Last night during the MBA course I teach on International Marketing we discussed the continued price wars Starbucks is inviting with its scaled down coffee blends and the introduction of low-price cups of coffee. The class debated whether chasing lower prices during recessionary times was the right strategy or adding services and value was the better approach. Soon the discussion expanded to include indirect channels and channel partners in general.
Here are the key take-aways from the discussion:
- Using pricing as the only differentiator is the catalyst of consolidation and the maker of red, red oceans in any industry. We are reading Blue Ocean Strategy in this course; it’s excellent and worth picking up hence the red ocean reference. Starbucks may have just made their own ocean quite a bit redder by focusing on price alone. Clearly a bad move in tough economic times.
- The original concept of the bistro, or meeting place, is being sacrificed for efficiency. The class concluded that relationships need to be back at the forefront and efficiency, while important, cannot be trumped by what people need most, which is a place to hang out and unwind between school, work and home. Relationships matter more when consumers are making trade-offs, the class concluded.
- Services are now substandard in many Starbucks, and the inclusion of free WiFi, a more attractive lunch menu and even light dinner menus was considered more attractive than just cutting the cost.
The bottom line, the class concluded, was that Starbucks is playing a dangerous game of initially setting high expectations with customers, then toggling them down with price, then working to increase them. In tough economic times staying consistent on expectations and regularly exceeding them is all that matters.