During the last recession Starbucks decided to raise its prices by up to 8%(30 cents). This is because some customers opted for cheaper options like McDonalds and Dunkin Donuts.
Conventionally it would seem that when there is recession a business should reduce its prices to maintain its clientele. However, to be successful, companies cannot make decisions based on intuition but rely on data and analysis. In the case of Starbucks, how do you get price increase when customers are leaving?
Here the analysis is that when some customers go to the competition only the customers are insensible to the prices and that they value to a greater extent the products of Starbucks.
Therefore, it makes sense to charge them more, as long as the loss of the benefit of further reduction of customers is less than the increase in profits due to a higher price. Starbucks has a gross margin of 22% on average per drink. Suppose in your high-priced drinks your margins are at least double, which means that the gross margin in these drinks is 44%.
Thus, if your premium drinks went up from $ 3.75 to $4.05, the margin of 44% leads to a profit of $1.78 per drink. Using the theory of elasticities, analyze in what conditions the increase can be given.
Analyze in what conditions can you give the price increase at Starbucks?
Use the concept of price elasticity of demand to do your analysis.