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STARBUCKS – Mystery of the ‘Short’ Cappuccino
A Group ‘F’ Presentation
Ilamparithi
Sujin Pringle
Sandipan
Nitin Shukla
Fathima Anila
INTRODUCTION
Starbucks Corporation – Seattle17,133 stores in 49 countries
11,068 in the United States, nearly 1,000 in Canada and more than 800 in Japan
Product Offerings drip brewed coffee, espresso-based hot drinks, other
hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastry, snacks, and items such as mugs and tumblers
CASE OVERVIEW
Cappuccino Vente, Grande, Tall, Short
Short Cappuccino 8 ounces, bold Superior taste Cheap
Short Cappuccino Unadvertised ? Menu card + Online
SMART PRICING
Pricing Dilemma.staff time, space in the queue, and
packaging costs same.Cheap Products – Lost Revenue.Strategy – Make cheap products
invisible/unattractive.Aided by - market power.E.g.: French Railways, Airport Lounges.
-
PRICE AND DEMAND
Demand inversely proportional to price.(There are exceptions)
Managers need to determine the optimal price for each product.(Using Data Analysis and Competitor Behavior)
DEMAND – PRICE CURVE
D=500
p=1000
Price
Number Of Items
Price Demand
Revenue
$250 875 $218,750
$500 750 $375,000
$750 625 $468,750
$1000 500 $500,000
$1250 375 $468,750
$1500 250 $375,000
Price Versus RevenueD=1000-0.5p
Concept of Markdown Pricing and Reservation Price.
Inventory remains after end of selling season – Markdown Pricing
Sell Below the Reservation Price but above the cost to manufacture.
Price Differentiation
• Fashion Conscious versus Value Conscious Customers
• Three Tier Pricing Strategy
P3 = 1800
P2 = 1600
P1 = 1000
D3 = 100 D2 = 200 D1 = 500 Number Of Items
R1 = 1000 * 500 = $ 500,000R2 = 1600 * 200 + 1000 * 300 = $ 6,20,000R3 = 1800 * 100 + 1600 * 100 + 1000 * 300 = $ 6,40,000
Revenue management
Integrate Pricing and Inventory strategies to influence demand
Pioneered by American Airlines in 1980s
Selling the right inventory unit the right customer the right time the right price
Where it is applied?
Perishable goodsFluctuating demandFixed capacity of the systemMarket segment based on Price and service
timeProducts sold in advance
Implements price differentiationAirline industry – 2different segments Leisure Travelers Business TravelersLeisure Travelers: Price Sensitive, not
sensitive to the duration of the tripBusiness Travelers: Not so sensitive to
price but highly sensitive to duration of the trip
Duadel & Vialle Framework for differentiating customers:
Leisure Travelers
No Demand
No Offer
Business Travelers
HIGH LOW
LOW
HIGH
SENSITIVITY TO DURATIONSENSITIVITY TO FLUCTUATION
SENSITIVITY TO PRICES
After distinctions being made2 Key steps a. Market Segmentation b. Booking ControlThen seats are allocated to Fare ClassesNetwork Management:Considers different legs and their revenue in
allocating the seatsDynamic nature of the pricing ensures the
capacity being utilized
Smart pricing
Price as tool to influence demand.Differential pricing- different prices to
different customersDynamic pricing- different prices over time.
Differential pricing
Group pricingChannel pricingRegional pricingTime-based differentiationProduct versioningCoupons and rebates
WHY DOES DELL CHARGE A DIFFERENT PRICE? WHY CANT NIKON AND SHARP
REDUCE WHOLESALE PRICE ?
We Implicitly assume that the demand is beyond the firm’s control.
But Advertising,displays,and promotional tools all can be used to change the demand level to some extent.
Dell:The exact same product is sold at different prices in website.Whats more the price changes rapidly over time .
IBM: Is investing in a software that would increase price according to the demand.
Nikon Coolpix:The store or online price is $500 ,but provides a rebate of $100 independently of where the camera is purchased.
Continued-
Sharp Digital Camcorder: Same strategy of discounting $100 independently of where the camcorder is purchased.Boise Cascade Office Products: The price for almost 12000 items ordered most frequently online might change as often as daily.
A closer look reveals that they use smart pricing or Revenue Management.
American Airlines : The companies incremental revenue was $1 billion annually, and if not for revenue management they would have been profitable only 1 year in the last decade.
Caveats:
Avoidance of unfair treatment of their customers in pricing strategies.
Amazon.com: Different amount on demographics or the browser they used.
Coca Cola: Doug Ivester’s price variation on temperature.Priceline and Hotwire.com: last minute ,selling of unsold
seats and hotel rooms through opaque fare.Finding the right balance is very tricky. In unstable
economy when many published fares are competitive enough its harder to attract customers.
Summary
Demand is not something put of control for supply chain managers.
We have fashion retailers using price markdown to sell excess inventory.
So revenue management and strategy pricing is followed by many.
But if customers feel unfair treatment then this techniques may ultimately hurt the business.