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