Living Economics

Drinking Experience
Starbucks commands premium prices for its lifestyle coffee because of its status cachet.

If preparing coffee is a track event, Dunkin’ Donuts beats Starbucks by 51 seconds for a cup of vanilla latte. But the Starbucks coffee cost up to 40% more (Tischler). For that price premium, you get the living-room experience of velvet couches, Wi-Fi access and kid-glove service. And you get a much stronger super No-Doz coffee (Gross).

That coffee price can range from 50 cents to $4.75 a cup is an interesting example of the evolution of commerce from commodities to experience (Gross). Initially, farm goods and minerals were sold as raw commodities. Next, value was added to commodities by processing them into convenient consumer goods. Then, value was added by turning goods into services. Finally, service was transformed into life-style experience where the good itself becomes incidental to the intangible feelings. Specifically, coffee beans are commodities; a can of ground coffee is a consumer good; a 50-cent cup of coffee you buy on your rush to catch a bus is a service; and your Starbucks Frappuccino is an experience (Pink).

The higher up the value chain it gets, the smaller the cost of raw materials and raw labor and the greater the pricing power. For lifestyle goods, this greater pricing power results from the inelastic demand. Unlike no-frills product where the product itself is not sticky enough to ensure return business and where customers will readily defect for cheaper alternatives, a status lifestyle product offers a cachet that inspires loyalty (Rodrick). This pricing power is evidenced by Starbucks' steadily rising retail prices amidst falling wholesale prices of coffee beans (Ligi). Its well-to-do clientele is not concerned with paying a little more just to enhance their social status. They are more concerned about being caught buying an average cup of joe from a diner.

The rise of lifestyle goods can be indirectly gauged by the almost ten-fold increase in Starbucks stock price. And the worldwide hunger for lifestyle goods is attested by Starbucks’ overseas expansion. Starbucks operates and licenses more than 8,500 coffee shops in more than 30 countries. But true to the status value of lifestyle goods, Starbucks does not go after sheer volume. Compared to Dunkin’ Donuts’ 17% and McDonald’s 15% market share of coffee sold, Starbucks has only a respectable 6% market share overall. What matters is that it probably has close to 90% of the high-end coffee market (Ligi).*

Note:
  1. *Editor's note (1/27/2008): Starbucks' share price fell by 42% in 2007 due to competition from Dunkin' Donuts and McDonald's who have moved upscale but still keeping their prices lower while Starbucks has commoditized its coffee experience but still keeping its higher prices. Starbucks' founder has resumed his CEO role trying to revive Starbucks' tarnished franchise.
  2. *Editor's note (1/27/2008): Starbucks' share price fell by 42% in 2007 due to competition from Dunkin' Donuts and McDonald's who have moved upscale but still keeping their prices lower while Starbucks has commoditized its coffee experience but still keeping its higher prices. Starbucks' founder has resumed his CEO role trying to revive Starbucks' tarnished franchise.
  3. **Editor's note (1/29/2009): Starbucks has closed down hundreds of stores and laid off thousands of employees due to slowing demand from recession-shocked consumers. Its stock fell from a high of $40 (5/1/2006) to $8 (11/17/2008).
  4. **Editor's note (1/29/2009): Starbucks has closed down hundreds of stores and laid off thousands of employees due to slowing demand from recession-shocked consumers. Its stock fell from a high of $40 (5/1/2006) to $8 (11/17/2008).
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