are requirements for the hotel:

1. We want to figure out how many rooms of each type to build based on maximizing revenue if we fill up the hotel. We expect to charge $190 for a suite that is non-smoking and $140 for a budget room that is non-smoking. Smoking room customers for both suites and budget rooms will have to pay an additional $20 per night.
2. We can spend up to $7,500,000 on construction of our hotel. The cost to build a non-smoking budget room is $12,000. The cost to build a non-smoking suite is $15,000. It is $3,000 additional for a smoking room of either type for smoke detectors and sprinklers.
3. We require that the number of budget rooms be at least 1.5 times the number of suites, but no more than 3 the number of suites.
4. There needs to be at least 80 suites, but no more than 200.
5. Industry trends recommend that smoking rooms should be less than 50% of the non-smoking room and in addition, we require our builder gives us at least 4 smoking rooms.

Answer the following using your Solver answers:

1. How many of each room type should be built, and what would the revenue be for a night when our hotel was fully booked?
2. Without re-running Solver, what happens to our revenue if we get an additional $1,500,000 for building? Explain in words how you got this answer without re-running solver. Over what amount of construction costs can you use this procedure?
3. Over what range of room price can our budget non-smoking rooms vary over for us to get the same answer for the quantity of each type of room?

Given demand curve for Silvana Chocolates Company ( SCC ) QD = 10,000 - 25P.

a. How many Bars could be sold for $100?

b. At what price would SCC sales fall to zero?

c. What is the total revenue (TR) equation for SCC in terms of output, Q? What is the marginal revenue equation in terms of Q?

d. What is the point-price elasticity of demand when P = $150 ? What is total revenue at this price? What is marginal revenue at this price?

e. Suppose that the price of SCC rose to P = $250.What would be the new point-price elasticity of demand? What is total revenue at this price? What is marginal revenue at this price?

f. Suppose that the supply Curve of SCC is given by the equation QS = -5,000 + 50P.What is the relationship between quantity supplied and quantity demanded at a price of $300?

g. In this market, what is the equilibrium price and quantity?

Construction Toys Corp. is using a​ costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The​ company's senior managers expect the engineering work to reduce​ appraisal, internal​ failure, and external failure activities. The predicted reductions in activities over the​ two-year life of the toy robot follow. Also shown are the cost allocation rates for the activities.

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​(Click on the icon to view the​ information.)Read the requirements

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Requirement 1. Calculate the predicted quality cost savings from the design engineering work.

YAD opened a consultancy office on September 1, 2017. On September 30, the balance sheet showed Cash $5,000, Accounts Receivable $1,500, Supplies $500, Equipment $6,000, Accounts Payable $4,200 and Owner's Capital $8,800. During October, the following transactions occurred.

2/10/2017. YAD purchases computer equipment for $7,000 cash.

13/10/2017. YAD purchases computer paper and other supplies for $1,600 from ABC Supply Company computer expected to last several months. ABC agrees to allow Microsoft to pay this bill in February.

14/10/2017. YAD receives $1,200 cash from customers for programming services it has provided.

25/10/2017. YAD receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

26/10/2017. YAD provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

27/10/2017. YAD pays the following expenses in cash for January: rent $600, salaries of employees $900 and utilities $200.

28/10/2017 YAD pays its $250 Daily News bill in cash.

29/10/2017 YAD receives $600 in cash from customers who had been billed for services in transaction number 26/10/2017.

Requirements:

1- Show the effect of the above transactions on the accounting equation .

2- Prepare Journal entries to record the above transactions .

3- Prepare the T-accounts for cash, account payable and expenses on January 31, 2017 .

4- Prepare the financial statements (Balance sheet, income statement, owner’s equity statement) .