Tuesday, February 23, 2010

Value-Added Pricing

Many company's are challenged to build its pricing power, which is "its power to escape price competition and to justify higher prices and margins without losing market share (page 262)." In order to increase the company's pricing power, company's adopt value-added pricing which is defined as "attaching value-added features and services to differentiate a market offering and support higher prices, rather than cutting prices to match competitors (page 262)." This primarily applies to commodity products simply because these types of products have little differentiation and extremely intense price competition.

Starbucks, founded and created in Seattle, never once compromised its price. Even with the economic downturn, Starbucks did not decrease its price, but instead increased its price. The company primarily focuses on people versus the products and offers the highest quality coffees. They believe that the connections they create with the communities around them is what has kept customers loyal.

Although many individuals find the $4.00 average price of Starbucks to be ridiculous, their financial statements prove that little will the increase in price effect their earnings. According to Hoover's, revenues for the company in 2007, 2008, 2009 were $9,774.6, $10,383.0, and $9,411.5 (in millions), respectively. Starbuck's financial statements prove that although the company increased its prices for a cup of coffee, the result did not effect its earnings.

In the end, Starbucks has stayed true to its name, still focused on the people versus the products and offering the highest quality coffee. In addition, the company implemented a rewards program in which customers accumulate points to receive a free coffee. The company has also created a blog site in which customer inputs can be seen and heard, and the company maintains close relations with all their customers through this website by responding to the individual requests. If the individual shares an idea, the company will note it, discuss why its probable or not and provide feedback. Starbucks is truly taking innovative measures in order to assure customers that the higher prices are supported.

Below is an image of a Starbucks Menu:


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