Step 1: Identify an example of a recent price adjustment. This can be a new sale

Question

Step 1: Identify an example of a recent price adjustment. This can be a new sale price, a price increase or a special offer.

Step 2: Research the history of the price. Research the history of the price for this product, including competitive influences. Consider what led the company to make the price adjustment. Was it proactive or reactive? What was the influence of competitors before the price adjustment? What are the actions taken by competitors after the price adjustment?

Step 3: Draw conclusions from your research. Be sure to include your thoughts and ideas on the questions above. If you do not have all of the answers that you feel that you need, speculate on the reasons why the company took the action that it did based on the information you do have.

Explanation / Answer

Starbucks decided to increase its drink prices by 8% . They did this just when customers are cutting back on their Starbucks trips and switching to cheaper alternatives from McDonalds and Dunkin Donuts.

The conventional “wisdom” on pricing is, when recession pushes customers to cut back on expenses and switch from your commodity to cheaper alternatives, you cut your prices to keep the customers. While this is a usually accepted and followed practice, it is not based on wisdom or analysis.

In the above case of Starbucks, how did they arrive at price increase, going against the flow? The basic calculation here is, when price conscious customers moved out all they are left with are price insensitive customers who prefer their products. Thus it makes sense to charge more for them as long as the loss in profit from further drop in customers is less than the increase in profit from higher price.

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