Companies that Retain Pricing Power Make for Great Investments. Here are 3...

I am a big fan of Starbucks coffee since I first had it in Boston 15 years ago while on a vacation.

What Chai is to Indians, having a Starbucks or Tim Hortons coffee is to Americans and Europeans.

The only difference is that tea is a commoditized product in India. There is no national brand for it. However, in developed countries, Starbucks has replaced the word coffee, even though the ease of making tea and coffee is the same everywhere.

Over the weekend, I had visited Starbucks to pick up my favourite coffee. My orders are normally standard which is cold coffee with caramel to beat the summer heat and the hot chocolate in the winters.

Now let's get to business... Starbucks adopts an amazing marketing and business strategy where the price difference between its smallest size, the one marginally bigger than it and the largest cup is barely anything in absolute terms.

The tall coffee comes for Rs 275 while the Grande (which is a size bigger) comes for Rs 305 and the Venti (largest cup) comes for Rs 335.

Now as a customer, would a Rs 25-30 increase make a difference? The obvious choice being Grande.

That is precisely the reason why the product mix for Starbucks is skewed towards the Grande Size. It is a win-win for both, the company and the customer.

When you ask someone the price of premium Starbucks coffee, they say it starts from Rs 275, which is the first piece of information in your head. But when you go to the cafe, your mind quickly switches to the Rs 305 coffee as it sees a miniscule price difference of Rs 30.

A Rs 275/coffee is automatically upgraded to Rs 305 by default for majority of customers.

When you calculate the realization difference in percentage terms, it is a 11% rise. While I do agree that the cup is larger but the cost increase because of the added coffee is definitely less than 11%.

That's smart pricing strategy leading to improved product mix.

So, while thinking about this, I came across a concept called the 'Anchoring Effect'- A psychological bias'

In simple terms, it means that our decisions are heavily based on the first piece of information we receive - regardless of whether that information is accurate or not.

Consider this - You walk into McDonald's and you can get a small coke for Rs 79 or a large coke for Rs 99. For a mere Rs 20, you can get almost twice as much coke!

With the first piece of information being that the small coke is for Rs 79, the large coke suddenly seems like an awesome deal, doesn't it?

However, in reality, the point we are missing is that both are overpriced.

The same goes with OTT apps like Netflix and Amazon Prime.

They place both their premium subscription plan & the standard one on the same page. This gives customers an impression that the latter is a bargain in comparison, making it more likely for them to subscribe.

But the most popular anchor bias of all and I am sure everyone must have fallen for it - is the Rs '99' price tag.

The fact is that Rs 499 sounds better than Rs 500.

Since our brain reads from left to right, the first digit of the price resonates with us and acts as an anchor to create an illusion of getting something in the lower number series.

Now as a consumer we all fall for such smart marketing. While there is nothing wrong as companies understand the human mind and psychology and use it to their advantage.

This is one way to increase the share of premium products or to get the added realization growth in the company.

As investors, when we look to invest in companies, it is such smart marketing techniques which ultimately add to the profit growth and premiumization trend.

A leading marketing manager once told me that, not matter how good the product is, if the company gets its pricing wrong, all hell will break loose.

That is exactly what happened to Apple Computers. Its flagship product Apple 3 and Apple Lisa failed on account of wrong pricing. The pricing of both these devices was out of reach for a large part of the target audience.

What can investors learn from Pricing and Marketing strategies of companies while investing?

While I have emphasized on the importance of pricing, let us look at what it means when evaluating for Indian companies.

Who determines Pricing?

9 out of 10 times, it is the market leader which makes the first move when it comes to price hikes, while the other mid-sized companies follow.

While analyzing a medium size or a 2nd or a 3rd player in the industry, it is important to check the pricing differential between the market leaders or brands.

Few basic assumptions which I make when I analyze small and medium sized companies.

If the pricing is the same- The company will perish

If the pricing is lower by ~5% -The company will just about survive

If the pricing is lower than 10% as compared to the market leader, the company in contention is likely to capture the lower end of the market- That is where your focus should be when identifying such stocks.

Analyzing the Marketing Strategy of Companies

During Covid, Dominos came up with a smart marketing and business strategy which was immensely profitable.

By launching the contactless delivery and advanced hygiene due to the pandemic, the company levied a Rs 30 delivery charge.

The point I am trying to make is that this incremental Rs 30 delivery charge/order directly goes to the bottom line of the company without any incremental costs having been incurred by the company.

Imagine the boost it gets on the profit without having to raise prices or incur any additional expenses.

Thousands of orders are placed in a day at Dominos, an incremental Rs 30/order enhances profitability.

As an investor these are things which one should learn from marketing strategies of companies.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

PS: Love to eat burgers? All of us do... But is your favourite Burger or Pizza Company a good investment? Find out in this video as I decode the QSR space.