Costs Strategy Habits

 Pricing Strategy Patterns Article

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Costs Strategy Habits

The desire to clean prices has been posited by coffee manufacturers as one reason for not completely adjusting prices to within costs. Within an investiga- tion by the British isles Competition Percentage, Nestle left a comment: Starbucks speaker Helen Chung stated, " We do not transform our rates based on initial fluctuations inside the coffee market” (Seattle Times, December several, 1999). P& G mentioned in conjunction with their 2004 price increase that P& G " raises product prices when it is obvious that product price boosts will be sustained” (Associated Press, Dec. 15, 2004). Espresso manufacturers typically cite actions in futures prices because moti- vation for cost adjustments, additional corroborating their very own stated wish to smooth prices.

Not evident coming from market-level uses is the fact that each manufac- turer prices often remain fixed for long periods of time. Figure 2 presents a normal manufacturer-price series for Folgers coffee.

Historically, adjustments in prices occurred primarily when coffee asset prices happen to be relatively volatile. Table 5 presents the standard devi- rules of each week coffee item prices by year, in addition to the average regularity of producer price changes during the year. These kinds of statis- 13

Cost Pass-Through in the U. S. Caffeine Industry / ERR-38

Economical Research Service/USDA

Figure a couple of

Atypical inexpensive price series


a few





10/29/97 10/29/98 10/29/99 10/29/00 10/29/01 10/29/02 10/29/03 10/29/04 Wholesale price

Coffee commodity price

Price per ounces (cents)

Origin: Author's analysis of Promodata wholesale-price data and New York Board of Trade product data.

" In making cost changes, NestlГ© was inspired first by need to prevent price volatility that could confound the customer and become difficult intended for the trade to manage. Subsequently, NestlГ© aimed to smooth price increases to stop sharp changes that could harm the self confidence of the buyer. The company said that the history of recent value changes, provided below, led to outcomes which were total more satisfactory to consumers than prices which in turn changed more often in response to changes in green-coffee-bean

prices, which will fluctuated daily” (United Empire Competition Commission rate, 1991). Page 2

tics calculate the quantity of price modifications, not including the retail price adjustments associated with trade special offers.

There exists a strong marriage (correlation pourcentage of zero. 84) between frequency of price alterations at the maker level plus the volatility of coffee bean rates over a offered period. For instance , the lowest regular deviation of weekly item costs and the lowest normal frequency of manufacturer value adjustments the two occur in 2003, while the maximum stan- dard deviation of weekly asset costs and the highest typical frequency of manufacturer cost adjustments result from 1997.

The data demonstrate, that in certain years, cost adjustments were very occasional. In the year 2003, the average rate of recurrence of maker price alterations in the year within the different UPCs was zero. 2 times as well as the standard change of weekly coffee bean prices was about 0. 1 cent. Taking into consideration that green-coffee-bean costs constituted about 40 percent of marginal costs in 2003, it indicates that the standard deviation of marginal costs was about two percent during that year.


Another way of analyzing your data is to assess the frequency of selling price adjustments around brands (table 6). The frequency of price alterations is relatively similar across the 3 major espresso brands: Folgers, Maxwell Home, and Hillsides Bros. Starbucks is an outlier in having very few cost adjustments. 1 potential justification for Starbucks' behavior might be that it is a superior product, having a considerably larger price range and perceived top quality.

Table 7 uses Nielsen Homescan statistics in summary the household profits characteristics of shoppers of different brands of coffee and...