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Sunday, January 08, 2006

Tim Harford And The Economics Of The "Short" Cappucino

Starbucks doesn't publicize it, but they do sell a "short" beverage size - an 8 oz. drink. For example, a short cappucino sells for $2.35 instead of the $2.70 charged for the 12 oz. tall size. It has the same amount of espresso, just less milk. One of my colleagues used to regularly order a short coffee - he said all he wanted was the 8 oz., so why pay the higher price for coffee he didn't want or need?

In his latest Slate piece, Tim Harford of "The Undercover Economist" explains the economics behind the "short" cappucino:
This is the Starbucks way of sidestepping a painful dilemma over how high to set prices. Price too low and the margins disappear; too high and the customers do. Any business that is able to charge one price to price-sensitive customers and a higher price to the rest will avoid some of that awkward trade-off.

It's not hard to identify the price-blind customers in Starbucks. They're the ones buying enough latte to bathe Cleopatra. The major costs of staff time, space in the queue, and packaging are similar for any size of drink. So, larger drinks carry a substantially higher markup, according to Brian McManus, an assistant professor at the Olin School of Business who has studied the coffee market.

The difficulty is that if some of your products are cheap, you may lose money from customers who would willingly have paid more. So, businesses try to discourage their more lavish customers from trading down by making their cheap products look or sound unattractive, or, in the case of Starbucks, making the cheap product invisible.
Click here for the whole thing. Very cool, and combining two of my favorite subject: coffee and economics.

Out of curiosity, I just tried to order a short cappucino at my local Starbucks. They said they don't do "shorts" at that store. I wonder if it was just that store, if it was because it was a Barnes and Noble affiliated one, or if it's because the jig was up.

All this reminds me (after all, I did get up by 6:00 this morning - Woo Hoo!). I haven't had my morning medication yet. Time to go brew some...

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