Q: You are the owner of a small independent chain of coffee houses competing head-to-head with Starbucks. The retail price your customers pay for coffee is exactly the same as Starbucks. The wholesale price for roasted coffee beans has increased by 25%. You know that you cannot absorb this increase and that you must pass it on to your customers. However, you are concerned about the consequences of an open price increase. Discuss three alternative price-increase-strategies that address those concerns


Overall a "Hold objective – Maintain market share or Match comptitor pricing is assumed. (2 points)

While price strategies are subject to mid- to long-term perspective firms need to manage prices short-term. Managing prices changes includes an understanding of the circumstances of the price change, possible tactics to react and to estimate the likely competitor reaction. (3 points) The options are 

  • a straight price jump, (2 points)
  • a staged price increase, giving lower discounts or (2 points)
  • unbundling of existing offers (e.g. coffee and Danish at a promotion price).(2 points)

When competitors are initiating price changes, companies need to analyse appropriate reactions. (2 points) Three issues are being considered: when to follow and when to ignore price changes and whether the reaction should be quick or slow. In this case the reaction should be “follow” due to rising cost and the reaction should be fast to fix the margin. (2 points)