Starbucks One-Dollar Cup o’ Joe

Starbucks CEO Howard Schultz once said, “Our marketing will emphasize quality and service, not price.” He’s now doing something different.

In a bigger shift in marketing strategy than spending millions on national television advertising, Starbucks is now selling short-sized cups of brewed coffee for a $1.00 and offering free refills at Seattle-area locations. (Reuters link | WSJ link)

Oh My! That is a MAJOR shift in strategy for Starbucks. Here’s why…

“Starbucks fiercely protects its pricing power because it knows a low-price strategy is the quickest pathway to commoditizing and marginalizing coffee back to being, well, just coffee. It also knows if it lowers prices, it will have a hard time ever raising them again. Most important of all, Starbucks knows higher prices bring them healthier profit margins, which fuel the cozy experience customers enjoy.

By ever deciding to run itself as a priced-to-sell retailer, Starbucks would be admitting it no longer values a unique product or a unique customer experience. Seth Godin, author of Purple Cow, goes one step further, saying that a low-price strategy is “the last refuge of a…marketer who is out of great ideas.” The folks at Starbucks are too smart, too savvy, and too creative to fall for the low-price trap. And if they ever did, Starbucks as we know it—Starbucks as a forward-thinking company—would cease to exist.” SOURCE

Those words were written in TRIBAL KNOWLEDGE, my love story to a company that shaped how I approach marketing. In my eight-years there, we, Starbucks marketers, would have never considered promoting a $1 Cup o’Joe to increase sales. Instead, we would have used of a combination of these ideas to solve for Starbucks problems.

A "cheap coffee strategy" ... Oh My! is right; because, a low-price strategy is indeed the quickest pathway to commoditizing and marginalizing coffee back to being, well, just coffee.

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UPDATE: For an editorial-like cartoon on this "One Buck" Buck strategy, peep this.

Comments

[Martin Bishop]

As a veteran of the ground coffee business, I couldn't agree more. That's a business that destroyed itself through a never-ending price war. Temporary sales gains from lower prices led to permanent shifts in consumers expectations, leading to focus on ways to cut costs (and quality) to be able to afford even more price cuts. Repeat and repeat again.

This futile battle between the major players eventually opened up a big gap at the quality end of the market. Starbucks was the major beneficiary. Are they about to start sliding down the low price chute too?

(Coincidentally, I talked about some of these same issues yesterday on my blog in a post about P&G getting out of the ground coffee business.)

[P]

McDonalds wants to be Starbucks
Starbucks wants to be McDonalds.
Sad

[Dave Klonke]

Do you know if this $1 cup of coffee is going to be the same coffee of the day that they sell in tall, grande and venti? Just wondering.

[johnmoore (from Brand Autopsy)]

Dave ... I'm sure this 8-oz. $1 Cup o' Joe will be from their daily offerings of a "Bold" coffee, "Mild" coffee, or a Decaf coffee.

So yeah, it'll be the same as what would be poured into tall, grande, venti sizes.

[AnnaMaria Turano]

By trying to be all things to all people, Starbucks might end up meaning nothing at all. They are struggling with understanding that "targeting" means making tough decisions about who you will serve / market to (and how - product, price, etc.) vs. who you won't. Very rarely can one company (especially in food/beverage) excel at serving every segment well.

[Chris]

It sounds (and is) goofy as a $1 a cup alone strategy, but as a limited time part of a larger Howard and SBUX stategy to apologize to patrons for almost killing the golden goose and "we swear we'll never forget what got us here" campaign (hey, I know we got away from our core mission-I know building 5 billion stores a week made me take my eye off you and your starbucks experience needs and this is also a way to make up to you and apologize for those stupid reindeer on the ski lift commercials).

Part of the underlying discussion is did Starbucks breach their agreement with their customers regarding their experience. What type of sucessful marketing campaign do you run to admit you've breached the faith but you promise to change and "make it up to you"?

I've seen other companies try-but the mostly come off like the Tim Meadows impersenation of Ike Turner apologizing to Tina after punching her.(Oh, baby, I'm sorry! I didn't want this to happen again! I mean, I'll give you anything you want, baby, just.. anything you want.. (See http://snltranscripts.jt.org/93/93mupdate.phtml ). But the main reason they fail is, like Ike, they aren't sincere and the company doesn't follow thru.

Ah, but perhaps SBUX is just like the first girlfriend who broke the magic in our relationship. You want to believe she wasn't a two-timing skank. I don't want to think my time with SBUX was just like time with McDonalds or the green mermaid was just using me for my money. If Howard, like John Cusak holding the tape player outside the window in "Say Anything", is using this a tactic to make me pay attention so that he can look deep in my eyes and tell me he's sorry--I might listen if the words and actions seem sincere and real change follows.

[Cam Beck]

Yikes. Didn't see that one coming.

[Prescott Perez-Fox]

Um, Marlboro Monday anyone?

I blogged about it as well, if anyone's interested.

http://www.perezfox.com/2008/01/23/starbucks-goes-for-broke/

[Surefire Guy]

I agree with you, John.

Just because same-store sales aren't increasing, doesn't mean they're not sitting on something amazing.

So much for paying for the "Starbucks Experience." There's still something to be said about the experience of going to Starbucks. I'm still willing to even pay $2.60 for a latte, just to sit in their environment. No other coffee shop, to my knowledge, has created an experience that is parallel to Starbucks.

I hope they don't make any more "hasty" decisions that will cause them to lose their panache.

[Paul Ding]

For a couple of decades, some fast-food restaurants have been giving users free refills on Coke, but they still offer several sizes of cups, at varying prices. Customers have certainly figured out by now that they can fill up the 16-ounce cup 2 times, or even 42 times, if they are that thirsty, but from looking around, there sure seem to be a lot of people who'd rather buy the big cup, so they don't have to walk over to the fountain machine and refill the smaller one.

Five Guys gives away peanuts. It doesn't seem to hurt their french-fry sales any; you don't see very many tables where people have NOT bought french fries. In fact, although I weigh 300 pounds plus, I have trouble eating their generous *small* serving of fries, and yet there are customers who buy their large fries.

I don't stop at Starbucks very often, and part of it is the price. I might be inclined to stop in for a buck mini-cup of joe, but you know, yesterday I stopped at the grocery store to buy some dehydrated vegetable flakes from the spice aisle, for $1.79, and by the time I got out of the store, I'd spent $57. Don't Starbucks sell munchies and music as well as expressed and brewed coffee? I have a feeling that people will stop in for the buck mini-cup at first, will graduate to buying a larger cup of brewed coffee, and then move on to buying expressed beverages.

So I'm going to try my best to stay out of Starbucks. If I was running a restaurant, though, especially one with a drive-thru, I'd sure be offering iced coffee. I haven't seen very many people buying specialty coffee beverages at McDonald's, but they are sure selling a lot of iced coffee.

[Mary]

Dang, they stole my idea! I have been telling my friends that a coffee house needs to open with a dollar cup of coffee given the obscene prices of coffee these days.

[Surefire Guy]

Paul,

But how could a coffee shop that sells $1 coffee stay afloat? Gas stations are even charging $1.09 - $1.19 per small cup of Folger's these days... I'm not saying your idea wouldn't work, I'm just wondering how you would plan on covering overhead costs?

Thanks.