Post Graduate Diploma in Management (PGDM 2023-25)

MANAGEMENT DEVELOPMENT INSTITUTE, GURGAON

Subject: Pricing Decisions

Topic: Starbucks

Submitted By:
Group 1
23P012- Avinash Kumar
23P030- Nipun Sharma
23P039- Rahul Mishra
23P045- Satyaki Sarkar
23P198- Ankita Ghosh
23P257- Anmol Singh

Submitted To:
Dr. Kishore Kumar Gangwani
Table of Contents
Table of Contents..............................................................................................................2
GLOBAL COFFEE INDUSTRY ...............................................................................................3
INDIAN COFFEE INDUSTRY ................................................................................................4
STARBUCKS – COMPANY OVERVIEW .................................................................................5
STARBUCKS- ENTRY INTO INDIA ................................................................................................ 5

PRICING STRATEGY ...........................................................................................................6

PRICE COMPARISON ON A GLOBAL LEVEL ..........................................................................8
PRICING STRATEGY IN INDIA ...........................................................................................10
PREMIUM PRICING ................................................................................................................. 10
VALUE-BASED PRICING ........................................................................................................... 10
PSYCHOLOGICAL PRICING ....................................................................................................... 10
GEOGRAPHICAL PRICING ........................................................................................................ 10
LOCAL ADAPTATION PRICING ................................................................................................. 11
PRODUCT LINE PRICING .......................................................................................................... 11

PRICING PROBLEMS OF STARBUCKS ................................................................................12

Primary Research............................................................................................................13
Analysis ................................................................................................................................. 14

Recommendations ..........................................................................................................15
References......................................................................................................................16

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GLOBAL COFFEE INDUSTRY
The Global Coffee Market size is estimated at USD 475.60 billion (USD 93.74 billion, at home;
USD 363.92 billion, out-of-home) in 2024, and is expected to reach USD 520 billion by 2029,
growing at a CAGR of 2.59% during the forecast period. In global comparison, most revenue
is generated in the United States amounting to ~ $85 B. The top five nations in the global cafe
chain market are, US, South Korea, China, Japan, and UK. Several factors drive the coffee
market, including rising demand for certified coffee goods, consumer acceptance of single-
serve coffee brew systems, and ongoing innovation spearheaded by the coffee market's leading
companies. Because of its quality and flavour, some customers in developed economies are
projected to migrate from instant coffee to premium coffee. Instant coffee was formerly
considered a high-end commodity, but it has starting to lose its younger user base, altering
market dynamics.

Coffee is the most popular brewed drink and is made from roasted coffee beans, which are the
seeds of the Coffea sp. Plant. The worldwide coffee market is divided into three sections:
product type, distribution channel, and geography. The coffee market is divided into four
product categories: whole-bean, ground coffee, instant coffee, and coffee pods and capsules.
The market is divided into on-trade and off-trade distribution channels.
Supermarkets/hypermarkets, convenience stores, specialty retailers, and other outlets are
examples of off-trade channels. Geographically, the market includes North America, Europe,
Asia-Pacific, South America, and the Middle East and Africa.

Consumers now are more aware of the manufacturing of the things they buy and the origins of
their purchases in recent years. This is especially true in the supply chains of food and beverage
products such as coffee. Customers want certified coffee items to confirm the legitimacy of
their coffee purchases.

Also, coffee brewing methods continue to evolve, offering consumers diverse and personalized
coffee experiences. Alternative brewing methods like capsule coffee, AeroPress, and cold brew
have gained popularity. These methods allow coffee lovers to experiment with different
brewing techniques, extraction times, and flavor profiles, enhancing their overall coffee
enjoyment.

One notable trend in the coffee market is the growing demand for specialty coffee. Consumers
are seeking unique and high-quality coffee experiences while exploring various flavor profiles.
Another significant trend in the coffee market is the increasing emphasis on sustainability and
ethical sourcing. Consumers are becoming more conscious of the environmental and social
impact of coffee production. They seek out brands that prioritize fair trade practices, promote
sustainable farming methods, and support the livelihoods of coffee farmers.

The coffee market is expected to continue its upward trend, driven by factors such as expanding
coffee consumption in emerging markets, premiumization, and the rising demand of organic
and fairly traded products.

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INDIAN COFFEE INDUSTRY
According to Statista, the coffee segment in India is worth $1.08 billion and is predicted to
expand at an 8.5% CAGR between 2024 and 2029. India is the sixth-largest coffee producer
globally, with an annual production of around 300,000 metric tons, of which over 75% is
exported. Key export destinations include Europe, the United States, and the Middle East.
Indians have long favoured tea to coffee in the morning. India has long been a tea-obsessed
country. This may not be true in southern India, where coffee has long been a daily routine.
According to Euromonitor International Statistics, Indians drank 15.6 cups of coffee per capita
in 2014. Urban consumption accounts for 73% of total consumption, while rural consumption
accounts for 27%, with southern India favouring filtered coffee. However, the number of coffee
drinkers has increased at an unparalleled rate during the last two decades. There are several
causes for this. The first and most significant is an increase in discretionary income (coffee is
more expensive than tea). While others include increased worldwide exposure, internet and
media penetration, urbanization, lifestyle changes, and so on, these changes have resulted in
what we call coffee culture.

Initially, it was an out-of-home phenomenon that sparked a Café culture in India giving birth
to branded service outlets such as CCD, Starbucks, and others. Coffee's popularity prompted
big players in the country and throughout the world to introduce a variety of unusual lines. A
growing number of retail establishments began stocking more coffee varieties. While out-of-
home consumption now drives the majority of growth, the category has the potential to see an
increase in consumption at home. However, geographical penetration of coffee looks to be a
significant barrier; geographical penetration of coffee is primarily limited to the urban
population in Metros, Tier I, and Tier II cities, with the exception of southern India. It is not
far from the truth that 70% of Indian population lives in rural areas, and because coffee is an
acquired taste, the sector has a long way to go.

The desire for unique experiences drives the growing demand for cafés. Specialised coffee
shops provide a distinct ambience and a diverse menu, creating an enjoyable atmosphere that
resonates with the preferences of the younger demographic. Customisation options are
particularly sought-after, allowing millennials and Generation Z to tailor their drinks to their
tastes and preferences. These outlets allow consumers to experiment with various flavours and
formats, contributing to increased retail sales. Moreover, selling packaged coffee, both instant
and beans, through specialist coffee shops gained mainstream popularity post-COVID-19.

The coffee market in India is poised to experience value growth, primarily propelled by the
preferences of millennials and Generation Z, with a particular emphasis on those residing in
metropolitan areas. The fast-paced lifestyles of these demographic segments, coupled with time
constraints in the preparation of traditional decoctions, will drive the dominance of instant
coffee in terms of volume consumption.

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STARBUCKS – COMPANY OVERVIEW
Starbucks was started in 1971 by Jerry Baldwin, Gordon Bowker, and Zev Siegl, with its first
location near Seattle's iconic Pike Place Market. The three founders shared a common interest
in academics, coffee, and tea. They borrowed money to create the first Starbucks in Seattle,
which was named after Starbuck, a character from Herman Melville's novel Moby Dick. Alfred
Peet, a coffee-roasting entrepreneur, significantly inspired Starbucks' founders. Peet was a
Dutch immigrant who began importing quality arabica coffees into the US in the 1950s. In
1966, he founded Peet's Coffee and Tea in Berkeley, California, focusing on importing high-
quality coffees and teas. Peet's success inspired the Starbucks founders to build their business
model around selling high-quality coffee beans and equipment. Peet's became Starbucks' first
supplier of green coffee beans. Baldwin and Bowker purchased an old roaster from Holland
and experimented with Alfred Peet's roasting processes to produce their own blends and
flavors. By the early 1980s, Starbucks had launched four outlets in Seattle that distinguished
itself from competitors with high-quality fresh-roasted coffee. Siegl departed the company in
1980 to pursue other interests, leaving Baldwin and Bowker, with Baldwin taking over as
president.

STARBUCKS- ENTRY INTO INDIA

In 2012, Starbucks formed a strategic partnership with Tata Consumer Products to enter the
Indian market. This joint venture was named Tata Starbucks Limited. The first Starbucks store
in India was opened in October 2012 in Mumbai. This store was designed to cater to the local
tastes and preferences while maintaining the global Starbucks brand. Starbucks in India offered
a customized menu to appeal to local tastes. They introduced various Indian beverages and
food items, including the popular "Tata Tazo Chai Tea Latte" and "Paneer Tikka Panini."
Starbucks continued to expand its presence across major Indian cities, including Delhi,
Bengaluru, Chennai, Hyderabad, and Pune. They adopted a gradual expansion approach,
focusing on key locations and maintaining quality. Starbucks in India also collaborated with
local suppliers and artisans to source high-quality coffee beans and ingredients. They
introduced innovations like Teavana beverages and cold brews to cater to a diverse customer
base. Starbucks in India emphasized community engagement and sustainability efforts. They
initiated programs like Farmer Support Centers to promote sustainable coffee farming practices
and support local coffee growers. Starbucks launched mobile ordering and payment options,
loyalty programs, and a strong digital presence to enhance the customer experience in India.
The Indian market posed unique challenges, including competition from established local
coffee chains, the dominance of tea culture, and price sensitivity among consumers. However,
Starbucks adapted its strategies to overcome these challenges.

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PRICING STRATEGY
Starbucks, a global coffee giant, employs a multifaceted pricing strategy that intricately weaves
together premium branding, target-oriented pricing, and strategic promotional activities. The
company has meticulously cultivated a premium brand identity that emphasizes quality,
consistency, and luxury in the coffee experience.

While Starbucks' products may not be the most affordable, its pricing strategies are tailored to
appeal to specific target demographics. Recognizing its diverse customer base, Starbucks offers
discounts, loyalty programs, and promotions to retain and attract different segments of the
market.

In sum, Starbucks' pricing strategies are a delicate interplay of premium branding, targeted
pricing, and well-planned promotions. This approach has allowed Starbucks to remain a
dominant force in the coffee industry, attracting a devoted customer base willing to pay a
premium for the Starbucks experience.

The various strategies applied by Starbucks are:

● Value based Pricing

Starbucks prioritizes profit maximization through a value-based pricing strategy. They

meticulously analyze customer behavior, gaining insights into their preferences and
willingness to pay. Armed with this data, Starbucks customizes its pricing strategies to
align with their target market's perceptions of value. This approach allows them to
charge prices that not only cover costs but also capture the additional value customers
associate with the Starbucks brand and experience. By effectively calibrating their
prices to match customer expectations, Starbucks optimizes its profitability while
maintaining customer loyalty and sustaining its premium brand image, making it a
master of balancing profit and perceived value in the competitive coffee industry.

● Menu-based Pricing

Starbucks' specialty menu is a key driver of their pricing strategy. Each item on this
carefully crafted menu is strategically priced based on factors like ingredient costs,
market demand, and perceived value. What sets Starbucks apart is the consistency of
this menu across its global locations. This uniformity enables them to procure raw
materials in bulk, leveraging economies of scale to lower operational costs. By
maintaining standardized recipes and ingredients, Starbucks ensures a consistent
product quality, reduces supply chain complexities, and streamlines its cost structure.
This efficiency ultimately allows Starbucks to strike a balance between offering
premium coffee and specialty beverages while optimizing their profitability.

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● Selling the Brand

Starbucks' branding strategy is marked by its expansive reach and meticulous location
positioning. The company strategically places its retail outlets, carefully considering
the demographics and preferences of their target audience. Despite this comprehensive
branding approach, Starbucks notably spends less on marketing initiatives compared to
some of its competitors. This cost-effective strategy is a testament to the strength of its
brand identity and word-of-mouth marketing generated by its loyal customer base.
Starbucks' ability to maintain its premium brand status, even in the face of competitors
offering quality coffee at lower prices, highlights the enduring appeal of its distinctive
ambiance, product quality, and the overall Starbucks experience. This unique
positioning enables Starbucks to command premium prices and sustain its market
leadership.

● Promotional pricing strategy

Starbucks' advertising strategy is a testament to the power of thoughtful, well-executed

campaigns over extravagant spending. While they allocate less to advertising compared
to some competitors, their campaigns are meticulously planned, creating a strong
impact. A prime example is their holiday season promotions, featuring special
beverages and seasonal menu additions. These limited-time offerings not only boost
sales but also add considerable value to the Starbucks brand. Importantly, these
initiatives don't significantly increase operational costs, yet they enhance the brand's
allure. Starbucks' ability to elevate its brand value through strategic, cost-effective
advertising underscores its mastery in leveraging seasonal promotions and customer
engagement to maintain its premium positioning in the competitive market.

● Demand Strategy

Starbucks employs a dynamic pricing model that directly responds to consumer

demand, showcasing their adaptability in the market. When demand surges for specific
products, Starbucks is known to adjust prices accordingly. This demand-driven
approach highlights that Starbucks' pricing strategy is primarily consumer-centric, with
a focus on offering what customers are willing to pay for rather than solely relying on
the supply cost of raw materials. Over time, Starbucks has successfully cultivated a
premium brand perception in the minds of consumers. This brand value, developed
through consistent quality, ambiance, and service, allows them to confidently adjust
prices in response to demand fluctuations while maintaining customer loyalty and the
perception of a premium coffee experience.

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PRICE COMPARISON ON A GLOBAL LEVEL

Starbucks, a global coffee giant, is known for its premium pricing strategy, which can vary
significantly from country to country. These price variations are influenced by a complex
interplay of factors, including local economic conditions, consumer purchasing power, and
market competition.

In Switzerland, for instance, a Tall Latte is priced at a premium $7.17 due to the country's high
cost of living and strong currency. On the other hand, in Turkey, the same beverage is
remarkably more affordable at $1.31, reflecting lower living costs and currency exchange rates.

This disparity in pricing reflects Starbucks' market positioning strategy. In wealthier nations
like the United States, Starbucks can charge higher prices due to the greater disposable income
of its customer base. Customers in these regions are often willing to pay a premium for the
Starbucks experience, which includes not only high-quality coffee but also a comfortable
environment and a sense of prestige associated with the brand.

Conversely, in underdeveloped or less-developed nations, Starbucks may adopt a more

competitive pricing strategy to attract a broader customer base. Lower prices in these regions
can help Starbucks gain a foothold in emerging markets and compete with local coffee vendors.

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Analyzing the cost of a Starbucks Latte as a percentage of the average daily income in different
nations provides valuable insights into the affordability of Starbucks coffee globally. In
countries like the United States, Norway, Austria, Qatar, and Australia, where Starbucks prices
are relatively low as a percentage of daily income (ranging from 2.1% to 3.4%), the brand is
considered more affordable, reflecting the higher average incomes in these regions.

Conversely, nations like India, Cambodia, Vietnam, and Bolivia face significantly higher
Starbucks prices as a percentage of daily income, making the brand less accessible to a broader
population (ranging from 39% to 86.1%). This highlights the economic disparities and
purchasing power differences that influence Starbucks' affordability on a global scale.

Such analyses underscore the importance of tailoring pricing strategies to local economic
conditions and income levels, ensuring that Starbucks remains competitive and accessible
while maintaining its premium brand image in diverse international markets. In essence,
Starbucks' pricing strategy is finely tuned to local economic conditions and consumer
expectations. It is a testament to their adaptability and recognition of the importance of catering
to the specific market dynamics of each country while maintaining their reputation as a
premium brand in markets where consumers are willing to pay for it.

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PRICING STRATEGY IN INDIA
PREMIUM PRICING
Starbucks is positioned as a premium brand in the coffee industry. Its pricing strategy is
designed to reflect a high-end coffee drinking experience which includes quality beverages,
excellent customer service, and a comfortable ambiance. This strategy, known as premium
pricing, allows Starbucks to create and maintain a high perceived value for its products and
services, justifying higher prices compared to standard coffee shops or fast-food outlets
offering coffee.

VALUE-BASED PRICING
In value-based pricing, price is calculated as per the perceived value by the customer. The price
is set a bit lower than the perceived value so that the benefit to the customer is positive.
Starbucks is priced at a level to give an effect of affordable luxury and has an aspirational status
attached to it in India. Rather than competing with cheaper coffee chains, Starbucks uses price
to stand out from competition and reinforce the premium image of their brand. It achieves this
through product differentiation by selling the experience of drinking coffee and not just a cup
of coffee. Understanding the customer base is essential to implementing a value-based pricing
strategy successfully.

PSYCHOLOGICAL PRICING
The Indian market is sensitive to price perceptions. Consumers are drawn to pricing that feels
affordable yet offers value. Starbucks often employs pricing just below a whole number (like
₹295 instead of ₹300). This strategy, common in retail, helps soften the impact of the premium
pricing by psychologically making it feel less expensive.

GEOGRAPHICAL PRICING
Economic disparities across Indian cities are significant. Metropolitan areas like Mumbai,
Delhi, Bangalore, and Kolkata have higher living costs and more affluent consumers compared

10
to smaller cities and rural areas. In response, Starbucks adjusts its prices to reflect the economic
conditions of each location. For example, a Frappuccino might cost slightly more in Mumbai’s
upscale neighborhoods than in emerging cities like Jaipur or Pune.

LOCAL ADAPTATION PRICING

Adaptation to local tastes and economic conditions is crucial. Starbucks has introduced India-
specific products, which often come at different price points considering local preferences and
spending habits. For instance, Starbucks offers Chai and other locally inspired beverages,
which are priced competitively to entice a broader segment of customers who might otherwise
frequent local tea vendors.

PRODUCT LINE PRICING

The company has a diverse product line, each priced differently to cater to a wide range of
customers. From simple brewed coffee to elaborate handcrafted beverages, the pricing is tiered
according to the complexity of the product, the ingredients used, and the preparation time
involved. This product line pricing strategy not only caters to various consumer segments but
also enhances the upselling and cross-selling opportunities within the stores.

Starbucks' pricing strategy in India is a nuanced blend of global branding and local adaptation,
aimed at delivering value to diverse consumer segments while maintaining its premium
positioning. This approach has helped Starbucks not only to establish but also to expand its
footprint across Indian cities, adapting to and capitalizing on the unique dynamics of this large
and varied market.

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PRICING PROBLEMS OF STARBUCKS
• Managing Premium Pricing in Price-Sensitive Markets:
• Consumer Sensitivity: Customers in markets where price sensitivity is high
may be reluctant to pay a premium for coffee, particularly if there are less
expensive options available.
• Competition: Local and national coffee chains, some of which may offer lower
costs, are competitors of Starbucks. This may increase pressure on Starbucks to
modify its price policy in order to stay competitive.
• Brand Consistency: Starbucks needs to strike a balance between its upscale
image and pricing that is affordable for a variety of customers. Price increases
could run counter to their marketing promise of offering a warm and inclusive
coffee experience.
• Commodity Price Fluctuation
• Expense management: If Starbucks is unable to pass on the expense of rising
coffee bean prices to customers, it may be difficult to maintain profit margins.
• Price Stability: Starbucks works to keep menu prices steady in order to prevent
customers from becoming perplexed or frustrated. When the price of coffee
beans fluctuates, though, this can be challenging.
• Relationships with Suppliers: To lessen the effects of price volatility,
Starbucks needs to keep solid contacts with its suppliers of coffee beans and
bargain advantageous contracts.
• International Pricing During Global Expansion:
• Exchange rate risk: Fluctuations in exchange rates can affect the relative price
of Starbucks products in different countries and profitability.
• Local Competition: Starbucks must consider the pricing strategies of local
competitors and adjust prices to remain competitive while maintaining its brand.
• Economic Conditions: Economic conditions, income levels and consumer
purchasing power vary widely from country to country. Starbucks must adjust
its price to local market conditions.
• Customer Decision Making:
Customers evaluate the value they obtain in relation to the cost they incur. Starbucks
needs to consistently improve the perceived value of its goods by focusing on things
like product quality, environment, and customer service.
Customers' preferences might vary greatly, and Starbucks offers a vast range of goods.
For pricing to have an impact on consumer decisions, it must reflect the perceived worth
of each good. Starbucks Rewards, one of its loyalty programs, offers rewards for
returning customers. Pricing choices must be in line with the program's objectives and
aims for client retention.

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Primary Research
We floated a survey form to understand the perception of consumers towards the brand
Starbucks. Following parameters were assessed and subsequent questions were asked:

AGE Gender
45-54 Non-Binary
35-44 5% 1%
10%
18-24 Female
32% 34%
18-24
Female
25-34
Male
35-44
Non-Binary
45-54
Male
65%
25-34
53%

Location Coffee Consumtion

Mumbai Bangalore Frequency
17% 15%
Everyday
Bangalore
Chennai Chennai Less than once a
15% 29% month
Kolkata Delhi 34% Once a month
16%
Kolkata
15% 9% Once a week
Mumbai 13%
Delhi Two or three times
37% a week

Perception of Starbucks
A waste of money
Trendy 16%
25%

Affordable A waste of money

9%
Affordable
Luxury
Mix of luxury and affordable
Trendy
Mix of luxury and
affordable
18%
Luxury
32%

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 Satisfaction with Current Reason for Buying Starbucks
Pricing Coffee
Atmosphere of
the outlet
Brand Image
15% 10%
No
16% 40% I don't buy it
20% Not Sure 2%
65% Yes Quality
32%
Taste

What would you like to see Starbucks do differently with

their pricing?
Offer more discounts
and promotions
24%

Lower their pricing

Make it more costly

Offer long standing
discounts on Starbucks
Make their prices more transparent
Card
1% Lower their pricing
54% Offer long standing discounts on
Starbucks Card
Offer more discounts and promotions
Make their prices more
transparent
19%

Make it more costly

2%

Analysis
• Overall, most respondents in the age group 18-34 perceive Starbucks as a luxury brand.
This is evident from the fact that the most common reason given for buying Starbucks
coffee is the brand image and the atmosphere of the outlet. Additionally, many
respondents are not satisfied with the prices of Starbucks coffee and would like to see
the company lower their prices.
• There is also a significant difference in the perception of Starbucks depending on the
frequency of coffee consumption. Respondents who drink coffee more often are more
likely to perceive Starbucks as a luxury brand, while respondents who drink coffee less
often are more likely to perceive it as an affordable brand. This difference may be due
to the fact that respondents who drink coffee more often are more familiar with the
brand and its offerings and are therefore more likely to associate it with luxury.

14
Recommendations
1. Lower their prices: This is the most common request from respondents. Starbucks
could lower their prices by offering more discounts and promotions, or by simplifying
their menu. This will lead to customized pricing depending on the income levels and
preferences in the area, Starbucks might establish different rates for various places.
2. Transparency in pricing: Starbucks could make their prices more transparent by
listing them on their website or in their stores. This would help customers to decide a
prior budget for their visits and make informed decisions about what to order.
3. Loyalty Programs and Discounts: Enhance the loyalty program to offer more
substantial rewards and personalized discounts based on customer behavior and
spending patterns. This can increase the frequency of visits and build customer loyalty.
4. Differential Pricing: Pricing according to locations, for example Starbucks Kiosks at
certain retail outlets or transport hubs will not necessarily have all the facilities as a
Starbucks Cafe. The Starbucks environment is part of their brand, and a kiosk provides
a lesser experience in comparison. Hence, there should be a differentiation between
kiosk prices and store/ cafe prices. The kiosks could be an affordable option, a “budget”
version of Starbucks, like many luxury hotel chains have their budget hotel ranges.

15
References
• Primary Research Data
• Lazzari, Zack (2019), Starbucks Pricing Strategy, Chron Newsletters
• Starbucks Corp in Consumer Foodservice (World) Report, Euromonitor
• Coffee Market Report, Statista

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