Are Starbucks' Prices Too High?

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 [1], 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.