Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Starbucks Prices the Coffee Experience
Transcript
- Lucas: There is probably no pricing decision more visible — or more personal — than the price of a cup of coffee. And no company has studied that decision more obsessively than Starbucks. Luna: I feel like every time I buy a latte, I do that mental math — is this really worth five dollars? And then I buy it anyway. Lucas: Exactly. And Starbucks knows that. They have built an entire pricing architecture that turns that internal debate into a predictable outcome. So today, let's look at how Starbucks prices the experience — not just the coffee. Luna: Where do you want to start? Lucas: Let's start with the most basic product in the store — a tall brewed coffee. In most US cities, that's about $2.75. Now, that cup of coffee costs Starbucks maybe 30 cents in beans, water, and a cup. So there's a massive markup. But here's the thing: that tall drip coffee is a loss leader in a sense. It gets you in the door. The real pricing game is on the customized beverages. Luna: Right, because once you're there, you can add a shot of espresso, change the milk to oat, add vanilla syrup — each of those is an extra charge. Lucas: Yes. And those add-ons are where the margin lives. A grande latte is about $4.50. But if you make it a vanilla oat latte, you're at $5.50 or more. And Starbucks has trained customers to expect that customization is part of the experience. You're not just buying coffee — you're curating it. And each customization is a micro price increase that feels small individually but adds up. Luna: I read that the average ticket at Starbucks is around $5.50. That's a lot of add-ons. Lucas: It is. And the genius is that they've made the base price look reasonable — a tall drip at $2.75 feels fair — and then upsold you on the experience. But there's another layer: location pricing. Starbucks pays a premium for corner locations with high foot traffic. That real estate cost is built into the price. So when you pay $5 for a latte, part of that is paying for the convenience of having a Starbucks on every corner. Luna: Is that why Starbucks in a busy downtown area costs the same as one in a suburb? I've noticed they don't vary much by location within a city. Lucas: That's a great observation. Starbucks actually uses a uniform pricing strategy within most metro areas. They don't want customers to feel like they're being gouged based on neighborhood. But they do vary prices across regions. A latte in New York City might be 10 to 15 percent more expensive than in Columbus, Ohio. And internationally, the differences are much bigger. In China, a tall latte is about 30 yuan — roughly $4.20 — which is a premium compared to local incomes. But they position it as an aspirational Western brand. Luna: So in China, it's almost a luxury good. That's a different pricing play. Lucas: Exactly. In the US, Starbucks is an everyday premium. In China, it's a status marker. And that affects how they raise prices. In the US, they've been raising prices about 2 to 3 percent per year — sometimes more recently due to inflation. And they've been able to do it without losing customers because of the loyalty program. Luna: The Starbucks Rewards program. I'm in it. And I have to admit, the stars system makes me less price-sensitive. I'll pay $6 for a drink because I'm earning points toward a free one. Lucas: That's the behavioral economics at work. The loyalty program creates a sunk cost dynamic. Once you've accumulated stars, you're more likely to keep buying from Starbucks to redeem them. And the program also gives Starbucks incredible data. They know exactly what you order, when you order, and how much you're willing to pay. That data feeds into their dynamic pricing experiments. Luna: Dynamic pricing — like surge pricing? I remember they tested that a few years ago. Lucas: They did. In 2020, they started testing a feature on the app that would adjust prices based on demand — higher prices during peak hours, lower during slow periods. But they were careful. They framed it as 'limited-time offers' rather than surge pricing. And they haven't rolled it out widely because customers hate the idea of paying more for the same drink at 8 AM versus 2 PM. So instead, they use the app to push discounts on slow items — like a discounted Frappuccino on a Tuesday afternoon. Luna: So they're using the app to manage demand without calling it surge pricing. That's smart. Lucas: Very smart. And it avoids the backlash that, say, Uber gets. But let's talk about the Frappuccino itself — a $6 blended drink that costs maybe $1 to make. That's pure margin. And Starbucks sells millions of them. The Frappuccino is a great example of a high-margin product that customers perceive as a treat, not a commodity. Luna: But is there a risk that they push prices too far? I've seen some complaints online that Starbucks is getting too expensive. Lucas: There is always that risk. And Starbucks has shown some sensitivity. In 2024, they actually lowered the price on some cold drinks in certain markets to stay competitive with smaller chains and local shops. But overall, their pricing power has held. The reason is that Starbucks isn't just selling coffee — it's selling a third place. A place to work, to meet, to escape. That's hard to replicate. Luna: I'd argue that Dunkin sells coffee more as a commodity — it's cheaper, faster, and less about the experience. And they've been growing too. So there's room for both strategies. Lucas: Absolutely. Dunkin's average ticket is about $3.50 — significantly lower than Starbucks. But Dunkin's margins are thinner. Starbucks makes up for it with higher prices and a more loyal customer base. And that loyalty is reinforced by the app, which now accounts for over 30 percent of US transactions. Luna: So the app is not just a convenience — it's a pricing tool. Lucas: Exactly. The app lets Starbucks test prices in real time. They can offer a personalized discount to a customer who hasn't visited in two weeks, or they can nudge a regular to try a new, higher-margin drink. And because the offers are personalized, there's no public backlash. It's a form of price discrimination that feels like a perk. Luna: That's fascinating. And it's a big reason why Starbucks can keep raising prices. They're not raising prices for everyone at once — they're using data to find the maximum each customer is willing to pay. Lucas: Right. And one more thing — Starbucks has been moving toward more cold beverages, which have even higher margins than hot drinks. Cold brew, iced lattes, Frappuccinos — they're all more expensive and cost about the same to make. So the product mix shift alone is a price increase. Luna: And they're also leaning into plant-based milks, which have a surcharge. That's another margin booster. Lucas: Yes. In 2025, they actually eliminated the upcharge for non-dairy milks in some markets to attract customers, but then they raised the base price of the drink. So the net effect was still a price increase. They're very clever about hiding the true cost. Luna: It's like a game of three-card monte with the price tag. Lucas: It really is. And you know, it's interesting — we're talking about a cup of coffee that costs more than a sandwich at some places. But people still pay. Because the pricing is tied to an identity. You're not just buying caffeine — you're buying a lifestyle. Luna: Speaking of value, I want to say something about this podcast. We spend a lot of time looking at how companies price their products, and I think that helps us all think more clearly about our own spending and business decisions. If these conversations have moved your work forward in some small way, we'd love for you to consider supporting the show. Lucas: Yeah, we deliberately don't run ads on these episodes. That's a choice we made from the start because we want the conversation to be uninterrupted. If you value that approach and want to help keep it going, the easiest way is to buy me a coffee dot com slash fexingo. No pressure — just an option for those who find real value here. Luna: Exactly. And now back to pricing — I want to ask about something you mentioned earlier: Starbucks in China. How does their pricing strategy differ there compared to the US? Lucas: Great question. In China, Starbucks positions itself as a premium brand. A tall latte costs about $4.20, which is roughly double the price of a local coffee shop. But they've invested heavily in store design and customer service to justify that premium. And unlike in the US, where mobile ordering dominates, in China, the in-store experience is still key. They have 'Starbucks Reserve' locations that are even more upscale, with higher prices. Luna: So they're essentially running two different pricing models — one for a mature market where they compete on convenience and loyalty, and one for a growth market where they compete on status. Lucas: Exactly. And that dual strategy is why Starbucks can keep growing. In the US, they squeeze more revenue from existing customers through personalization and price increases. In China, they capture new customers who aspire to the Western coffee lifestyle. Both strategies rely on pricing power, but the levers are different. Luna: It makes me wonder — as coffee becomes more commoditized, can Starbucks maintain that pricing power? Lucas: That's the billion-dollar question. So far, the data says yes. Their same-store sales have been positive for years, even with price increases. But the rise of third-wave coffee shops and at-home brewing could erode that. Starbucks is responding by focusing on speed and convenience — drive-thru, mobile order, and delivery. That's where they can still charge a premium. The moment you walk in the door, you're paying for time saved as much as for the coffee. Luna: And that's a pricing strategy that goes beyond the drink itself. Lucas: Exactly. Starbucks prices the experience of convenience, status, and customization. The coffee is just the vehicle.