People used to joke about the $4 cup of coffee from Starbucks. Then they joked about the $5 cup of coffee. Now they might choke when they look at the top price at the chain: $7. Not for some fancy espresso-style drink that you must order in fluent Italian, but for a cup of coffee. Starbucks is offering ultra-premium coffee, according to MarketWatch, which costs upwards of three times what the company’s regular coffee runs. Crazy? Only like a fox. Starbucks is using a strategy that every person with an MBA online degree should know. Creating premium lines of products is about the money, certainly, but so much more as well.
Margins: The most obvious reason to create premium product lines is increasing profitability. Such products may well cost more to produce than the normal ones. But normal markups mean that much more in margin dollars. And the margin percentages you get may be higher. According to the MarketWatch story, markups on high end coffee in chains is typically 80 percent. A coffee bean supplier claims that Starbucks pays only $1.30 extra a cup of the rarer blends, which means the other $3.50 in premium cost above its regular coffee becomes pure profit.
Differentiation: Money is good, but so is defending against competitors. Starbucks has been in the crosshairs of Dunkin Donuts, McDonald’s, and other chains that want a big piece of its coffee business. By shifting to automated brewing, Starbucks changed the consumer experience and cut down a barrier to competitors. What difference is there in getting robo-brew from one shop or another? But ultra-premium helps fix the problem. Most of the competitors have price-conscious customers that won’t pay that much for a cup of coffee. Starbucks regains snob appeal.
Brand halos: An expensive line of products can provide an imprimatur of exclusivity to less exclusive offerings. One reason that Starbucks gained the international appeal it has is because it created an aura of quality with pricy espresso drinks. Many people unconsciously assume that the cost, and the time spent on preparation, is a guarantee of quality. Even if people don’t buy a $7 cup of coffee, they may be subconsciously attracted to get something at a location nearby. Creating a premium line of products will likely also increase sales of your regular products. Maybe your company doesn’t spend its days roasting coffee beans and pouring cups of java for caffeine-fueled overachievers. However, developing a premium line of products or services can make just as much sense for you as for Starbucks.