Case Study: Mistakes Companies Make While Losing Profits



For the average businessperson, economic cycles can make it difficult to manage costs, threats from competition, and demand and supply.

Oy vey! Not to mention maximizing prices for products and services. That’s certainly true for restaurant chains where discounts and promotions occur frequently.

Starbucks, of course, is known for its higher-priced coffee and its profit margins have been good in recent years.

But the McDonald’s-like value meals and related issues at Starbucks provide a prospective classic business-school case study regarding price optimization and maximum profits.

bwi ambro www.freedigitalphotos.netMany businesses can learn from the situation in which the coffee company found itself.

Thanks to a good store environment and consistent quality, I confess to having enjoyed countless cups of the company’s coffee over business discussions with associates. In my travels, Starbucks has been a home away from home whenever I wanted a good cup of coffee.

There were once questions about the company’s decline in profits following a robust 20 years.

Mega growth

The company and investors were delighted that the fiscal 2009 $175 million in cost-savings in helped Starbucks’ Q3 earnings improve to $151.5 million compared a loss of $6.7 million the same period the year before.

The company’s profits had declined in significant double-digit percentages, prompting Starbucks to layoff thousands of employees as the company closed nearly 800 stores.

However, cost-savings are only part of the profit-making formula.

Starbucks appeared to be on the defensive regarding McDonald’s strategies. First, it was McDonald’s new coffee quality. The, Starbucks announced its free WIFI — like McDonald’s.

…cost-savings are only part of the profit-making formula.

Exponential decline

Starbucks seemed to act as if it was invincible by growing to epic proportions – it was everywhere and created a happy-buying environment for coffee lovers. The company became famous for not charging customers when it took a few minutes to brew their customers’ purchases. Cheerful baristas treated customers as if serving them drinks were important daily events and rituals.

But along with the economy, it seemed customer service sagged. My friends and associates expressed dissatisfaction about the company’s customer service.

Starbucks has recovered but it suffered unnecessarily. In my frequent visits, it became rare to hear a barista say thank you to customers or prevent buyers’ remorse. Mediocre service negatively influence customers’ perceptions of Starbucks’ value. That’s why customers most-often generously tip jovial Janes and Joes.

Economic downturn or not, consumers who love a company’s services and products, will spend their money. When loyal customers shop elsewhere, my research shows 70 percent of the time it is because the customers feel taken for granted.

Lower-priced value meals are a good idea but they weren’t the complete solution. At upscale stores or even low-end fast-food restaurants, eventually, it is hard for customers to swallow mediocre service. In a situation where an upscale company slashes costs – without providing noteworthy customer service – it is not conducive to sustainable profits.

Motivating perceptions

Eighteen percent will only buy if you’re selling at the cheapest price in the marketplace. Yes, one in five prospects will be hardcore — they always insist on paying the cheapest price — no matter what. Focus on people who are motivated by price and value.

For them, here are the five value perceptions of what your customers sub-consciously think in motivating them to buy from you:

Employees, Spokespersons – 52 percent. The key characteristics are integrity, judgment, friendliness and knowledge. Remember, about 70 percent of your customers will buy elsewhere because they feel they’re being taken for granted by your employees. And customers normally will not tell you why they switched to your competitor.

Image of Company – 15 percent. They are concerned about the image of your company in the community. Cause-related marketing is a big plus in forging a positive image. So is cleanliness and good organization.

Quality of Product or Service Utility – 13 percent. The customer is asking the question – “What will this do for me?”

Convenience –12 percent. Customers like easy accessibility to do business with you. That includes your Web site, telephoning you, and the convenience of patronizing your business.

Price – 8 percent. Price is important, but it’s the least concern among the five value-motivating perceptions.

Two other lessons about profit:

  1. Too many company locations always cannibalize sales from each other.
  2. It’s easy to lower prices but it’s difficult to raise them.

From the Coach’s Corner, here are more profit and pricing tips:

For Stronger Profits, Avoid 11 Typical Pricing Mistakes — In general, how can you manage the sweet spot – between your price-optimization and costs? Here’s how.

Want More Business? Build Trust with Consumers…Here’s How — With consumers trying to cope with information overload – you will increase sales with long-term customer loyalty – if you build trust by using best practices. It may be an obvious approach, but it’s confirmed by a 2012 study that shows 84 percent of the respondents declared trust must be warranted before they buy.

8 Strategies When Sales Drop and Costs Cut into Your Profits — If your sales are down and costs are hurting your profits, you’re certainly not alone. This is still not a good economy for many sectors. The irony is you can do something about it.

Checklist — 10 Tips for Leadership Tips in Business Profit — In the new economy — a former Great Recession that seems to linger and linger — a company will succeed if it’s a leader in generating capital. Unfortunately, this economy has become a zero sum game for many businesses.

“Profit in business comes from repeat customers, customers that boast about your product or service, and that brings friends with them.”

-W. Edwards Deming


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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry. 




Photo courtesy ambro www.freedigitalphotos.net

Seattle business consultant Terry Corbell provides high-performance management services and strategies.