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How Starbucks Uses Pricing Strategy for Profit Maximizationby Tucker DawsonLast Thursday 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 affectgrande 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 net income rose 25% to $417.8 million from $333.1 million a year earlier, and green coffee prices have plummeted, so what gives?Photo Credit: Thomas HawkStarbucks 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 profits by an average of 11%.Value Based Pricing Can Boost MarginsFor the most part, Starbucks is a master of employing value based pricingto 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 maximizationis the process by