73. Starbucks: A Behavioral Economics Analysis

Six months ago, I did my behavioral economics analysis of Costco, which has zoomed into the 11th most downloaded episode of this podcast. My analysis of Apple Card is right above it, so we can say they share the 10th spot. Today, I’m doing another behavioral analysis of a business: Starbucks.  It’s not a coincidence that we are getting into Starbucks right around the holiday season. They have definitely done some things very right when it comes to the holidays…and I will touch on the controversy they’ve seen as well. In the episode we will talk about featured drinks, red cups, nostalgia, pricing strategy, scarcity…and a whole lot more. If you’ve been listening for a while, you know I love Starbucks. Not just for their chai tea lattes and marshmallow dream bars, or because I live in Seattle…but because of the amazing things they have done as a company to shape the world we live in today. Starbucks is a dynamic and large company with a plethora of examples I could have chosen to talk about today.  There isn’t time for everything. Instead, I have picked some of my favorite pieces for the episode – ones I think you will find valuable and interesting and be able to apply to your own business (whatever that may be). Whether you work for a global business like Starbucks, are a solopreneur or an academic or somewhere in between…you can learn from the smart things the company has done and how they have understood human behavior. In the episode, we will dig into their star rewards program, as well as featured drinks and products – from PSL to the Unicorn Frappuccino, as well as the coveted red cups (which just launched a couple days ago by the time this comes out), the personality and overall brand choices in their logo, locations and on social media and, of course, pricing. Show Notes: [04:31] Without the original brand and pricing, Starbucks would be just another coffee shop. [05:04] It really is an amazing feat when you think about the commoditized industry Starbucks was facing before it launched its first store. [06:04] One of the big aspects Starbucks had to overcome was the pricing anchor. The first number you hear (or a standard price) is the anchor, and the brain adjusts from that to determine what is reasonable. [07:02] The way we act is driven by our subconscious, and when you ask a logical question to the conscious, it doesn’t answer in a way that reflects true behavior. [07:19] To justify a higher price, Starbucks needed to invent a new category. [07:59] This wasn’t just about coffee – it was creating community…a “third place” – an experience that was something more.  [08:21] Functional fixedness: when all you have is a hammer, everything looks like a nail. [08:48] When you look at what everyone else is doing, herding will keep you stuck. [09:01] Howard Schultz and Starbucks took a step back, got out of their own way, and created a new category which changed the conversation about coffee. [09:12] Asking good questions can help you get there. [10:01] Ask questions that aren’t about what everyone else is doing. Don't get stuck in the herding or the anchors. Instead, it is about looking to what could be, and asking “How might we?” or “Why?” [10:07] For your business, look at all the things you do because everyone else does. Is that serving you well? What would make your customers excited? Delighted? [10:29] Price is never about price. It's about all the things that come to for the price. Starbucks is a fantastic example of that. [10:56] Studies about wine show that people get more enjoyment from drinking wine that is more expensive. [11:37] When you can break free from the herd and make it about something more, your business can reap benefits beyond what you even imagine. [12:13] Starbucks changed the game with all of their drink options. The first drink they made famous was the Frappuccino. [13:38] The brain gets what it expects. If you expect Frappuccinos to be delicious and you get something similar by a different name, it won't be as good. [14:46] Starbucks started the original pumpkin spice latte or PSL. The limited nature triggers scarcity and loss aversion. [15:53] For scarcity to be a value in your business, you actually have to take something away. [18:43] Starbucks is constantly testing, and they're not afraid to have something popular only available for a limited time. [19:20] The new thing that started this week is the red cups. Keeping traditions alive is something that Starbucks does amazingly well. [20:03] For many, the red cup has become part of a tradition on holidays. When you become a lifestyle brand, you bear the responsibility of becoming a part of peoples’ lives. [21:34] Starbucks had a set of filters that every brand aspect had to pass through. These included being handcrafted, artistic, sophisticated, human, and enduring. [23:46] Taking the time to stop and evaluate what is really going on is important. [25:11] When you think about the value of the brand, it's about the overall experience with the brand at its core. [26:33] Your business should learn to watch the trends. What is going on that is cool and interesting and that everyone is talking about, and how would it look if you were to incorporate that into your offering? [28:00] Star rewards are one of the smartest things Starbucks could have done for their business. In many ways, this built upon the wildly popular “treat receipt” where you can get a discount when you buy a second item after 2pm or 3pm. [29:06] The star rewards model is built to create habits for users and increase visits. [34:03] Star rewards are a smart balance of loss aversion, scarcity, relativity, habits, and more. All executed through a series of experiments to see what is bringing the most value to the company and its customers. [34:42] Don't get sucked into your brain’s natural tendency to herd. Just because everyone else is doing something one way, doesn’t mean it is RIGHT to do so. [34:59] Take a step back and think bigger. Look to the future and the possibilities. [35:11] Scarcity is a powerful tool when used correctly. Especially when paired with loss aversion to help people choose your product. [36:05] Making your brand a habit is about more than caffeine and sugar. Starbucks puts effort into getting more customers to choose them more often for more things. [37:59] Next week, we are digging into the concept of time pressure. Thanks for listening. Don’t forget to subscribe on Apple Podcasts or Android. If you like what you heard, please leave a review on iTunes and share what you liked about the show.  Links and Resources: Episode 47. A Behavioral Economics Analysis of Costco Episode 42. Apple Card: A Behavioral Economics Analysis A Starbucks Barista Asked Me This 1 Simple Question, and Using It May Be a Great Way to Boost Your Sales Every Starbucks Growth Strategy Is Working 30 Interesting Starbucks Facts and Statistics (2019) | By the Numbers Episode 11. Behavioral Economics Foundations: Anchoring and Adjustment How Starbucks Transformed Coffee From A Commodity Into A $4 Splurge Episode 53. An Overview of Lazy Brain Biases Episode 19. Behavioral Economics Foundations: Herding Episode 4. Questions or Answers Episode 5. The Truth About Pricing Starbucks Didn't Invent the Frappuccino. Here's Who Did. Starbucks Has Made An Insane Amount Of Money From PSL Sales Starbucks Red Cups 2019: When Do Christmas Holiday Drinks Start Going on Sale? A Brief History of Starbucks’ Holiday Cup Controversies Episode 43. A Guide for You to Create a Brainy Brand Episode 44. Rebrand, Refresh or Reinforce? 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