Saturday, January 14, 2012

Starbucks "Thinks Holistically About Prices"

Today's New York Times has a story about a higher price on Starbucks tall coffees in stores across the Northeast. The price is officially $1.85 in New York City for 12 oz of java. With tax, however, the total price paid is $2.01.

Now that's an unusual price. It forces customers to either carry spare pennies, break another bill, or--as is happening at some NYC Starbucks stores--be grateful to the cashier who offers to put in a penny from the tip jar. Meanwhile, competition in the gourmet coffee market is fierce, and many places now offer great coffee at a great price. It's not on the menu, but seniors can get a cup o'joe at MacDonald's at a significant discount if they know to ask for the "senior coffee."

The psychological effect of pricing is well known. When we see an item priced at $3.99, the theory is that we "process" the price starting with the number on the left, which means we perceive this price as being in the $3 range. Some retailers use odd-number pricing to get us to pay attention; Walmart, for instance, offers 97-cent shipping, a number that is probably intended to call attention to the low shipping fee (under a dollar!).

Back to Starbucks: The company told the New York Times that it “thinks holistically about prices and about the total value it provides its customers.” Questioned specifically about the New York City price being $2.01 including tax, an exec confirmed that this “wasn’t an accident.” The reporter wonders whether the "annoyance factor" of having to carry extra pennies will discourage some NYC customers from being loyal to Starbucks. Let's see.

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