brand coffee makers have some market power to set prices above the generic value brands, Starbucks operates under monopolistic completion where there are many small firms that sell similar products, therefore they do not exert complete market power in the industry.
Starbucks has, up until now, been able to take advantage of premium pricing but according to an article in Business week, “Starbucks is looking to rebound from dismal US sales as more consumers cut back on spending. In its first-quarter report last week, same-store sales - a key indicator of a retailer's performance - dropped 10 percent. That's worse than the 8 percent decline in the fiscal fourth quarter.”
Because there are a lot of options for the more cost conscious consumer looking to save money on coffee purchases, Starbucks felt the need to make a price change. After all McDonald’s Corp is offering new, lower-priced specialty coffee drinks and Dunkin' Donuts is advertising value-minded deals. So when Starbucks founder ,Howard Schultz, decided to offer a $1 cup of coffee in certain stores to compete with McDonald’s and to increase existing store sales, some critics thought it may have done more harm than good. Their thoughts were that the decrease in price may have implied that there is nothing more to Starbucks than coffee. By offering a cheap cup of coffee, Schultz may be reducing the company to commodity status, and the natural result being a price war. No longer is buying a cup of Starbucks coffee an experience. But because coffee is an elastic product in which price controls demand, Starbucks may want to consider a small decrease in their price to increase demand which will increase revenue and allow them to be more competitive.
Pricing decisions also serve as a marketing tool and is one of the most compelling attributes of product positioning. It makes a very clear statement about how a consumer should perceive a product. Starbucks cannot become the low price leader; it takes away from the brand image and ambience that they are known for.
When Starbucks became a major competitor, it was because the company’s environment was like none other and focuses on the benefit of the customer. People considered Starbucks as a “third place” after home and work. Howard Schultz’s vision was not to build a coffee shop, but instead build a company that treats people with dignity and respect. He wanted to establish a place where you can go relax and have a delicious coffee and smother yourself in a comfortable seat that makes you feel like you’re sitting on your living room couch. Ear pleasuring music will be consuming your background and make a customer feel as if they are at their home away from home. Or a place where you can bring your laptop and get some work done if there were any distractions at home or work. Starbucks is also the type of place where you can meet a friend, stay and talk for hours, and feel like you’re the only two people in the place. Customers and employees as well receive an experience for Starbucks, in which Starbucks constantly strives to pleasure everyone around them. The environment is so inviting, relaxed, and probably trendier than most people’s living room, and at the same time, quick paced if you need a coffee to-go. Starbucks has set an environment where the relationship between customers and employees sets the company apart from other coffee shops. Starbucks sets a different type of trend than any other coffee house that seems to be contagious to customers and even other companies.

One area of business that Starbucks spends the least amount of their money on is its advertisements compared to competitors. Schultz believes that experience beats ads. In an article from Businessweek.com “Starbucks: Keeping the Brew Hot”, explains that given that philosophy of experience beats ads, conventional advertising has been no real significance to the growth of the Starbucks brand. Rather, it has been the store experience