Due to what? OK, hang on. We will get to the Weber Fechner Effect in a bit.
But before that, a few words on the long relationship that I’ve had with what was one of my favourite brands – Starbucks.
Somewhat reminiscent of Harry & Sally’s relationship in that movie, my relationship with Starbucks was also a long one, with some steady phases and some moments of separation too. From my first taste of the brand way back in the late nineties in the US, to enforced breaks as I had to move to an India devoid of Starbucks, to brief reunions during business trips to Singapore, our relationship has endured for the better part of twenty years.
In the meantime, I became a big admirer of what Howard Schulz did with the brand that he acquired from its original owners way back in 1985, building it into a global behemoth. Starbucks took a category that was essentially a commodity in the USA, and pulled it up by its socks to transform it into a premium lifestyle category. Confounding skeptics who couldn’t imagine why Americans would pay more than a dollar for a cup of coffee, Starbucks was able to sell the Italian coffee-shop experience to Americans, who loved it so much that they willingly coughed up $4 or more for their daily dose of caffeine.
Over the last few years, I have become a regular coffee drinker, and am just a slight push away from becoming one of those annoying coffee snobs (though some friends think that I have already crossed that line). Having learnt to use a French press, I tend to brew my coffee at home. And since the last five years or so, I have been buying my coffee beans from Starbucks.
Now Starbucks was selling these beans for Rs. 750 per 250g, which is pretty expensive compared to other brands. But then they would sweeten the deal with a free coffee (approximate price Rs. 300) every time you bought a pack of beans, which brought the effective price down to a much more reasonable sounding Rs. 450. I was comfortable with this bit of jugglery, and have been a very consistent buyer of their coffee beans.
The breakup
Like most breakups, ours came as a surprise to me too.
Confident that my Starbucks card had sufficient balance, I ordered my customary pack of beans, only to be informed by the “partner” that I would need to load some more money into the card. It turned out that Starbucks had taken a huge price increase of almost 50% on the pack, taking it up from Rs. 750 to a mind-boggling Rs. 1100 ! I was so pissed off that I walked straight across to the other end of the market and bought a packet of coffee beans from the Blue Tokai cafe there.
This happened about a month ago, and I am pretty sure that I will never buy coffee beans from Starbuck again. Well it is a partial breakup – I still have the occasional cup of coffee there every once in a while. But obviously the relationship is no longer the same, and it is difficult to get over the sense that the brand has somehow been unfair to me.
The Weber Fechner Effect
So why did I react this way? This is where Messers Weber and Fechner come in. They noticed that human beings always evaluate price proportionately, and not in absolute terms. They decided to take full credit for this observation by naming the phenomenon after themselves.
What do I mean when I say that we evaluate prices proportionately? Let’s take an example. If you were to notice an offer of Re.1 off on a Rs. 10 pack of Lays potato chips, it would seem like a pretty good offer, right?
But would you have the same reaction if you were offered the same Re. 1 off on an iPhone worth Rs. 99,900, as you can see in the Amazon screenshot below?
According to traditional economics, Re. 1 has the same absolute value regardless of the situation, so if you had thought that the offer on the Lays pack was good, you should have reacted the same way to the iPhone offer. But that is not how our minds work. We look at prices proportionately. So while Re. 1 on a base of Rs. 10 looks decent, Rs. 1 on the iPhone price looks ridiculously small. This is the Weber Fechner Effect.
So what could Starbucks have done differently to retain a customer like me? Well, if their brand manager had taken our pricing course, or had simply gone and asked Sharmajee from the the neighbourhood kirana shop, they would have been advised to be just a little bit patient to get to the eventual Rs. 1100 target price.
How to utilise the Weber Fechner Effect to your benefit
Sharmajee (& I) would have advised them to start off with a Rs. 50 price increase. Rs. 50 on a base of Rs. 750 does not look too bad, and most buyers would have continued to buy the coffee, maybe with some grumbling about the state of the economy. After all, we live in a high inflation country, and we do expect prices to rise over time. After a few months, the brand manager could have taken another inconspicuous price hike of maybe Rs.75, again without losing too many customers. The smart brand manager could have progressed in this manner till they reached the desired end price. Of course, this would have taken more time, but this would also have helped them get to that price point without having lost a significant proportion of their customers.
And that is the key lesson of the Weber Fechner Effect. If you have to increase prices, then do so in small enough increments so that the consumer doesn’t really notice or mind the increase. And if you decide to drop prices in order to attract more consumers, then make the drop large enough to look significant as a proportion of the base price. We are now so used to seeing discounts of 20%+ that it is pretty certain a 5% price drop will not excite anyone to move to your brand.
So there we are. A simple understanding of the buyer’s psychology would have helped to prevent Starbucks from making what seems to be a fairly fundamental pricing mistake, which is surprising for a company that is generally so sophisticated a marketer.
And how is my new relationship progressing? While I did hook up with Blue Tokai on the rebound, their coffee has turned out to be pretty darn good, so this could be the beginning of another long relationship. C’est la vie, I guess.