Tuesday, January 10, 2006

Starbucks' Price Discrimination

This article last week by Tim Harford discusses price discrimination by Starbucks. Apparently, there is a size of cappucino that they do not list on the menu and you have to ask for specially: the "short" cappucino, which is higher quality and cheaper.

Making you ask for it is the way that they differentiate their customers: people who are more price-conscious are more willing to go through specially asking for the size.

This strategy is similar to the strategy of offering coupons. Another example mentioned in the article is a British grocery store, Tesco, that puts its cheaper store-brand of products in notoriously ugly packaging (again, more price-conscious customers will care more about the price than the packaging).

Any other examples of businesses trying to segment their customers this way? Any other explanations for why Starbucks would have that secret menu item?


Anonymous said...

I am SO sorry I just remembered that we had to do this. It could be possible that Starbuck’s had the short cappuccino on the menu at on time and they took it off because it was not one of their top sellers. A lot of times places like Starbuck’s and other restaurants will still serve you things that are not on the menu if you ask. However, you have to know what else they serve that is not on the menu, so in the situation where the menu changed, only a customer that has been going to Starbuck’s for a long time is going to know about it. This might almost be a special reward for people that have been going to Starbuck’s for a long time.

Jessica Monk

Anonymous said...

I have seen the "hidden" cup size. It makes sense, i mean why else would they have their smallest size be "tall" instead of "short"? I really don't go to starbucks very often because their coffee is too expensive and not very good, but it makes perfect sense for starbucks to price discriminate like that. Obviously, they charge people who want their coffee and want it now more, because those people are more reluctant to ask around about different coffee sizes than the "tall" "grande" and "vente" trademarks of starbucks. This same sort of price discrimination can be equated with buying a car. A car buyer has a better negotiating position and can get a better deal if he or she researches the car desired. Likewise, if a dedicated starbucks' customer came in, grabbed all of the brochures on the counter, he or she would probably find out about the small cappucino size. However, it may just be that the starbucks menus are out-of-date with
giving only three cup sizes for a cappuccino.

David Wyant

Daniel Hanison said...

According to the article, the "short cappuccino" is a third of the size of the smallest size on the menu. It is also 30 cents cheaper. If Starbucks can get away with charging a higher price for a lower quality product then why not? It is in Starbucks' interest to do this, however, it is in the consumer's interest to purchase the "hidden cappuccino". Starbucks can price discriminate because it has a huge market share and people will still come in everday on their way to work or school and buy the coffee no matter what.

Hagar the Horrible said...

David, your example of a car salesman is an example of what economists call "asymetric information," which just means that one of the parties in an exchange has more information than the other. It has indeed the effect you describe. When information is not symmetric, or more generally, when information is not perfect, one of the assumptions for a perfect market fails. And that means that sellers can charge a higher price without customers going to the competitor.
What makes asymmetric information different from price discrimination is that with price discrimination you charge different customers different prices for essentially the same product. With asymmetric information you charge a higher price to anybody as long as you can maintain the information imbalance (i.e. keep them in the dark).

What are other examples of price discrimination? Off the top of my head I would think things like senior or student discounts at movie theatres, amusement parks or whathaveyou. It's not that companies are so nice and want to help out the poor senior citizens or students -- even though I believe that at the mom and pop store this is probably why they have such discounts -- it's because they want to "get" the students as well without having to lower the price for everybody. Okay, that's it for now.

Sam Ulrich said...

There was at one time a small on the boards but too few people bought it to make it an easy buying option. I have a feeling that the only reason that they still serve that size is that there are some drinks that take that size cup, otherwise they would cut costs and save on the paper that it takes to make the cup. I dont like how they changed their sizes from small medium and large to tall, grande and verte. I think it is a form of trickery since in essence they become small medium in large in comparison but it gives the buyer a flase sense of savings when they buy a tall instead of a small.

Rebecca Merrick said...

Another example of price discrimination is restaurants where they have soda in the bottle and from the fountain. Customers who order from the fountain get free refills, while the people who order bottles usually only get two bottles. If you just ask for soda, they give you the bottles. This separates the customers who don't know to ask for the fountain drinks and also separates the people who prefer the glass bottles.

Anonymous said...

Gas stations also ingage in this kind of price discrimination. Some have special cards for people who come in alot (like fuelman) and they recieve special discounts on their gas. And as far as to way they might does this... it is possible that they use this option to find their select drinkers because from what Mr. Arjona said the smaller it is the better. From this they could gather emails and have a mailing list.

John Garrison

Jeff Bloom said...

I have always wondered why the smallest size on the menu was called a "tall" why not calling it a "small". But now its crystal clear to me.....because there is a short size. If the "hidden" small cup is a third of the size of the small, why don't they take advantage of it! I know that Sam said that they used the small cup at one point, but it didnt sell well, but now look at our society. We are in the age of diets and diet-programs. Although coffee doesn't have a really heavy calorie count in it, Starbucks could use this "short" cup and make an entire campaign out of it, marketing it towards those "dieters out there" who still need their Stabucks Fix!
If Starbucks happens to get on to the "WalkerEconomics Blog" and get this idea, Please contact me, because it was MY IDEA FIRST!

Thats the way the cookie crumbles

Anonymous said...

In my opinion I think that this hidden cup of cappuccino was not very popular which led to taking the product off of the menu and only those customers that have gone to Starbucks long enough would know to order it which shows their loyalty. But i also believe that most people who go there, go there for a quick fix no matter what the cost and i don't think people would actually spend time searching for those "hidden short cups" when they are willing to pay for a larger size.