Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Starbucks Raised Prices Without Losing Customers
Transcript
- Lucas: Luna, I want to start with a number that stopped me this morning. Starbucks raised prices across most of its US menu by about 8 percent between last fall and this spring. And their same-store sales in the quarter ending March 2026? Up two percent. Luna: Which is not what usually happens when a company that size pushes through an eight percent hike. Normally you'd see a dip, at least for a quarter or two. Lucas: Exactly. And that's what makes this episode interesting. Because the conventional wisdom in pricing is that you raise prices slowly, in small increments, so customers barely notice. Starbucks just did the opposite. And it worked — for now. Luna: For now being the key qualifier. But before we dig into how they pulled it off — Lucas, if this kind of breakdown is useful to you, I want to mention something quickly. These episodes stay ad-free because of listener support. Lucas: Yeah, it's a small thing, but it makes a big difference. If today's conversation moves your thinking forward in any way, you can keep it going at buy me a coffee dot com slash fexingo. Luna: And we mean that sincerely. It's what lets us spend the time on stories like this one. So — back to Starbucks. How do you raise prices eight percent and not see a sales drop? Lucas: Well, let's look at three specific moves they made. The first one is the mobile order algorithm. Starbucks has been tweaking the way its app suggests add-ons and modifications for about two years now. Luna: I've noticed this. If I order a cold brew, the app now asks if I want a splash of sweet cream before I even get to the checkout screen. It's a tiny nudge, but it adds a dollar fifty to my ticket. Lucas: Right. And that's not an accident. The company has been A-B testing these prompts relentlessly. The result is that the average ticket for a mobile order has gone up about 4 percent over the past year, even before the menu price increases. Luna: So the price hike and the add-on nudges are working together. You're paying more for your drink, and you're also buying more stuff. Lucas: Exactly. And that's the second move: the tiered rewards system. Starbucks revamped its loyalty program in late 2024. They made it harder to earn a free drink unless you visit more frequently, and they made the free items mostly the cheaper options. Luna: Which means customers who are loyal — the ones who go three or four times a week — they're still earning rewards, but the perceived value of those rewards has gone down. So they're less likely to view the price increase as a loss. Lucas: You've put your finger on it. The rewards program essentially changes the reference point. If a regular customer thinks 'I'm paying $6.50 for this latte, but I'll get a free one after 12 visits,' the effective price per drink feels lower. Starbucks can raise the menu price and the loyalist barely flinches. Luna: But what about the casual customer? The person who stops in once a week and doesn't use the app? Lucas: That's where the third move comes in. Starbucks selectively rolled back the upcharge for non-dairy milk in February of this year. For years, oat milk and almond milk cost an extra 70 to 90 cents. They eliminated that charge for most drinks. Luna: Which sounds like a price cut. But it's not. Because they baked the cost into the base price of the drink. A latte with oat milk went from $5.75 plus 80 cents to $6.55 — a net increase of about 15 cents, but the customer sees no add-on. Lucas: That's exactly it. The psychology is powerful. Starbucks removed a visible irritant — the 'you're being nickel and dimed' feeling — while actually raising the overall price. And the data shows it worked. Non-dairy milk orders have surged, and the customer satisfaction scores for mobile orders ticked up. Luna: So they gave customers a win. They removed a fee that had been annoying people for years, and in exchange, those customers accepted a slightly higher base price. That's a really smart trade. Lucas: It is. And it's a classic example of what pricing strategists call 'goodhart-proofing' — you change the metric that customers use to judge value, so the price increase doesn't register as a loss. But here's the thing. Not everyone is convinced this is sustainable. Luna: What's the risk? That eventually customers do the math and realize they're paying more overall? Lucas: Partly. But the bigger risk is what I'd call the 'seven-dollar cold drink ceiling.' In major cities, a grande iced latte with oat milk now runs $6.95 before tax. Once you cross seven dollars, you enter a different psychological bracket. That's territory occupied by sit-down restaurants and specialty cafes. Luna: And Starbucks is still fundamentally a drive-through and a grab and go. You're not getting table service or a ceramic cup. So at that price point, the value equation starts to fray. Lucas: Precisely. And there's early evidence that's happening. In New York and San Francisco, some locations have seen a slight dip in transaction counts — not revenue, but customer visits. People are going less often, but spending more when they do. That's fine for the income statement, but it erodes the habit loop that Starbucks depends on. Luna: Which brings us to the big strategic question. Is Starbucks a premium brand that can charge premium prices, or is it a convenience brand that needs to stay accessible? Lucas: That's the tension. And the answer might depend on which market you're in. In China, for example, Starbucks is facing fierce competition from local chains like Luckin Coffee that charge half the price. Starbucks has actually cut prices there — selectively, with promotions — to defend market share. Luna: So they're raising prices in the US and cutting them in China. That's a really sophisticated strategy, but it also shows that pricing power isn't a universal thing. It's market by market, customer by customer. Lucas: Right. And that's the lesson I hope listeners take from this episode. Pricing power isn't just about having a strong brand. It's about understanding the specific psychological levers your customers respond to. Starbucks nailed three of them here: the add-on nudge, the rewards-program reference point, and the visible fee elimination. Luna: But the seventh dollar is a real threshold. If they cross it, they might lose the very customers who made them a phenomenon in the first place. Lucas: And that's the question I'm watching in the second half of 2026. Can they hold the line at $6.95? Or will they push through another increase and test whether the habit is strong enough to survive an eight-dollar latte? I honestly don't know the answer. But I think the next twelve months will tell us a lot about whether Starbucks has genuine pricing power or just a very good run of luck. Luna: And maybe a reminder that even the best pricing strategy can't defy gravity forever. Thanks for listening.