Are Starbucks’ Prices Too High?

By
Sampson Lee
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23
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Should Starbucks lower its prices? If you ask people what they think about Starbucks—and we did—you hear a lot about price:

  • “Just overpriced coffee. Would not make me badmouth it, simply not go there often.”
  • “I tend to go to Starbucks when I travel, especially abroad because it is a consistent experience. There is a Starbucks five blocks from my home, and I never go there because their prices are too high. I hate paying more than $3 for coffee.”
  • “The price comes nowhere near the product delivery I have had far better coffee at half the price—pricing is ridiculous.”
  • “Face it, Starbucks is expensive. With so many other options available to me, it is not always worth the added expense.”
  • “It is this simple. I love coffee. I love GOOD coffee. I need a cup of coffee early every morning. I try to avoid Starbucks and end up buying coffee somewhere else for half the price.”
  • “Raising of prices would cause me to leave Starbucks. They are already very high.”
  • “If prices go any higher, I will have to reduce my visits.”
  • “If prices go up again, I’m out.”
  • “At this moment, prices of non-coffee products are unacceptable. When price of coffee-products also increase[s], I’ll stay away.”

Those are real comments from people who took a survey we organized with CustomerThink on the Starbucks in-store experience. We received 3,865 valid responses collected across the globe. And as you can tell, price was the No. 1 factor (see Figure 1) respondents like least about Starbucks.


Figure 1: What do you like the least about the Starbucks in-store experience?

I confirmed that negative reaction to price when I mapped the emotions and feelings of Starbucks customers. I looked at a natural-time sequence during an entire experience from entry to exit at one store.

As you can see in Figure 2, despite their differences in market maturity level, taste and cultural background (we received the largest number of responses from North America—the United State and Canada—and Mainland China), consumers considered price to be the most significant pain peak.


Figure 2: Starbucks In-Store Emotion Curves—North America Versus Mainland China

Should Starbucks executives listen to the voice of customer, they might respond by cutting prices. However, as I always stress, you should be very cautious when you listen to the VOC. You must put the survey’s message in context. To do that, you must examine the impact of that pain point both to customer and to brand.

Implied importance

Though survey respondents considered price the “least-liked” factor in their in-store Starbucks experience, it does not necessarily mean that price is customers’ most important concern. In research terminology, we could use implied importance to find out how important price (and every other attribute) was to customers. And we did this by linking it with a summary question: What is your overall satisfaction with the Starbucks in-store experience? From that, we could run correlation or regression analyses to derive the importance level of each attribute in affecting customer satisfaction. Figure 3 illustrates the importance rankings of all attributes derived by PLS (partial least square) regression. (We ran correlation analysis and partial least square regression, with similar results. For simplicity’s sake, the figure shows only the results of the PLS regression.)

Figure 3: Importance Rankings of Key Attributes—Starbucks In-Store Experience
Subprocesses in Time Sequence North America Mainland China
To Customer To Brand To Customer To Brand
1. Convenience of store location 26 24 23 26
2. Attractiveness of exterior and signage 24 25 20 24
3. In-store decoration 9 6 11 19
4. Pleasant atmosphere/ambience 1 8 10 20
5. Smell when you walk into store 19 23 15 21
6. Background music 21 14 16 23
7. Appropriateness of prices 22 2 26 1
8. Coffee varieties 23 22 13 8
9. Time in queue 14 17 24 17
10. Friendly / attentive staff 6 13 6 14
11. Knowledgable staff 8 16 5 6
12. Personal treatment 10 15 21 16
13. Payment options 12 26 12 9
14. Waiting time for coffee production 13 19 9 10
15. Packing / presentation of coffee 11 1 7 12
16. Self-service counter (milk, sugar, napkins) 16 7 14 18
17. Ease of locating a comfortable seat 17 12 25 25
18. Cleanliness of store 4 11 4 13
19. Coffee taste / flavor 3 3 3 7
20. Relaxed environment 2 9 2 11
21. See and be seen (feel you are “part of the group”) 5 10 8 5
22. Availability of newspapers / magazines 20 20 17 3
23. Availability of Internet facilities 25 5 19 15
24. Availability and cleanliness of washroom 15 21 22 22
25. Free trial of new drinks / snacks 18 4 18 2
26. Good-bye with genuine smile (treated as valuable customer) 7 18 1 4

 

These approaches show how customers feel about the importance of price in a more meaningful context. It was ranked low for all survey respondents (22nd in North America and 26th in Mainland China). You might think it’s good news for Starbucks management. But should we stop here? Are we confident enough to say price is not important? No, no, no. Don’t do that. You’re just seeing one side of the coin.

Flip it and consider how price affects the brand. We asked a summary question: To what extent did you find the in-store experience at Starbucks to be different from that of other coffee shops? Then we ran the correlation and regression analysis to find out the importance of each attribute in affecting the generation of a differentiating experience to customers. With this, we arrived at price as the second most important attributes to the brand to customers in North America and the first to those in Mainland China.

Interesting, isn’t it? Price as an attribute, while relatively unimportant in affecting overall customer satisfaction, is certainly important in affecting the generation of a differentiating customer experience. That does not mean that customers are satisfied with Starbucks price. It means only that the premium price is one of the key differentiators of Starbucks from other brands. Theoretically speaking, if Starbucks cut prices, assuming other elements remained constant, the store would be less differentiated from its competitors.

Of course, price should not be the only key differentiator, and customers won’t buy Starbucks just because of (a high) price. Brand values of Starbucks could be as simple as the product (coffee), itself. Or it could be the new coffee experience. Or it could be Starbucks’ success at making its stores the “third living place,” after home and office. To justify its premium price, Starbucks has to deliver an effective experience: creating positive emotions and memories while delivering target brand values. Is Starbucks delivering an effective experience?

Consider again the emotions curve in Figure 2. It seems that the emotion curve of North America customers is more drastic. They love and hate more “severely” than their Mainland China counterparts. The pleasure peaks for the North America customers are much higher than those of Mainland China customers in an absolute sense. The top three are at store location, smell and payment options. However, when we look at their importance rankings in Figure 3, they are not important either to customer or to brand. On the other hand, the top three pleasure peaks for Mainland China customers are at cleanliness, coffee taste and relaxed environment. They are important both to customer and to brand. What’s more, if you’re a believer in the peak-end rule, the “good-bye with a genuine smile” is an important subprocess and should be an area for improvement—especially for North America Starbucks.

Should Starbucks lower its price? As a customer, I believe that price cuts are always welcome. But if the company could deliver a truly effective experience that addresses my most critical needs while reflecting unique brand values, I’m willing to pay a premium price to enjoy my cup of coffee.

Starbucks still has ample opportunity windows to provide an effective, branded experience to its customers. It will be interesting to see what the company does.

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23 COMMENTS

  1. Sampson

    An excellent piece of analysis. I have a few doubts about using a complex construct such as a satisfaction (driven by expectations, perceptions and perceived service quality) as the dependent variable without breaking out the constituent parts, but that is just a niggle.

    As you so rightly point out, Starbucks relative delivery of the coffee experience compared to its competitors is what counts. It doesn’t matter so much Íf its prices are higher than competitors if it overdelivers on the things that matter to customers, compared to its competitors. Take a look at Richard D’Aveni’s article on Mapping Your Competitive Position in the November edition of the Harvard Business Review and Leszinski & Marn’s article on Setting Value Not Price in the McKinsey Quarterly for more information on this difficult trade-off. Both articles provide tools to answer the very question you ask.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  2. There are several difficulties with this analysis:

    1. The surveys are not representative samples of Starbucks customers. The size of the sample is irrelevant.

    2. The length of time between the Starbucks experience and rating is not considered. Basically, customers start to forget key details of a service episode almost as soon as they walk out the door.

    3. The report does not show the magnitude or statistical significance of the coefficients. I’ve never seen a PLS procedure that provided a clear ranking of this many attributes once confidence intervals on the coefficients are considered.

    4. Price is the least liked variable in vitually every survey of this type, regardless of subject. What rational consumer is going to say, “hey, I’m ok with paying more for coffee?”

    5. Path analysis would provide more insight into the dynamics of the store experience, assuming you have a reliable and representative data set with which to work.

    I’ve thought of authoring an article, “Clueless in Seattle,” but I think that would be too harsh. There are many other chains that don’t understand what is happening at the store level and are relying on inadequate tools to monitor the store experience.

    Victor Crain

  3. Victor

    I think you may judging Sampson’s work too harshly.

    Sampson’s post does not make any reference to the experimental design used in his study, nor to the sampling procedures, nor provide any details of the statistical analysis used. Without these details, it is difficult to make real methodological criticism.

    Your comments about performance vs satisfaction measurements are very interesting (I remember Cronin & Taylor’s arguments about SERVPERF vs. SERVQUAL in the early 90s). There are clear differences between measuring service performance immediately after the service experience and service satisfaction some time afterwards. But again, insufficient methodological detail is provided upon which to base real criticism.

    If you look at Sampson’s earlier posts about Ikea, Starbucks and others, you would see that his work is more of the nature of exploratory data analysis than robust statistical analysis (the use of PLS Regression notwithstanding). And if you look at the general nature of posts on the CustomerThink portal, you would see that Sampson and most other authors are writing for a general business audience, rather than readers of a learned statistical journal.

    I think that the purpose of Sampson’s article was to illustrate the difficult value trade-offs that customers must make during a typical purchasing experience (in this case, coffee from Starbucks). Something which Sampson’s post clearly achieved. His purpose was not to author an article for the Journal of Marketing Research. It is all too easy to sometimes miss the value woods for the statistical trees.

    Dr. Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  4. It is always easy to be criticle of research approaches and statistical procedures, espcially when viewed in this kind of vaccum. It’s usually hard to convince small and mid-size companies of the value of research and how data can be effectively and creatively interpreted.

    Sampson Lee’s effort here should be applauded for it’s clarity of intention. He is doing the research community a great service by showing how data can be interpreted and how price is very often a red herring when conducting market research.

    We need more of this kind of effort.

    Bob Kaden
    The Kaden Company
    Author of Guerrilla Marketing Research

  5. If someone asked me if I’d like Starbucks coffee for less, I’d probably say yes.

    Same goes for other luxury brands, like Mercedes, Rolex, etc.

    Who would ever say the price was too low?

    But after the price was cut substantially, would I still buy these brands? Probably not, because the price creates part of the value. Without a high price, how can an item be called a luxury?

    I agree with Sampson that blindly listening to the voice of customer through standard surveys could lead a company to make bad decisions. Deeper research into why people go to Starbucks would probably reveal that a high price is part of the total experience they find valuable, even though it’s hard to admit.

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  6. Prices to high and always to cold in stores, do not go to Starbucks any longer…..many others places with better coffee..lv

  7. Bob

    I think you hit the nail on the head with your comment about luxury vehicles. In addition to the superior quality offered, (which has its price), part of the value proposition is in knowing that only an exclusive group of people with discerning taste like you can afford such a vehicle. For the plebian masses who can only look on enviously as you drive past, there are vehicles from Ford, GM and Chrysler.

    But is Starbucks a luxury good? I don’t think so. Starbucks was partly responsible for reinventing the coffee experience. And it charged customers high prices for the privilege. But Starbuck’s has lots of competition today, including from smart corporations with vastly more resources like McDonalds. The danger that Starbucks faces is that their coffee experience is no longer seen as special and thus no longer deserving of a price premium. This is the innovator’s dilemma described by Clayten Christensen. And it isn’t confined to the retail coffee experience either. It’s also relevant to home coffee machines too.

    Starbucks offers a good coffee experience. But is it worth the price premium they charge? For a raving fan, perhaps. But not for me. I defected to my local McCafe long ago, with its comparably good coffee, better service and much nicer staff.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  8. To justify its premium price, Starbucks has to deliver an effective experience: creating positive emotions and memories while delivering target brand values.

    Is Starbucks delivering an effective experience?

    Today I’ve read an article Starbucks Smells the Death of Its Brand Experience which shows Howard Schultz may well aware the severity of the issue, “…Starbucks has become so efficient at packaging coffee to require minimal handling by its workers that its shops no longer smell of ground coffee… have led to the watering down of the Starbucks experience and what some might call the commoditization of our brand… chain of stores vs. the warm feeling of a neighborhood store. We achieved fresh-roasted bagged coffee, but at what cost?”

    Sampson Lee
    The Effective Experience

  9. What a great exchange on Starbucks –

    Starbucks changed the notion of the coffee shop and now its facing the issue of “what next?”

    I see an evolution toward “21st century sitting room” where you can meet friends, drink coffee, listen to music, buy music…. maybe books,… maybe more. Maybe instead of going to a mall and visiting many retail stores, we can go into Starbucks and over coffee with friends, “shop together” while gossiping!

    Mei Lin Fung

  10. Dear Mei Lin

    Should the target brand values of Starbucks be changed?

    For example, if the original brand values of Starbucks are the New Coffee Experience and The Third Place, should they be changed to adapt to the different needs of different markets (countries / markets), or, to cater to the needs of broadener customer segments due to her fast local and global expansion?

    Sampson Lee
    The Effective Experience

  11. Great article and I am not going to debate the research technique because if you ask customers – they always want a lower price.

    Since Starbucks exists to create shareholder value – I think the answer is they should charge as much money as possible to boost their margins. Once the lines die down, then they should look at lowering prices. Too many people frequent Starbucks for the experience that the cost of the coffee is secondary.

    Scott Santucci

  12. Scott

    You suggest that Starbucks exists to create sharholder value. Whilst at a certain level you are absolutely right, I somehow doubt that if they had purposefully set up shop to maximise shareholder value that they would have succeeded anywhere near as well as they have.

    As recent articles in the McKinsey Quarterly, the Financial Times and other prestigious financial journals have pointed out, value creation for shareholders is a consequence of good business practice, like reinventing the coffee drinking experience, not the other way round.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  15. Graham

    Thanks for the article.

    “May the best latte win.” is the ending sentence of The Economist’s article. We may argue it’s not only about product, it’s may also due to over-expansion or deviating from the third place—they may all count—but the root cause should be about who are the target customers of Starbucks, as the third place would mean entirely different thing to different people, e.g. the rich, middle-class or general mass.

    Sampson Lee
    The Effective Experience

  16. Who came up with the term the third place? Starbucks? Or the market?

    To my understanding, the third place is defined as the “extra place” people frequent after home and work.

    If my take is correct, then the third place is the third place for those who have home and work, but it’s not for those who are homeless and jobless.

    Daryl Choy
    Make Little Things Count
    wisdomboom.blogspot.com

  17. When I told my MBA students about Starbucks being the third place, they groaned, as one, in disbelief. Such hubris. Don’t Starbucks customers ever go to the pub? Starbucks certainly reconfigured the ‘coffee shop experience’ in ways which others have followed. But the coffee…. no thanks! Bland. Unleaded. I’ll have a beer. Real ale, if you please.
    Francis Buttle

  18. I think an aspect of the article by Sampson is neglected. He mentioned the importance of the experience and proposes that the price should be seen part of the experience. I agree people are willing to pay high for luxury goods but I doubt coffee is a luxury good! Starbucks might well consider to lower the prices but should change some other aspects of the experience in order to create a new peak (in spirit of peak-end rule).

  19. Well, your’e obviously to poor to enjoy the luxuries of Starbucks Coffee, how can you dare tempt people to go to the dark side of coffee at locations like McCafe, 7-11 and Dunkin Donuts?

  20. On occasion I have had Starbucks coffee. It’s okay – but, I have learned that the best coffee is of my own brew. Never cared for strong coffee and having a coating on my teeth after consuming it.
    I feel sorry for people routinely spending so much for a serving of coffee. Hey, the price of coffee dropped years ago.

  21. “Think global, act local”

    On a case-by-case local level they could consider lowering prices – if their overall revenue was to rise in a specific market.

    But on a global level they should be wary of the effect on their brand of prices that would be too different from one market to their next. In the long run the brand is very much global and as we all know – consistency is fundamental for any brand.

    Ed Dean http://www.jett-asia.com

  22. stevefnp1
    May 26, 2012
    starbucks
    I often go to starbucks because of the wi-fi and my coffee ritual. Occasionally I will buy some of the meals which are usually pretty good though pricey. Some of the things that are irritants many times are the noise, the uncleanliness, the cold temperature, the holier-than-thou attitudes of some of the employees and clientele, and the dive-bombing flies. Its often hard to justify Starbuck’s prices with that decrease in ambience with the occurence of those problems. One of the draws of Starbuck’s versus a store like McDonalds is ambience though sometimes I’ll go to McDonalds lately since they also have wi-fi and its sometimes actually quieter during slow times. I can sacrifice the ambience but the coffee will never be Starbucks. The reputation of Starbuck’s suffers when I’m confronted too often with grunge kids and middle-aged beatniks talking-it-up while I swat away at flies at my little table that I just cleaned and employees give me the nonentity look without a thank you or hello after my purchase. I seriously don’t like the tip jar when I’ve paid twice as much for coffee as at McDonald’s. I do like to wear long sleeve shirts at Starbucks because of the temperature which also gives me a place to show off my designer shirts and catch up on the styles which I suspect is a big reason a lot of other people go as well and then some afternoons its merely the all-American “mutt” look!

  23. Even though these data are, by now, a bit on the old side, they still illustrate a fundamental element of customer experience research. What customers say, with respect to importance and performance ratings/rankings, is often considerably different than the actions they take in the marketplace, or how they may act in the future. Case in point: In a lost customer study for a b2b product and services client, the principal stated reasons for defection were “price is too high” and “budget constraints”. This is a typical set of responses; and, if the company had taken them at face value, management might have been tempted to lower prices. When customer advocacy research was conducted among these customers, it was found that the real causes of churn, using discriminant function analysis, were usefulness of product delivery method, billing accuracy, reputation, and understanding needs. All of these could be improved; and, in a fitting piece of research irony, price/value was actually a positive lever of advocacy behavior.

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