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Starbucks Price Increases: Are They Leading or Signaling? | Pragmatic Pricing

Starbucks is raising prices. In my last blog post, I discussed the pros and cons of that decision. In this post, let’s look at some more advanced issues.

When competitors announce a price increase, they typically do one of two things: They lead or they signal.

Firms lead when they are price makers. They are essentially saying, “I don’t really care what my competitors do. I’m raising my price anyway.”

Firms signal when they are trying to communicate with their competitors. In this case they are saying, “I announced this price increase. If you follow, we both will have higher prices and we both will make more profit. If you don’t follow, I will bring my prices back down.”

It seems obvious that Starbucks is a price leader. They don’t care what other coffee companies charge. Heck, I can buy coffee at McDonald’s for $1 and it even tastes pretty good … but I don’t. I go to Starbucks.

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Starbucks Price Increases: Are They Leading or Signaling? | Pragmatic Pricing.

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