Starbucks’ Price Positioning Misstep

How timely! Just yesterday, I blogged about the importance of pricing in positioning. And while this is not particularly new news, today, I saw a couple of blogs discussing Starbucks’ experiment with $1 coffee. (And to think I was just patting Howard Schultz on the back!)

The background: Starbucks founder and recently (re)instated CEO, Howard Schultz, has decided to offer $1 coffee. The experiment will be limited to Seattle shops for now. The purpose of the new pricing is to compete with McDonald’s and to boost existing store sales. As I mentioned yesterday, pricing decisions go well beyond simply covering costs-pricing is a marketing tool. It is one of the most compelling attributes of positioning. It makes a very clear statement about how a consumer should perceive a product.

In making this decision, Schultz is implying that there is nothing more to Starbucks than coffee. By providing a cheap cup of Joe, he is reducing the company to commodity status, the natural result being a price war. No longer is buying a cup of Starbucks coffee an experience. Now, we’re just customers who are helping the company pay their bills and take a jab at competitors.

Barry Berman, a marketing professor at Hofstra University’s Frank G. Zarb School of Business, told Newsday that in settling to sell a $1 cup of coffee, Starbucks effectively deprives its customers of a “sensuous experience,” that the purchase of coffee at Starbucks becomes merely a pursuit of caffeine.

To bring the point home, Berman comments on the Starbucks guest mindset: “if I’m in line buying a $5 cup of coffee, I don’t want to wait in line behind people buying a $1 cup of coffee.” (full article here)

I agree with Berman completely. But what do you do? It’s no secret that Starbucks has been seeing shrinking numbers lately. There are a couple of options. The painful route: start shutting down many of their stores, and return to their quaint beginnings. But perhaps a less painful route would be to create a new brand that makes it a business of selling cheap, good coffee (think Toyota and Lexus, Pei Wei and PF Chang’s, etc.). That way, the Starbucks brand is not contaminated with pricing gimmicks that smack of Wal Mart and McDonald’s. Not that there’s anything inherently wrong with these two companies, but I just don’t want for Starbucks to become the “low price leader” of coffee. That’s not their brand and it’s not the position they’ve fought so hard to gain. To be admittedly melodramatic, to reduce themselves to bargain prices is to forfeit their brand.

Surely there are strong feelings about this decision on both sides. I’d love to hear your thoughts on the issue.

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Follow Up:
Here’s an interesting report from the NYT (1-31-0 on Schultz’s plan. (No doubt, my blog was instrumental in Schultz’s decision )
Starbucks to Close Stores and End Sandwich Sales

Services Marketing and the Pizza Continuum

My neighborhood borders a large area of undeveloped land. Actually, it used to border a large area of undeveloped land. Just since we moved to this neighborhood last July, we have witnessed the building of a strip mall, a development of patio homes, and some office space in nary more than a half mile of land.

My wife and I have watched the strip mall closely, hoping for some exciting new store or restaurant to be located so close to our house. We watched as the open spaces were filled with a dry cleaner, a liquor store, and what looks to be a home furnishings store. So when we saw that one of the last openings was to be filled with a no-name pizza joint, we watched closely with guarded anticipation.

Two days ago, the restaurant had an “Opening Soon” banner out front. Yesterday, a “Now Open” banner proudly waved at its storefront. I was excited-until this morning. As I drove to work today, I looked longingly at this new potential, only to see the lawn of the strip mall strewn with signs that advertised “$6.99 Large Pizza.” The potentially low quality of such a cheap pizza was not so much of my concern as the positioning the restaurant was attempting. I don’t mind paying less for a pizza, but I do mind going to a “cheap” pizza restaurant.

“Price” is one of the most underrated of the Five (or Six or Seven) P’s of marketing. Businesses assume that people simply want to pay as little for a product or service as possible. (Except, of course, Howard Schultz, founder of Starbucks). But in a marketing context, price has to go well beyond simply guaranteeing the lowest of the industry. Price positions.

When I was in high school, I schlepped pies for a restaurant called “Pay-Less Pizza.” Indeed, the name did say it all. And for about 4 months, Tulsans could buy a very cheap large pizza (around $5.99 at the time). Compare that to the hole-in-the-wall, Savastano’s, an unassuming little pizzeria south of Tulsa that has the ambiance of a dorm room on the freshman floor. This place has the nerve to charge $16.50 for a 12″ deep-dish cheese, pepperoni, and sausage pizza-and there is always a long wait to get in.

Of course, quality is an issue-Savastano’s serves the best deep-dish pizza around—a product that takes roughly 30 minutes to complete, and which stands inches high atop the platter it comes out on. But the point that I want to make is that price is not king, and the primary value of this “tool” is not to pay for the supplies, salaries, etc. that went into the product or service, but to position the product or service in the consumer’s mind. That’s right: the relationship between price and costs is merely incidental. But the relationship between price and positioning is monumental.

Enter Services Marketing.

In services marketing, the “product” is the person—the front-line service employee. Unfortunately, some restaurants shout their devaluation of this essential “product” as loudly as the pizzeria near my house did when they posted gaudy signs in the lawn. Companies do this when they use job applications as tray-liners, or when they post the available shifts on their company message center out front. These companies are saying to the general public, “We care so little about the type of employee candidates we are looking for that we will use one of our most effective recruiting tools as a disposable ketchup-catcher.” I now know how much this company values one of its most significant branding tools: the service-side employee.

Services marketing begins before the employee recruitment process takes place. It has to do with the way employees are sought out. It has to do with the first point of contact between the company and the candidate. It has to do with the value the company places in their application process. There is a message, not only to the candidate, but also to a company’s clients, in the way these things take place. The companies who use applications as tray liners are simply advertising to potential candidates and the rest of their clientèle, “Hey, we offer a $6.99 service product.” And from my experience, the fruits of such internal branding match the value ascribed by the company.

Recruitment and marketing go hand-in-hand. Valuation of the employee candidate is essential to internal branding. And the recruting initiatives of a company speak volumes both internally and externally.

So which end of the pizza continuum is your company on?

I Want to Cheat on the Craftsman Club

In late December 2007, Herb Greenberg deemed Eddie Lampert, Chairman of Sears Holdings, the year’s worst CEO. Of course, Lampert is not actually a CEO, which makes me think that things must have been really bad for Greenberg to be compelled to go outside the fold.

Now, I’m not saying that this notorious award was related directly to Sears’ loyalty programs, but I am pretty sure that Eddie and the manager in charge of loyalty programs at Sears, Roebuck and Co., the well-known retail side of the corporation (which also owns K-Mart) rarely do lunch. And maybe that’s a problem. Let me explain.

I like to work around the house. So, like any other self-respecting amateur handyman-husband, I have more tools than I will ever use. And the majority of my power tools are Sears’ store brand, Craftsman tools. So it just made sense that I join Sears’ loyalty program, the “Craftsman Club.”

The process of joining required a phone call and a 4-6 week wait for a membership number which is absolutely required in order to enjoy the benefits of the Craftsman Club.

I wanted to cheat on Sears right away.

Do you realize how many tools I could have purchased from Lowe’s in the amount of time it took for me to receive this membership number? Do you realize how much I could have spent on Home Depot’s website during the 10-minute obligatory phone call I had to initiate to request a membership card?

Regardless, I was excited weeks later when I received my Craftsman Club card (and membership number), so I got on the website as quickly as possible-at an address that is not clearly printed on the face of the card. I put two and two together and simply got onto the Craftsman homepage in hopes that there was a Craftsman Club link available. There was. The landing page for the Craftsman Club is simply accessed via a link in the upper navigation on Sears’ website-not a bad idea. The landing page itself however does not contain a single link (other than the previously mentioned nav-links at the top of the page). There is simply a box in which to enter one’s membership number.

I entered my membership number, and was presented with a simple e-version of the paper Craftsman Club ad flier that is mailed to members’ houses.

A few things I took away about loyalty programs:

1. Membership in corporate loyalty programs should be initiated by the company based on the buying patterns of its customers. A simple CRM initiative can provide all the information a company needs to identify candidates. Surely Sears does this, but how many products must one buy to be invited?? And why aren’t the store cashiers pushing this program with people like me?
2. The membership process for those not contacted by the company in Step 1 should be super easy! (sorry for the highly technical jargon) Remember, those with less frequent buying patterns at your store are the ones who really could go either way. Make it easy for them to choose your program. I like Dollar Car Rental’s “Dollar Express” loyalty program process: you apply online at an easily accessible link, and you receive a membership number on the spot. The card comes in the mail a little later (read: less than 4-6 weeks), but you can take advantage of membership privileges immediately.
3. You have got to put your primary contact point-the program’s website URL-in a highly conspicuous spot…like the face of the membership card.
4. The “meeting place” for loyalty program members has got to be something special-something that keeps your most loyal customers, uh, loyal. An electronic regurgitation of an archaic collateral format that the member has already seen ain’t compelling.
5. The program’s “meeting place” (its website) must have a community focus. This is a perfect opportunity for loyal members with near-guaranteed similar interests to establish roots and stay for a while. The site should at least have an element of interactiveness (and I don’t just mean the ability to turn electronic pages with one’s mouse).

When Commodities Compete, Branded Service is the Key

You’ve probably heard the news about how McDonald’s is competing directly with Starbucks yet again by installing full-service coffee bars in 14,000 of their locations. You may also have heard about how Starbucks is bringing Chairman Howard Schultz back to take over the CEO role, recently “vacated” by Jim Donald. If you haven’t heard this, let me catch you up:

McDonald’s is competing directly with Starbucks yet again by installing full-service coffee bars in 14,000 of their locations, and Starbucks is bringing Chairman Howard Schultz back to take over the CEO role, recently “vacated” by Jim Donald.

In a recent blog post, Danielle Blumenthal comments on the good and bad of McDonalds’ latest attack. Her “bad” was, I felt, particularly insightful: “it shows how commoditized the Starbucks experience is.”

So, how does one win such a competition? Well, in a commodity service, it all comes down to FLSE’s. It’s been a while since I’ve blogged, so just as a reminder, FLSE stands for Front Line Service Employee. (No, I still have not come up with anything more catchy than that.) If the products are essentially the same, the convenience is essentially the same, and the prices are essentially the same, there’s not a whole lot left on the battlefield. Differentiation must come through the most dynamic (both literally and suggestively) asset: the people who make direct contact with the customer. For the long version, read my paper on Services Marketing and the Branded Service Employee-yes, unabashed self-promotion. Or check out a book I recently started reading entitled Why Is Everyone Smiling? by Bob Spiegelman of Beryl. (Awesome book-surely more coming about it soon.)

I think Starbucks already has this in the bag, and I think that Schultz’s return will guarantee the results. Remember his Jerry Maguire-esque memo from last year in which he expressed concerns over losing the “romance and theatre” of the experience and, even more important in such a commodity service, the “intimate experience with the barista”? These concerns, which were not particularly well-received at the time, are what set one commodity service apart from another, liberating the service from commodity status altogether. And while I can appreciate what McDonald’s is attempting in their service and HR model, I’m not convinced of its efficacy. Starbucks on the other hand is already in the business of differentiated service. I believe that Schultz’s return will only reinforce this model, and will, in the end, win this latest battle and perhaps even lead to the “rebranding” of Starbucks altogether, effectively moving the company into what Blumenthal calls “the ultimate, uncopyable “third space” that is suited for the way we live now.” Should be interesting to see what happens.