One of the random blogs in my blog reader is Starbucks Gossip. I'm a regular customer (grande drip, no room) and I like getting some insights into how the stores work (and what employees complain about). The post I've linked to has much hand wringing about a potential price increase and the discussion focused on “is that fair?” and “well, did our costs go up?”
From the cost side, someone posted this:
According to Starbucks standardized procedures, the total amount of labor required (including prep and COGS) for a Grande Syrup Coffee Frappuccino is 1.5 minutes labor and $0.41COGS. A minute and a half of labor. That's about $0.20. Plus COGS. Wow. A whopping 61 cents.
Venti Raspberry Mocha Frappuccino: $4.60
Actual Cost: $0.61
Where's that other $3.99 going?
Somebody else came back with:
what about the labor of making said mixes, someone has to do that, then put said mix into the sure shot, label it, etc. Get your prices staright. [sic]
There are a lot of costs — materials (COGS), direct labor (to make the drink), indirect labor (prep, other work), store overhead, corporate overhead…. but is any of that relevant to the price they can charge? A lot of that $3.99 is probably going to pay for employee health care that Starbucks funds.
Starbucks pays more for health care than for raw materials, but that's a different topic for a Lean Healthcare post.
Prices companies charge are basic economics — they charge what the market will bear. Why does Starbucks charge $4 for a venti drink? Because customers are paying it.
It has nothing to do with what your costs are. It has nothing to do with “what's fair.”
If prices are too high, customers will go away. That's how business works.
Whenever you ask, “why does company X charge $$ for product Y?”, the answer in your head should be “because they can.”
We should all be so fortunate as to choose a business with low materials costs, where the customer is willing to pay a price that gives us a good strong margin! This ties back to the Toyota equation, Profit = Price – Cost. Starbucks probably isn't taking their costs and adding on a profit margin (Price = Cost + Profit). That would be outdated thinking.
I'm sure Starbucks is generally charging what the market will bear. Starbucks prices seem pretty consistent nationwide (at actual Starbucks locations). I'm sure they could charge more in some cities, but probably want customers to know what the price will be regardless of where they are? Does Starbucks have a consistent pricing policy, I wonder?
Remember this WSJ article (and my blog post) from a few years back about Starbucks and their efficiency efforts?
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