STARBUCKS – Mystery of the ‘Short’ Cappuccino

A Group ‘F’ Presentation

Ilamparithi

Sujin Pringle

Sandipan

Nitin Shukla

Fathima Anila

INTRODUCTION

Starbucks Corporation – Seattle17,133 stores in 49 countries

11,068 in the United States, nearly 1,000 in Canada and more than 800 in Japan

Product Offerings drip brewed coffee, espresso-based hot drinks, other

hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastry, snacks, and items such as mugs and tumblers

CASE OVERVIEW

Cappuccino Vente, Grande, Tall, Short

Short Cappuccino 8 ounces, bold Superior taste Cheap

Short Cappuccino Unadvertised ? Menu card + Online

SMART PRICING

Pricing Dilemma.staff time, space in the queue, and

packaging costs same.Cheap Products – Lost Revenue.Strategy – Make cheap products

invisible/unattractive.Aided by - market power.E.g.: French Railways, Airport Lounges.

-

PRICE AND DEMAND

Demand inversely proportional to price.(There are exceptions)

Managers need to determine the optimal price for each product.(Using Data Analysis and Competitor Behavior)

DEMAND – PRICE CURVE

D=500

p=1000

Price

Number Of Items

Price Demand

Revenue

$250 875 $218,750

$500 750 $375,000

$750 625 $468,750

$1000 500 $500,000

$1250 375 $468,750

$1500 250 $375,000

Price Versus RevenueD=1000-0.5p

Concept of Markdown Pricing and Reservation Price.

Inventory remains after end of selling season – Markdown Pricing

Sell Below the Reservation Price but above the cost to manufacture.

Price Differentiation

• Fashion Conscious versus Value Conscious Customers

• Three Tier Pricing Strategy

P3 = 1800

P2 = 1600

P1 = 1000

D3 = 100 D2 = 200 D1 = 500 Number Of Items

R1 = 1000 * 500 = $ 500,000R2 = 1600 * 200 + 1000 * 300 = $ 6,20,000R3 = 1800 * 100 + 1600 * 100 + 1000 * 300 = $ 6,40,000

Revenue management

Integrate Pricing and Inventory strategies to influence demand

Pioneered by American Airlines in 1980s

Selling the right inventory unit the right customer the right time the right price

Where it is applied?

Perishable goodsFluctuating demandFixed capacity of the systemMarket segment based on Price and service

timeProducts sold in advance

Implements price differentiationAirline industry – 2different segments Leisure Travelers Business TravelersLeisure Travelers: Price Sensitive, not

sensitive to the duration of the tripBusiness Travelers: Not so sensitive to

price but highly sensitive to duration of the trip

Duadel & Vialle Framework for differentiating customers:

Leisure Travelers

No Demand

No Offer

Business Travelers

HIGH LOW

LOW

HIGH

SENSITIVITY TO DURATIONSENSITIVITY TO FLUCTUATION

SENSITIVITY TO PRICES

After distinctions being made2 Key steps a. Market Segmentation b. Booking ControlThen seats are allocated to Fare ClassesNetwork Management:Considers different legs and their revenue in

allocating the seatsDynamic nature of the pricing ensures the

capacity being utilized

Smart pricing

Price as tool to influence demand.Differential pricing- different prices to

different customersDynamic pricing- different prices over time.

Differential pricing

Group pricingChannel pricingRegional pricingTime-based differentiationProduct versioningCoupons and rebates

WHY DOES DELL CHARGE A DIFFERENT PRICE? WHY CANT NIKON AND SHARP

REDUCE WHOLESALE PRICE ?

We Implicitly assume that the demand is beyond the firm’s control.

But Advertising,displays,and promotional tools all can be used to change the demand level to some extent.

Dell:The exact same product is sold at different prices in website.Whats more the price changes rapidly over time .

IBM: Is investing in a software that would increase price according to the demand.

Nikon Coolpix:The store or online price is $500 ,but provides a rebate of $100 independently of where the camera is purchased.

Continued-

Sharp Digital Camcorder: Same strategy of discounting $100 independently of where the camcorder is purchased.Boise Cascade Office Products: The price for almost 12000 items ordered most frequently online might change as often as daily.

A closer look reveals that they use smart pricing or Revenue Management.

American Airlines : The companies incremental revenue was $1 billion annually, and if not for revenue management they would have been profitable only 1 year in the last decade.

Caveats:

Avoidance of unfair treatment of their customers in pricing strategies.

Amazon.com: Different amount on demographics or the browser they used.

Coca Cola: Doug Ivester’s price variation on temperature.Priceline and Hotwire.com: last minute ,selling of unsold

seats and hotel rooms through opaque fare.Finding the right balance is very tricky. In unstable

economy when many published fares are competitive enough its harder to attract customers.

Summary

Demand is not something put of control for supply chain managers.

We have fashion retailers using price markdown to sell excess inventory.

So revenue management and strategy pricing is followed by many.

But if customers feel unfair treatment then this techniques may ultimately hurt the business.