Starbucks to Raise Prices in Financial Hard Times

When times are tough and people are broke, the logical response to a drop in business is to lower prices – but Starbucks has never been known for doing the logical thing. As of last week, the international coffee giant started charging as much as 30 cents more for their high end, frothy beverages in some cities. Depending on how the customers react, those price rises will extend to other cities over the next couple of months.

What’s the logic behind raising prices on luxury coffee in the middle of a recession? According to Valerie O’Neal, a Starbucks spokesperson who spoke with the New York Times, the goal is to continue balancing the needs of business with the value the company provides for customers. In fact, the idea of raising prices on Starbucks’ top end drinks while maintaining a lower price line on the standard brewed cup of coffee could be a great idea, say some marketing specialists.

One of the issues that Starbucks faced last year – and over the last couple of years – was an erosion of the company’s branding of itself as an “affordable luxury” – a cut above the typical coffee shop chain. Many of the coffee shop’s fans felt that the brand’s edge became dulled through over-exposure as Starbucks stores became as common as McDonalds’ across the country. Instead of standing for quality, the stylized Starbucks mermaid started to look more and more like homogenization. Starbucks was in danger of becoming the Holiday Inn of the coffee shop world. Like McDonalds, like Holiday Inn, you always knew what you were getting when you walked into a Starbucks.

Starbucks has also been battling McDonalds’ in the so-called “coffee wars”, introducing sweet, frothy espresso drinks to compete with the higher-priced Starbucks lattes and frappuccinos. While many businesses might see the competition as a cue to lower prices in order to woo back customers, Starbucks has apparently chosen a different tack – raising prices to re-emphasize and reinstate their “premium” brand.

This actually makes sense, says a professor of marketing at the Haas School of Business at UCLA Berkley. McDonalds is peeling off the “low-hanging fruit”, attracting away the customers who are more interested in price than quality. The customers who stay with Starbucks are willing to pay more for the premium brand. Since that’s the case, Starbucks seems to be saying, since they’re willing to pay more, let’s charge them more.

And they’ve got some surprising support for the strategy – coffee connoisseur Kenneth Davids, who regularly grades coffees. He’s taste-tested both Starbucks and McDonalds and found, he says, that the basic espresso that each of the companies brew don’t differ much. The differences are, according to him, “very subtle”. However, the differences in quality and flavor become very marked when you start adding syrups and creams. That’s where Starbucks really shines – so it makes sense for them to charge a premium for a better quality product.

Nor do the customers seem to disagree. Despite an initial drop in customers across the chain’s stores, the loss in sales has pretty well leveled off. Most of the remaining customers agree with an LA customer who admitted, “I’m hooked. It’s like asking a cocaine addict “if I raise my prices, are you going to buy less?’?