What The Market Will Bear

Recently, Starbucks opened a new location in New York City which isn’t news.  Not really.  What is news is that it’s called Starbucks Reserve, and it’s one of about 500 stores that Starbucks plans to open on an international level.  That’s still not news.  Not really.

Here’s what is news:  A tall 12-ounce serving of plain black coffee at Starbucks Reserve in New York City costs four dollars.

That might shock you into wondering what could possibly support marketing 12-ounces of plain black coffee at four dollars, and hoping the Starbucks Reserve will succeed.

Could it be the location since this store is in the Chelsea neighborhood of Manhattan?  No.

Could it be the artwork purchased and hung on the walls?  No.

Could it be the hand-lettered menus?  No.

Could it be the high-end brewing system that brews the plain black coffee at Starbucks Reserve?  No.

Could it be the vintage rug and furniture?  No, since that was bought from second-hand furniture shops.

Supposedly it’s because the coffee beans are exclusive, micro-lot coffee beans.  They’re rare coffee beans.

The sticker shock is going to throw more than a few coffee lovers into caffeine arrest, as the price of a tall freshly brewed coffee at other Starbucks locations is less than two dollars … with many coffee lovers complaining about how expensive plain black coffee is at Starbucks.

So what is it about Starbucks Reserve that emboldens Starbucks to charge so much for am everyday cup of joe?

The oft-quoted strategy in business is that successful businesses price their product and services on what the market will bear.   Businesses thrive because there’s profit for the business to be in business.

In certain industries, there’s agreement on what is considered a reasonable mark-up on products.  In other industries, there’s agreement on what is considered a reasonable fee for services.

But just because there’s agreement on what prices should be, doesn’t mean that all businesses are bound to follow the pack.  If a business can successfully demand a higher amount that other businesses are demanding for similar products and/or services, there’s no law that says they can’t do just that.

But what happens when the price seems to be more than what the market will bear?  What happens then?

Recently, this situation played out for Martin Shkreli and Turing Pharmaceuticals, where the price of pyrimethamine (Daraprim) was dramatically increased once the patent for the drug was under Martin Shkreli’s control, it became a difficult situation to gauge.  In the Turing Pharmaceuticals case, a monopoly existed after competition was shut down, and the distribution chain was tightened as a precursor to the unheard of price increase.   This allowed Turing Pharmaceutical to increase the price per dose from $13.50 USD to $750 USD overnight.

That’s an increase of 5,500 percent.

Martin Shkreli’s earlier career was running an investment fund.  He took the skills and talents acquired from that career, and applied it to his start-up company, Turing Pharmaceuticals.

The drug was on the World Health Organizations List Of Essential Medicines, but that didn’t stop Turing Pharmaceuticals from raising the price per dose to a price that was unaffordable to those who took the drug.  He knew his market (which didn’t have any options but to cave to the price demands).

It was determined by the US Congressional Committee on Oversight and Government Reform, and confirmed by Turing Pharmaceuticals that in the U.S. about 3,000 patients were affected.

Martin Shkreli stepped down from his post at Turing Pharmaceuticals in December after he was arrested on securities fraud charges, but the price for the drug is still prohibitively expensive for the majority of its target market.

When considering how to price your businesses products and services, make sure your market research focuses not only on what your competition is charging, but on the negative and positive aspects of competitors who charge less or who charge more than the bell curve amount.

If you can Starbucks Reserve price your products and services, and continue to grow your business, there’s nothing wrong with that.  If you’d rather not Starbucks Reserve price your products and services, there’s nothing wrong with that either.

The bottom line is that it’s important to understand the impact your pricing on products and services may have on your customers as well as your profit margin.

Elyse Bruce

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