("Watch out," they must be thinking. "Here comes the crazy business professor!")
Anyway, it turns out that the firm raised some prices, kept some the same, and lowered others. The price of a 12-ounce regular coffee fell from 1.65 to 1.50. The 16-ounce coffee rose from 1.80 to 1.90, and the 20-ounce rose from 1.95 to 2.10.
On a per-ounce basis, things work out like this:
Under the old pricing, the first 12 ounces cost 13.75 cents per ounce. Now those ounces cost 12.5 cents per ounce.
Under the old pricing, the next 4 ounces cost 3.75 cents per ounce. Now those ounces cost a whopping 10 cents per ounce.
Under the old pricing, the next 4 ounces cost 3.75 cents per ounce. Now those ounces cost 5 cents per ounce.
This is a really interesting illustration of second-degree price discrimination. For this pricing to make sense, the firm must have decided that the weak economy and increased competition has made consumer demand for the first few ounces more elastic, but made the residual demand curve (that is, the demand for additional ounces past the first 12) less elastic.
It would be cool to know what data the firm used to come to these conclusions, but I think any MBA ought be to able to at least sort out how you'd design an experiment to measure these elasticities.
I also learned that many customers were quite upset by this pricing change. Apparently there was some yelling at employees (who, of course, had nothing whatsoever to do with the decision to raise prices), and more than a few angry phone calls to the district manager.
So I managed to learn some cool economics, even standing in a coffee shop. The whole conversation was nearly as entertaining as the time that two biz-economist friends of mine and I wandered into a shoe store in Maine (long story) and managed to get a really interesting lesson in mystery shopping and performance evaluation in retail.
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5 comments:
Do you ever go to the coffee garden at 9th and 9th? It would be interesting to know what affect Starbucks price change has on local coffee shops. It seems like the customers at the coffee garden are going to be more inelastic than Starbuck customers.
-Matt
That place is way too hip for me. But if an enterprising reader wandered in and quizzed the employees about how price changes at Starbucks were affecting Coffee Garden, I'd be interested in the answer.
This one reminds me the earlier post about how the government trade-off between benefits and costs of the limitation of years in patent. Does the government also do the sensitivity tests to figure out how many years limitation is optimal for the society?
20 years seems a long time to me. I would argue that the policy makers may not take into account the happiness of self-fulfilling from inventing a new machine - which can lead to new inventions even without monetary incentive, but very difficult to measure. However, a sensitivity test by changing the policy of years limitation can easily help them figure out the "right" number.
By the way, this is the best blog I've ever read. Lunch time is no longer boring:) Thanks, Scott.
-Huan
So, Starbucks at this point has all the data they want to optimally price their coffee. I would like to know the price per once before the first price change and if the the first change was uniform across all sizes. The have obviously have since optimized pricing even more based on those new data. Has there been any studies done on how price optimization using the IEPR compares to $.99 pricing strategies?
How many questions did you have to ask before they gave you the cup of coffee for free?
Nick
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