Starbucks Metal Card and Prestige Pricing

Gilt.com recently offered a "Limited Edition Metal Starbucks Card" for $450. Per the sales pitch, the card is "[f]ashioned from stainless steel and etched with an eye-catching design and the unmistakable Starbucks Siren logo." The card was preloaded with $400, and included instant Gold Level membership in the My Starbucks Reward program upon registration.

This limited edition of 5000 cards sold out in less than one minute!

Since the initial public offering, prices of the Metal Starbucks Cards have soared on the secondary market. eBay currently lists 147 "sold listings", with sold prices as high as $1249.99! The lucky buyer did get free shipping.

How can we explain the pricing of the Metal Starbucks Card? Why did 5000 people jump at the chance to pay $450 for a card with a preloaded value of only $400? Why have dozens of other people engaged in bidding wars to pay up to $1249.99? What value do they perceive beyond $400?

The underlying value of the Metal Starbucks Card is the value of its underlying bundle of rights. The most obvious right in this bundle is the right to use its preloaded value of $400 to purchase $400 worth of drinks, food or other products at Starbucks stores. Now, some people might argue that this right is actually worth less than $400 since customers usually get a volume discount when they make a large purchase. However, for this discussion, assume this right is worth the full $400.

Another right provided by the Metal Starbucks Card is the right to instant Gold Level membership in the My Starbucks Reward program upon registering this card. At this membership level, members receive a free birthday drink, free refills on brewed coffee or tea, and a free drink or food every 12 stars. (Members earn a star every time they use their card to pay at participating Starbucks stores.)

One could arguably measure the value of the right to instant Gold Level membership by summing up the value of its perks (e.g., the value of a free birthday drink, free refills and free drinks or food every 12 stars). However, it's very probable that anyone even considering purchasing the Metal Starbucks Card for $450 (or up to $1249.99!) is already a Gold Level member, which is available at no cost to anyone who collects 30 gold stars within 12 months. Thus, assume this right is worth zero.

The final right provided by the Metal Starbucks Card is the right to own a card "[f]ashioned from stainless steel and etched with an eye-catching design and the unmistakable Starbucks Siren logo." Starbucks itself has said that the card cost $50 to make. Despite these pitches, the scrap value of the stainless steel is no more than a nominal amount, and may well be zero or a negative amount due to the overhead that would be involved. The Card is designed to fit within a wallet or purse, and so would have little or no value as a decoration. Thus, assume this right is also worth zero.

Therefore, the underlying value of the Metal Starbucks Card is basically equal to its preloaded value of $400. Perhaps it's a few dollars more to account for the underlying value of the instant Gold Level membership or the scrap value of the Card itself, but it would be difficult to justify a valuation of more than its initial public offering price of $450.

Why, then, are some people willing to pay as much as $1249.99 for the Card?

The answer to why some people are willing to pay extra for the Metal Starbucks Card is prestige pricing, also referred to as premium pricing.

Prestige pricing is a strategy of setting a price at or near the high end of a possible price range in order to attract status-conscious consumers. Prestige pricing is often used to create or reinforce a product's luxury image.

There are generally three reasons why consumers will buy a prestige-priced product:

1. They believe the high price is indicative of high quality;
2. They require perfect performance (e.g., such as when buying a pacemaker); and
3. They believe the high price is a symbol of their success and status.

In this context, the first two reasons make little sense. After all, the owner of a Metal Starbucks Card will receive the same quality of drinks or food as any other Starbucks customer--many of whom are also Gold Level members--and a poorly-made latte is unlikely to cause anyone's demise.

Therefore, the most likely reason that some people are willing to pay a premium to purchase a Metal Starbucks Card is simply that they wish to make a social statement that they are successful, and can afford to belong to an exclusive club of people who have the means and are willing to buy one. The appeal of the card's exclusivity is backed by Jason Goldberger, executive V.P. of Gilt.com, who explained: "When you're waiting in line at Starbucks, the next person in line won't have it."

There is, however, another explanation for why some people are willing to pay so much for a Metal Starbucks Card.

According to "The Greater Fool Theory", someone who makes a questionable investment may assume he can resell it later to a greater fool at an even higher price.