Starbucks is definitely premium coffee, here in Asia. For a caffeine enthusiast, he has a wide set of options for picking the coffee that suits his preferences and his budget constraint. He could start off with $1.20 coffee at the local coffee shops/hawker centers, graduate to $1.50- $2.50 at the local coffee chains and then finally move on to $4-$10 coffee at the premium chains like Starbucks, Coffee bean etc.
Why do people pay so much for Starbucks?
Obvious reasons are a great assortment of choices- espresso, soy lattes, decaf, skinny etc. The outlets offer great ambiance be it for reading, meetings or dates. And of course the premium branding. Paying 9 bucks for the largest sized Frappaccino, gives you a satisfaction that you are earning just enough ;)
For a long time, the price premium ensured that Starbucks attracted only the right set of customers. Working busy people who are loyal and visit frequently, and are willing to spend on the overpriced coffee and the sandwiches. Rentals at prime locations are expensive thus a steady customer segment is crucial for their operations.
Recently, I noticed a trend in Singapore, with students flocking in coffee chains like Starbucks, Spinneli and Coffee bean, and spending extended periods of the day with their pile of notes.
An opportunity to avail the undisturbed ambiance for a small premium, seems to justify their behavior.
The once loyal customer segment is frustrated by the lack of space each time they visit their favorite outlets. Singapore is a small country after all. The outlet managers are worried by the drop in sales and often prompted to chase out the students for space, who in a few years could have been potential loyalists.
So how can Starbucks manage this situation?
Let's first look at Starbucks' objective. Drive sales and profit. Simple right. If you look at a typical coffee drinker, he starts off his day with a fresh brew, has another after his lunch, and maybe one more in the evening. Even though Starbucks offers the ocassional salad, Brownies and pastas, it's not your typical restaurant. Thus it needs the students, writers, bloggers and web designers during the lean periods of the day.
So let's think of a solution.
In a perfectly effecient world, the best strategy would have been charging customers two components, price for just the coffee and a usage fee (by mins/hours) for the experience, both priced at a slight markup above their marginal costs. However it's impossible to do that in a real world. It's a cafe not a hotel.
Can we design a more realistic solution to realize similar outcomes?
For a start, since customers are willing to pay a premium for the "Starbucks experience", take outs should be priced cheaper than normal. For instance a Decaf Latte selling earlier at $5, now goes for $4.50 at the take out counter whereas it sells for $6 inside. The take out price captures the first component as in the efficient case. This lower price also means the marginal coffee enthusiast has yet another reason to choose premium coffee over the cheaper local alternate, trading off few minutes of in-house seating to drinking it outside or most commonly at his desk.
The premium customer who decides to drink it inside is also generally the one more inelastic to higher prices, thus is also expected to order more of the sides driving more revenue during peak periods. He inturn should continue to be rewarded with loyalty points and gift cards.
Above seems like a long winded solution but we still haven't figured a way to charge the customer proportional to his time spent. A few years back Starbucks gave out session hours to their free wifi network based on the bill spent. However tethering has ruined this elegant method. And it anyways never worked for the tradition reader/student who could still function without internet.
So can you think of a better way? Do drop your comments. Thanks.
Image source: http://kncifm.radio.com/2011/04/12/a-new-study-says-your-coffee-addiction-may-be-genetic/