A hot brand made of a great blend of ingredients:
- Quality coffee
- Warm, relaxing environment
- Cool swag that makes for awesome gifts
But it still begs the question – why is Starbucks so much more expensive than other coffee shops essentially offering the same quality of coffee?
According to Brian McManus, the average markup for coffee is 150%.
The base cost for a $1 cup of drip-coffee is about 40 cents while an espresso costing $2.50 costs just under a dollar to produce.
Despite what Starbucks’ marketing would like to have you believe, their beans are roasted no differently than many mom-and-pop shops and the quality of the bean is the same.
So that can’t be it.
Some Starbucks junkies would argue that the price is in the premium service and ambience.
Yet, you look at the average indie coffee houses and their decor is pretty swank too and the baristas know a thing or two about being friendly and outgoing, so that can’t really be it, can it?
So what is the real reason for Starbucks to have higher prices than any of their competitors?
Tim Harford, author of The Undercover Economist nailed it down to…
Public transportation – namely, subway stations.
How does that work?
First, Starbucks (as with so many other businesses) and the landlords that rent out the space for enterprises like Starbucks know how valuable being close to a high-foot traffic zone like a subway station happens to be.
Starbucks is actually taking a haircut on profits with these locales, but they do it because they know the mom-and-pops can’t afford to be anywhere near them.
So when thousands of commuters are tired and grouchy from riding in an over-packed subway car, and immediately see a Starbucks when they come out of the station, their first instinct is to go in and get that comforting coffee right away. It’s early in the morning and they can’t be bothered to walk one or two blocks to find coffee that’s a dollar cheaper.
What about the Starbucks that aren’t close to a subway station?
They get their business from the indoctrination that is produced by the subway locations.
It only takes 3 weeks to start a new habit.
So in the end Starbucks does not make money because of better coffee, cute baristas or ambience.
They make their money from getting high-priced real estate their competitors can’t afford.