The pricing brilliance of Starbucks’ $1 instant coffee

Imagine you’re a marketing executive at Starbucks, caught between bloated retail overexpansion and a bad recession. Customers around the world are rethinking $5 cups of coffee. Dunkin Donuts and McDonald’s are chasing you; hell, they just put up paneled walls. You gotta bring prices down but don’t want to kill profits or erode your brand. What do you do?

Instant coffee. This week Starbucks launched an entirely new powdered-coffee product line, which will sell for $2.95 for a pack of three — putting the price of a single cup of Joe under a buck. The official line reported by WSJ is “the market for instant coffee is so big, particularly overseas, they can no longer ignore it.” Um, yeah. What’s really going on is Starbucks is having its cake and eating it too, by differentiating its new low-cost coffee product a mile away from the expensive custom brew.

The genius of this is it creates variable pricing for essentially the same product. Just as some customers show up at grocery stores with coupons and buy canned soup for 50 cents less than you do (if you are like us and too lazy to scout coupons), Starbucks now can reduce prices only for the types of customers who really want a bargain. The other lazy types (um, us) will still walk in and somehow believe the ground stuff behind the counter is worth $4 more than the ground stuff in the instant bag. If 90% of people think coffee tastes better when someone else makes it, Starbucks has in effect only lowered its prices for 10% of its customers.

Margins protected. Just add water and stir.

Photo: Jeff Kubina

2 thoughts on “The pricing brilliance of Starbucks’ $1 instant coffee

  1. I don’t know, I am not sure if this is a wise move. If you try to out McDonalds McDonalds, I have a fair idea who will win.

    I sort of think this is short-term thinking.

    Starbucks has built its brand on bringing in snooty elitists like myself. The instant stuff turns off the core audience and looks very out of place compared to its core values.

    The name development blog has a good take on it, including citing research that most customers don’t find the current Starbucks coffee over priced:

  2. But if that 10% grows, then they start cannibalizing their core business, which always seemed to be about the perception of a rich coffee brewing experience. Becoming an instant coffee shop doesn‘t really require funky colored walls and Paul McCartney CDs, just a little shelf space at ShopRite.

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