Starbucks Price Increases: Are They Leading or Signaling?

Starbucks is raising prices. In my last blog post, I discussed the pros and cons of that decision. In this post, let’s look at some more advanced issues.

When competitors announce a price increase, they typically do one of two things: They lead or they signal.

Firms lead when they are price makers. They are essentially saying, “I don’t really care what my competitors do. I’m raising my price anyway.”

Firms signal when they are trying to communicate with their competitors. In this case they are saying, “I announced this price increase. If you follow, we both will have higher prices and we both will make more profit. If you don’t follow, I will bring my prices back down.”

It seems obvious that Starbucks is a price leader. They don’t care what other coffee companies charge. Heck, I can buy coffee at McDonald’s for $1 and it even tastes pretty good … but I don’t. I go to Starbucks.

Let’s say you own a coffee shop, and Starbucks has raised their prices. What should you do? You want to make an educated decision. How much do you think your sales will increase if you leave your price alone? I’m guessing not much. The best decision is to probably just follow the leader. They will make more money, you will make more money. Win-win.

Remember, there are two sides to this “implicit communication.” One firm announces price increases. They often do that to get other firms to follow their lead. When you want to raise prices, and you are in a competitive price market, announce your intentions. Watch for followers.

The other side is listening to the “implicit communication” coming your way. Again, if you are in a price-competitive market, watch your competitors closely. When they announce price increases, follow them.

The aim of business is to make more profit, not to make more profit than your competitor. Play nice and everyone prospers.