Computer Skills for Economic Analysis

1

Jessica Collins

Economics and History

Computer Skills for Economic Analysis

Dr. Myers

9/7/09

Why are people willing to spend more money for a Starbucks coffee versus a normal cup of coffee?

Abstract

In today’s society, coffee is a commodity in high demand, especially when it is paired with a pleasant buying experience and taste. People are willing to buy Starbucks coffee two and three times a day at an inflated price because of the care they receive, the addictive ingredients in coffee such as caffeine and sugar and the overall quality of the coffee. The economic benefit of this entire experience is higher than the economic cost of the coffee itself making it worthwhile for the average consumer.

Introduction

Every day business people, workers, students, parents and many others grab a cup of coffee. Whether this is to start the day off right or simply an aid in waking up early, coffee has become a highly demanded good. Although this good can be consumed at home, at a local café or even at work itself, many opt to buy this commodity from Starbucks at a much higher price. Priced at a premium, Starbucks was, on an average, over three times costlier than that sold by local cafes. “A basic coffee that costs $1.75 at Starbucks could be bought for 50 cents at the local café.” (Verma 2005) Consumers are willing to spend three times the cost of an average café coffee because of the expedient service, personal care, overall environment and beverage taste that Starbucks offers.

Analysis

Starbucks provides service that is both personalized and expedient which is beneficial to the consumer. In today’s fast-moving society, prompt service is necessary for efficiency. While local cafes offer a cheaper price for a cup of coffee, many require sitting down and ordering, taking time out of an individual’s day. Similarly, brewing one’s own pot of coffee, although cheaper, takes time and effort on the individual’s part. At Starbucks, baristas make orders to a consumer’s specifications in a significantly reduced amount of time. “Consumers in the U.S. did not seem to mind paying the sum, pointing out the ease with which Starbucks baristas attended to requests like ‘I’ll have a grande low-fat triple-shot half-caf white-chocolate mocha, extra hot, easy on the whip cream and I’m in a rush.’” (Verma 2005)[1] This expedient and personalized service to a consumer is beneficial in that their time is saved and they have a high satisfaction.[2] By buying a cup of Starbucks coffee, their marginal benefit has increased. As consumers responded, the cost of the beverage is far outweighed by the marginal benefit they receive through buying it from Starbucks as opposed to an average coffee vendor.[3]

In addition to special attention given by baristas, the overall atmosphere that Starbucks creates for the consumer encourages them to buy regardless of the higher price. “In some cases the place, or more specifically the atmosphere, is more influential than the product itself in the purchase decision.” (Milliman 1986)

This is also because of marginal utility. By simply buying a cup of coffee, an individual has the opportunity to enjoy the environment within a Starbucks store. “[It was] realized that apart from coffee, people came to Starbucks for the ambience- the music, the comfortable velvety chairs, the smells and the hissing steam.” (Verma 2005) As Starbucks added these and more enhancements to the restaurant atmosphere the revenues steadily increased, showing the consumers response to the additions. For the individual, the marginal utility of buying a cup of coffee or buying an additional cup of coffee during the day not only increased satisfaction through the purchase itself, but also through the environment which an individual had the opportunity to enjoy.[4]

Individuals are willing to buy Starbucks at a higher price because of the quality of the coffee and its addictive ingredients. In the store, espresso and coffee beans are freshly ground each morning with perishable ingredients stocked accordingly. This contributes to the strong taste of a cup of Starbucks. (Starbucks Corporation 2004) However, many Starbucks drinks contain caffeine with many including one or more shots of espresso for taste. These ingredients contribute to a consumer’s draw to Starbucks versus the average cup of coffee. In the rational model of addiction, the utility the consumer derives from consumption depends not only on the quantity consumed, but also on the degree of addiction. […] Thus, current consumption affects future choices. Consuming the good now increases it’s desirability in the future. (Nilss Olekalns 1996) This idea is also shown in figure 2. As more and more choices of drinks and specialty drinks were added over the years 1994 to 2004, there became more options of drinks with caffeine or espresso, increasing sales and ultimately, revenue. (Starbucks Corporation 2004) Therefore, a cup of Starbucks coffee is more desirable, especially over time, to a consumer than is a normal cup of coffee.

Consumers are willing to buy a cup of coffee from Starbucks, even multiple times a day, at a much higher price because the marginal cost is offset greatly by the marginal benefit. Not only are consumers given a delicious and captivating beverage, they are also given an enjoyable experience and exceptional service. An individual, while gaining a comparable product by buying an average cup of coffee at a much lower price, is not enjoying as high of a marginal benefit as he/she would buying a cup of Starbucks.

Works Cited

Milliman, Ronald E. "The Influence of Background Music on the Behavior of Restaurant Patrons ." Journal of Consumer Research, 1986: 286-289.

Nilss Olekalns, Peter Bardsley. "Rational Addiction to Caffeine: An analysis of Coffee Consumption." Journal of Political Economy, 1996: 1100-1104.

Starbucks Corporation. October 2004. http://www.starbucks.com/aboutus/timeline.asp (accessed September 8, 2009).

Verma, Mridu. "Starbucks in 2005: Sustaining Growth." ECCH The Case for Learning. 2005. http://www.unisanet.unisa.edu.au/Resources/LCB004/Strategic%20Management/Case%20studies/Starbucks.pdf (accessed September 8, 2009).

[1] At Starbucks, each drink has a specific name and specifications for each order. For example, a tall is the equivalent of a small drink, a grande is a medium and a venti is a large. For each specification such as additional shots of espresso are stated with special abbreviations.

[2] Marginal Benefit- The amount a consumer gains for the consumption of an additional unit of a good

[3] Marginal Cost- The cost associated with the consumption of an additional unit of a good

[4] Marginal Utility- The utility, or overall use of an additional unit of consumption to the consumer