How Starbucks Uses Pricing Strategy for Profit Maximization...

How Starbucks Uses Pricing Strategy for
Profit Maximization
by Tucker Dawson
Last 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 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 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 Hawk
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 profits 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