How Starbucks Makes 1 000% Profit
Coffee is a highly commoditized product. It can easily be made almost anywhere in the world with widely available ingredients at a very low cost.
Coffee has been around for hundreds of years. Like salt, sugar, and rice, once these products started being mass-produced, it was a race to the bottom for prices.
In business school, they’ll teach you not to enter industries like this because it would be difficult to make a profit. This was true for a long time until Starbucks changed the rules.
So how did they convince the world to pay $3 for a cup of coffee that costs less than 30c?
Starbucks employs a scientific method of selling their product. This science is called behavioural economics.
Behavioural economics is the study of how people make less than perfect decisions.
Let’s examine a few ways that they use this science and see whether we can apply it in our businesses.
The cups names are ingenious
Starbucks changed the name of the cup sizes so that you can’t compare them to any other place that sells coffee.
Coffee was so commoditized that many places that served food gave it out for free or charged very little. Some eateries would often allow free refills, seeing it as a cheap way to make people stick around longer and buy more food.
If people were used to paying less than $1 for a medium cup of coffee, then Starbucks couldn’t suddenly start selling a medium cup of coffee for more than $3.
They had to remove the connection that anchored the old price of a medium coffee in your mind.