Monday, January 23, 2006

Article: Starbucks Screwing You Further

If you're like me, you love coffee but hate paying $3-4 for it. But there are some days where you are so tired, so caffeine deprived, that you would strangle a basket of kittens to death with your bare hands if you thought you could squeeze a cup of coffee out of them - or, similarly, you might even consider going to Starbucks.

Well it turns out that for "just $2.35" you can actually get a "short cappuccino" from them, with a higher coffee-to-milk ratio then any other cappaccino they serve. The only catch is that its not listed on the menu...

But why does this cheaper, better drink—along with its sisters, the short latte and the short coffee—languish unadvertised? The official line from Starbucks is that there is no room on the menu board, although this doesn't explain why the short cappuccino is also unmentioned on the comprehensive Starbucks Web site, nor why the baristas will serve you in a whisper rather than the usual practice of singing your order to the heavens.

Economics has the answer: This is the Starbucks way of sidestepping a painful dilemma over how high to set prices. Price too low and the margins disappear; too high and the customers do. Any business that is able to charge one price to price-sensitive customers and a higher price to the rest will avoid some of that awkward trade-off.


"The bottom end of any market tends to get distorted," says McManus. "The more market power firms have, the less attractive they make the cheaper products."

That observation is important. A firm in a perfectly competitive market would suffer if it sabotaged its cheapest products because rivals would jump at the opportunity to steal alienated customers. Starbucks, with its coffee supremacy, can afford this kind of price discrimination, thanks to loyal, or just plain lazy, customers.

The practice is hundreds of years old. The French economist Emile Dupuit wrote about the early days of the railways, when third-class carriages were built without roofs, even though roofs were cheap: "What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich."

I don't know if this is actually true or not - but the next time I need a fix, I'm going to test this theory, and I'll let you know.

Pic stolen from ">Alien Luvs Predator.
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