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You are the owner of a small independent chain of coffeehouses competing head-to-head with Starbucks. The retail price your customers pay for coffee is exactly the same as Starbucks. The wholesale price you pay for roasted coffee beans has increased by 25%. You know that you cannot absorb this increase and that you must pass it on to your customers. However, you are concerned about the consequences of an open price increase. Discuss three alternative price-increase strategies that address these concerns.
Enlarge product line and heavily advertise higher price coffee products:
This first strategy focuses on both cross-selling and up-selling as a means to absorb the increases in costs. The former will add more items to the menu which customers would also buy with their coffees, and the latter would introduce and heavily advertise higher price coffee products that would have a higher profit-margin. This would all be done while leaving the original coffee price the same.
The cross-selling strategy may be best executed by the introduction of alternative drinks and snacks. The drinks menu could be expanded to incorporate more types of teas, juices, and hot chocolates. Adding a richer variety of snacks, sandwiches, salads, and pastries could also help to expand the menu selection. The purpose of this would not be to de-market coffee products; customers would be enticed to also buy other menu items with a higher profit margin.
The up-selling strategy would see the introduction of higher price coffee products that would be easily able to absorb the cost-increase of the coffee beans. This market of exclusive and quality differentiated coffees regularly consists of customers looking for trendy, new, and sometimes eccentric blends. This market may be inelastic enough to adopt these products, regardless of their higher prices.
Focus on the product quality, customer experience and service:
Starbucks is undoubtedly the father of coffee chains. They have built "the perfect blend" brand on both quality and exclusivity. However, in the UK, a rival chain Caffé Nero is generally perceived to be much higher quality at a lower price in a large number of surveys (The Independent, 2008), (London Hotel Insight, 2010). They have ranked as the number one consumer choice in the past six years (Westfield Health, 2010). This demonstrates the concept that the Starbucks target market is an inelastic one. Their customers appear to be not overly sensitive to price changes and willing to pay much more for a coffee in a place with a great reputation and atmosphere.
Young adults would generally see Starbucks as a place for trendy coffees which present their lifestyle. The middle age target segment sees it as a great place to relax, chat, surf the internet. A third target segment is coffee lovers who are extremely focused on the quality of the coffee. Starbucks does not appear to be a coffee chain that target customers who are looking for a bargain.
Therefore I believe that an open-price increase would not badly affect sales if it was coupled with a new marketing strategy which promotes a more 'authentic' coffee and customer service. This strategy would fail in market segments which focus on low prices such as the McDonalds coffees. Coffee chains that are part of the high price and "perfect blend" quality market that Starbucks has made consist of customers that are certainly looking for a frills-service. Although this strategy would be difficult to execute, it could be quite a rewarding one for maintaining customer loyalty and retention.
Make low visibility price changes
This third strategy is quite a risky one, which could potentially damage customer loyalty if not executed properly. However, it is the most tangible solution to covering cost increases without raising the overall price of the coffee product.
The first low visibility change would be to remove discounts and loyalty schemes that may be running in the business. This would address some of the price increase problem by lowering the amount of cost to customers. However, this may negatively impact sales as these loyalty schemes and discounts may be the reason that customers may make the purchases.
The second type of change would be to intelligently decrease the amount of coffee beans required per item. This could mean slightly smaller portions, or lower amounts of coffee beans per cup. This could be done without customer communication, which could lead to dissatisfaction, or the change could be attributed to health awareness campaigns of lowering the amount of caffeine in people's diets.
This is quite an obvious strategy and it may meet the end goal of absorbing prices. However this may damage the brand and contradict the two main keys of marketing success. It could lower the perceived value that customers may be used to from discounts and loyalty schemes, and they may become less satisfied if the quality of the coffee is sacrificed for the sake of lowering costs.
References - Assignment 3
The Independent, 2008, "Starbucks is bottom of high street coffee test", [online], Available at: http://www.independent.co.uk/news/uk/this-britain/starbucks-is-bottom-of-high-street-coffee-test-773150.html, Accessed on 10th November 2010.
London Hotels Insight, 2010, "Starbucks vs Caffè Nero vs Costa: who wins?" [online], Available at: <http://londonhotelsinsight.com/2010/05/10/starbucks-vs-caffe-nero-vs-costa-who-wins/>, Accessed on 10th November 2010.
West Field Health, 2010, "Cash plan is Caffè Nero's cup of tea". [online], <Available at: http://www.westfieldhealth.com/intermediaries/caseStudyNero.asp>, Accessed on 10th November 2010.