This week Starbucks reported some very strong financial results.
Overall operating income for the third quarter improved from $14 million in 2008 to $199 million in 2009. In the U.S, profits more than doubled. This is very impressive because revenues in the U.S. were down during the same period by -4%. Operating margin in the U.S. improved dramatically, from a paltry 1.7% in Q3 2008 to 9.3% in Q3 2009. This is impressive indeed.
There were clearly a number of things that contributed to the strong results. One of the important drivers was segmentation based pricing.
Earlier this year Starbucks made some significant pricing moves; the company rolled back the prices on regular coffee drinks and increased prices on fancier drinks such as caramel macchiatos.
I suspect this pricing move aligned perfectly with customer segmentation. Traditional drip coffee drinkers are a more price sensitive bunch. They appreciate both quality and price. Reducing prices for this group will sustain loyalty. The caramel macchiato crowd appreciates the customer experience. These folks are willing to pay. Increasing price for this group is a good way to build margins with little volume risk.
Segmentation is a powerful tool. When a company uses the technique to modify pricing and optimize margins, it can become a key profit driver. The strong results at Starbucks demonstrate how understanding and capitalizing on customer segmentation can drive impressive results.