Application of elasticity in Starbucks Corporation
Introduction
The concept of elasticity has great application in the decision-making process of a firm. Both production and pricing strategies must consider the level of elasticity of demand for various products. The market behavior of various products can be predicted by determining their elasticity with respect to price and income (Dobson & Palfreman, 1999). The price elasticity of demand helps in the measurement of the extent to which the quantity demanded responds to price changes while the income elasticity indicates how the quantity demanded varies households’ incomes (Opeyemi, 2013). Therefore, price elasticity helps in the pricing decisions while income elasticity helps in the determination of whether a product is normal or inferior. This paper will consider the analysis of the application of the concept of elasticity in Starbucks Company.
Starbucks Company overview
Starbucks Corporation is based in America and deals with coffee distribution through the establishment of coffee houses (Starbucks Company, n.d). The company has an efficient business model that involves the establishment of over 21,000 franchises which span 60 countries. The revenues of the company surpass $ 10 billion every year (Krikorian, 2014). Starbuck has a great brand reputation due to its unique quality standards, and it has Starbucks has continued to expand its production and distribution chains by establishing more franchises which increase its efficiency in the expansion of its operations and customer services (Krikorian, 2014). Additionally, the company’s performance has contributed to its reputation across the world.
Analysis of elasticity in the company
Different companies deal with coffee processing and marketing. Additionally, coffee is substitutable by other products such as tea. Therefore, Starbucks’ product is price elastic since changes in prices are accompanied by significant variations in the quantity demanded. The availability of various substitutes is one of the factors that influence the elasticity of coffee (TermPapers, 1999). Additionally, coffee exists in several brands processed by different companies. Thus, a decision by Starbucks to increase its price will result in a significant reduction in demand as customers shift to its competitors’ brands or the substitutes.
How elastic is Starbucks’ coffee
The coffee brand produced by Starbucks has a small degree of elasticity as the company is well established in the market. The company uses an effective business model that allows it to modify its brands to meet customer expectations (Krikorian, 2014). Due to a high level of customer satisfaction with Starbucks’ brands, customers have become strongly loyal to the product. This makes the company’s product to have low demand elasticity and gives it a leeway to confidently adjust its prices based on the market conditions.
The importance of income elasticity of demand for the Starbucks’ coffee
Income elasticity measures the responsiveness of market demand to changes in households’ income. Consumers adjust their consumption pattern based on the decisions made by the firm (Mitchell, Makienko, 2013). An analysis of income elasticity of demand for Starbucks’ product will help the company in various ways. The company will be able to predict customers’ reaction after any decision is made. For example, the income elasticity of demand will enable the company to estimate the impact of a price increase by estimating the expected change in the total revenue. Additionally, the income elasticity of demand is useful in determining whether a particular decision will have a significant impact on the performance of the firm (Opeyemi, 2013). For example, if a1% change in household income produce more than 1% change in the quantity demanded, the company would contemplate increasing its production to meet this demand.
Elasticity of supply for this product
PES (Price elasticity of supply) measures the relationship between variations in the price of a product and its market supply. Supply can be perfectly elastic, perfectly inelastic or has unit elasticity (Dobson & Palfreman, 1999). Starbucks Corporation must conduct a strategic analysis to determine how changes in prices are likely to affect the quantity supplied of its products. The supply of Starbucks’ coffee is relatively elastic, implying that the company can adjust its supply depending on the market conditions.
Some strategies that will help Starbucks to maximize its revenue and profit
Starbucks Corporation can use various strategies to increase its total revenue and profits. Some of these strategies will be formulated by making several considerations such as the expected changes in consumer behavior as well as the strategies used by the competitors. The establishment of more coffee distribution chains in various countries will enable the company to effectively expand its market as well as increasing its total revenue.
Another strategy that will help to maximize the revenue and profits of the company is the direct exportation of its products in countries where coffee is not produced in large scale since competition with local firms will be low. Starbucks should also engage in intensive market research and analysis to identify cost -effective technologies that can enable it to reduce the production and other costs significantly. Cost reduction will allow the company to offer highly competitive prices and increase demand for its products in the global market.
References
Dobson, S., & Palfreman, S. (1999). An introduction to economics. New York: Oxford University Press.
Mitchell, T., Makienko, I. (2013). Making Price Elasticity A Useful Metric For Maximizing Profit. American Journal of Business Education (Online), 6(6), 565-572
Krikorian, M. (2014). Business overview: Why Starbucks deserves your attention. Retrieved January 15, 2017, from http://marketrealist.com/2014/01/business-overview-starbucks-deserves-attention/
Opeyemi, A. O. (2013). The Theory and Applications of Elasticity: A Study on Consumers in Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria. American Journal of Economics, 3(6), 313-321.
Starbucks company profile. Retrieved January 14, 2017, from https://www.starbucks.com/about-us/company-information/starbucks-company-profile
TermPapers, (1999). Supply, demand and price elasticity of coffee. Retrieved January 14, 2017, from https://www.collegetermpapers.com/viewpaper/1360999044.html
