econlife - The Surprising Reason That We Love Our Pumpkin Spice Lattes by Elaine Schwartz

We are about to witness the earliest (and maybe biggest) Pumpkin Spice Latte (PSL) launch ever. A week earlier than last year, the Dunkin’ pumpkin menu will roll out on August 21. At Starbucks we have to wait until August 27.

Perhaps because we were used to the Tuesday after Labor Day, the official Starbucks launch date feels much sooner. Below, you can see they made the switch last year:

Commenting on its popularity, a Dunkin’ employee suggested that pumpkin syrup be available all year round.

That would be a big mistake.

The Pumpkin Spice Latte

The Dunkin’ fanfare includes eight stores temporarily named Pumpkin’ where 250 guests will get some free pumpkin flavored coffee and a lip balm named Munchkins. (The eight stores will be in eight locations that together spell pumpkin–maybe Paducah, Utica, Memphis…we shall see.) Although apple cider doughnuts are new to the Dunkin’ menu, it’s the Cinnamon Sugar Pumpkin Signature Spice Latte that is creating the buzz.

Meanwhile Starbucks is engaging in its own product differentiation:

Our Bottom Line: Diminishing Marginal Utility

With all of this happening, there still is just one reason for the huge popularity of the Pumpkin Spice Latte. It is all about how much we enjoy that extra cup.

Given a pile of chocolate chip cookies when we are hungry, the first is delicious and so too is the second one. But then the extra pleasure we get from each subsequent cookie plummets. Or, using economic language, we say that the marginal utility diminishes.

Similarly, when Pumpkin Spice Lattes hit the menu, fans rush to purchase them. For whatever reason–taste, anticipation, trendiness–the quantity we demand surges. Next however, the excitement subsides and, sooner or later, we buy less. Like our chocolate chip cookies, we experience diminishing marginal utility. Every extra Pumpkin Spice Latte tastes less good…

However, before we can touch the bottom of our demand curve, Thanksgiving arrives and these limited edition drinks disappear from the menu.

So why do we love our PSLs? Because they are gone for at least eight months.

My sources and more: My first hint that a PSL would arrive early from Dunkin’ came from the NY Times. At the same time, BusinessInsider told us about the Starbucks rollout and this 2014 article described its discovery. Finally, I should add that although I am in Starbucks frequently, I have never purchased a PSL because I am one of the few people who dislike it.

Also, please note that several of today’s sentences about diminishing marginal utility were published in a past econlife and our featured image is from eater.com.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Who Will Care About the Starbucks Price Hike? by Elaine Schwartz

Starbucks just announced that a cup of brewed coffee will cost 10 to 20 cents more. While the price increase depends on where you live, a “tall” (their smallest size except for the “short”) probably is somewhere between 1.95 and $2.15 before tax.


Who agrees with Leah?

It could relate to Dunkin’ Donuts and McDonald’s, a Frappuccino, and a rubber band.

Substitute Products: Dunkin’ Donuts and McDonald’s

Thinking of the recent price hike, we need to ask if we have substitute products. I suspect the answer depends on the coffee drinker. Some have said that there is a coffee war among Dunkin’ Donuts, McDonald’s and Starbucks. If you agree, then the first battle started in 2002 when Dunkin’ Donuts announced a new line of espressos, cappuccinos, and lattes. As for McDonald’s, it entered the fray with McCafé in 2009. Lower priced than Starbucks, it offered its version of the latte, the cappuccino and the mocha to which it recently added a caramel macchiato, a vanilla cappuccino, and an americano.

If the three brands are interchangeable, then the price increase will make Starbucks less attractive. On a Starbucks graph, an economist would shift the demand curve to the left to display less demand because people were switching to cheaper substitutes.

Reference Points: Frappuccinos

Higher Starbucks prices can also take us to reference points. Tall, grande, and vente cups of coffee have always been the cheapest drinks at Starbucks. Because I buy the coffee that is custom made in their Clover machine, my price is closer to $3.00. As a reference point, that clover makes the price of a basic cup of coffee, even after an increase, look inexpensive. Similarly, compared to a Frappuccino, a higher priced plain coffee is still pretty cheap.

Our Bottom Line: Elasticity

Maybe though it all comes down to your elasticity. And that is where the rubber band enters the picture.

If price changes a lot and the quantity we buy remains almost the same, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With elastic demand, like a rubber band, the quantity we demand stretches when price drops and contracts when its rises.

At Starbucks, we see inelastic demand from those consumers who believe Dunkin’ Donuts and McDonald’s are not substitutes. Similarly, pricey Frappuccinos that are reference points only reinforce inelastic demand. No matter what, consumers with inelastic demand buy their Starbucks coffees.

However, there is price point for all of us when our inelasticity becomes elastic. And that returns us to Leah’s Tweet.

My sources and more: After seeing the increase at WSJ, I went to Eater which is always good for food and drink insight. Meanwhile Refinery29 told a bit more and Money looked at the coffee wars. Finally, I even discovered the coffee war academic perspective here.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The iPod, Starbucks, and Richard Thaler’s Behavioral Economics by Elaine Schwartz

Discussing the iPod he designed, Tony Fadell expressed his frustration with products that said “charge before use.”

He remembered arriving home excited about a newly purchased gadget. But then his emotional momentum would hit a wall when he discovered he could not immediately play with it. So Tony Fadell and Steve Jobs created a fully charged iPod that was ready to use.

Fadell and Jobs were not the only ones concerned with emotional momentum.

 

The Starbucks Consumer

Starbucks founder Howard Schulz also targets consumer emotion. When he developed the Starbucks concept during the 1970s, he said they were a “third place,” a home away from home. Now though, with a Starbucks on every street, the allure has diminished.

Globally, you could select among more than 25,000 Starbucks for a cup of coffee:

Realizing there was a niche where he could re-invent himself, Howard Schultz left his CEO position to focus on the chain’s roastery stores. The result so far is more than 30 coffee bars that sell high-end beans and Starbucks regular brews. The chain also projects opening larger roasteries with “rare and exotic” coffees. Resembling a wine bar, these upscale coffee stores will offer small-batch roastings that encourage consumers to spend $5 to $10 and more for a cup.

As was true for the original Starbucks, the experience matters as much as the product.

 

Our Bottom Line: Behavioral Economics

Asked how he was going to spend his 2017 Nobel Economics Prize, Richard Thaler said, “irrationally.” Dr. Thaler explained that (like all of us) he does a mental accounting of his consumption decisions that divides purchases into categories. In the slot reserved for extravagances, he was planning to use the Nobel prize money.

Dr. Thaler’s mental accounting lets us understand consumer spending that will not neatly fit into the logic of traditional economics. In the Thaler model, demand and quantity demanded do not necessarily decrease as prices rise. One reason is his “extravagance slot.”

Through behavioral economics, we can explain our spending on Apple’s products and a $7 cup of coffee (that is mostly water) by recalling the need for emotional momentum.

My sources and more: Sitting here in a typical suburban U.S. Starbucks, I wondered how they could create a better experience and found this Bloomberg article. But then I remembered Tony Fadell’s TED talk and (happily) realized it all fit together. To complete the puzzle, you might also enjoy this summary of Richard Thaler’s work as the father of behavioral economics.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Starbucks Moments by Jim Triplett

The other day I found myself automatically going to a Starbucks in the local mall.  The coffee shop was not on my list of places to visit; rather, I entered the store by habit.  In other words, this was a decision I made without thinking.  While the outcome of this decision has little overall impact on me, other than the opportunity cost of time I could have been doing something else and the economic cost of about $5 for the drink, I’m reminded of the number of decisions we make daily with little or no active thinking.

Reflection and asking questions of oneself reduces the likelihood one uses limited or zero active thinking.  Mental shortcuts - called heuristics - are quick ways of thinking that may work in routine and predictable settings with little negative impact, but may lead to problems when they don’t match the situation.  Individuals develop these heuristics to manage the number of decisions faced each day.  These mental shortcuts are developed over time based on experiences, cultural and religious influences, socioeconomic status, etc.  They become a filter - a bias - that leads people to make decisions automatically, often without even being aware of the decision.

Research in the field of judgment and decision-making by such notable persons as Herbert Simon, Amos Tversky and Daniel Kahneman, suggests that much of one’s thinking is really automatic decision-making that is performed without much thought (like driving and having a conversation with someone in the front seat - try to remember every driving decision you have made from point A to B).

Behavioral economist Dan Ariely (2008) suggested that when it comes to the effects of marketing, for instance, "We are pawns in a game whose forces we largely fail to comprehend ... just as we can't help being fooled by visual illusions, we fall for the '’decision illusions' our mind show us" (p. 243).  This research suggests because so many decisions are made on autopilot, people fail to make truly informed decisions until they actively think about how these decisions are made.  Ariely used the example of standing in line at Starbucks I noted above to illustrate.  At some point, one first encounters Starbucks and, lacking experience with the store, goes in to try it.  If the experience (and coffee) is pleasant, one may go back again.  Over time, one may find him/herself standing in line at Starbucks without even thinking about this (my wife almost always stops at Starbucks, even without thinking about it).  Ariely suggests the reader periodically ask themselves, "Why am I standing I line at Starbucks?"  If you are good with the decision, keep standing in line; otherwise, maybe it’s time to go to Dunkin' Donuts or even just go back to work.  Automatic decisions made every day will not change until you actively thinks about them.

So, next time you find yourself standing in line at Starbucks - or other moments or decisions that, upon examination you find are made with little or zero active thinking, consider how you might improve your awareness of them so you can make better decisions.

Ariely, D. (2008).  Predictably irrational: The hidden forces that shape our decisions.  New York, NY: Harper.

Jim Triplett is an author, instructional designer, and instructor in the areas of finance, economics, ethics, and critical thinking. Jim holds Masters Degrees in Finance, Organizational Leadership, and Instructional Design Technology, is ABD / PhD in Organization and Management, and is currently completing a doctoral degree, Ed.D, in Educational Leadership with a focus on Educational Technology.