What is Keurig’s pricing strategy to fend off ground coffee from cannibalizing its cash cow K-Cups?
1. The price of reassurance
“You can always easily go back to ground coffee”
If you shop at Costco or Sams, Keurig really wants you to know its brewers also work with ground coffee. It’s willing to “donate” its own fancy reusable filter ($15.99 on keurig.com) for you to believe so, colorfully advertising the reassuring “free add-on.” PS: Also shrewdly included, some 18 free K-Cups.
Why the “extra value”? Isn’t this free filter an invitation to cannibalize the K-Cups that make virtually all of Keurig’s coffee division profits? Keurig’s classic “razor and blades” pricing model makes little to no profit on brewers (especially @$99 on sale at Costco Wholesale), so it can then sell us a lifetime of (4x overpriced) ground coffee and convenience that justifies paying so.
Want FREE? Oh, the work and time you will waste … for that 20-cent cup of coffee
“I dislike intensely” … “Best way to screw up your morning” …
These Amazon reviewers are talking about Keurig’s way to “reassure” customers they can pass on pricey K Cups and still use ground coffee with the last-gen Keurigs … until they buy one and try it.
On the face of it Keurig is keen to “enable” customers to:
- Go through a SEVEN step process …
- Then wash by hand or dishwasher FIVE separate parts …
- Keeping track of two different assemblies to swap in and out …
- ☕ To make a 20-cent cup of coffee. ☕
After reading multiple times a small-font, multi page instructions insert …
AS LONG as one ever wishes to use ground coffee in a Keurig ever again.
PS: The machine makes a mess sputtering hot droplets around the cup and on the machine wall with the non-K-Cup “option”. Even the filter name is a handful “My K-Cup® Universal Reusable Coffee Filter”.
In defense of Keurig, there are many positive reviews of this contraption on Amazon as well. Based on my experience, I have a hard time understanding them as anything other than early enthusiasm, or customers with very low value for their time. Maybe that IS the segment this offering is supposed to solve for.
2. Keurig’s financials offer some context, and pressure for solutions
Keurig’s coffee segment is contracting, despite price increases.
Operating income dropped in both ’22 vs ’21, and again in first 6 months of fiscal ’23, by 9% and 15% respectively.
(The fizzy drinks other segment, formerly Dr. Pepper, props up the overall performance of parent Keurig Dr Pepper Inc., also on the back of healthy price increases)
Keurig’s challenge: Costco’s value-oriented shoppers and an inconvenient aisle full of ground coffee offerings
We’d expect Keurig to work on clever ways to promote retention, branding its K-Cups as the superior, premium option.
Depriving lower-priced options of features and value is a tried and true tactic of pricing strategy, to prevent cannibalization of premium options.
But that usually applies to a company’s own offerings.
Trying to deprive the competitors’ offerings of value by injecting inconvenience in their consumption … is this TOO clever?
Preempting the real competition
Keurig’s tactic to include the filter seemingly over-engineered to complicate a cup of coffee may preclude many customers from searching for simple, cheap, efficient alternatives (see this $1.99 / filter option from Temu):
✅ONE step to drop in
✅NO assembly swap required
3. Has Keurig landed on the best pricing (and retention) strategy?
Once they discover the less painful ways to use ground coffee available, the option set for the price sensitive buyers looks more like this:
Keurig’s competitive challenges
Keurig loses to the competition in two scenarios:
- Household doesn’t buy a brewer to begin with (perhaps worried to be captive to high prices for K-Cups with no return path to ground?)
- Household buys a Keurig brewer, and proceeds to live on ground coffee, using a filter to “replicate” the K-Cup brew
For price-sensitive / value-seeking buyers at Costco, Keurig has apparently concluded its softening sales dictate a response to #1. That response: Discounted promo prices on the brewers themselves AND reassurance there is a ground trade-down “easily” available with the included fancy filter.
But how to prevent #2? Giving someone your fancy razor at break-even only so they can use someone else’s cheap, simple and functional blades?
The popularity of these filters (closing on 14K ratings on Amazon, which sells it for only $10.98), suggests just how many people love this option, even if they have to pay for it.
The Amazon price also reveals that Keurig is not a stickler for getting its original list price of $15.99. Why? Maybe every home with a Keurig brewer and a bad ground brew experience is a “good” home for Keurig!
Pricing strategy / segmentation questions:
Could Keurig avoid this awkward in-between, stand firm on its premium segment positioning, offer no ground filter at all, and let customers know its brewers are designed for K-Cups only?
Should it leave open the backdoor use of 3rd party filters … but warn such customers they’re on their own (such use voids warranty, etc)?
Could Keurig keep the price of the brewers higher and instead of the “waste your time into the ground” filter, include a 2x $20 set of coupon codes / mail-in rebates for K-Cups bought on Keurig.com, or elsewhere?
Or does this end up working as well as Keurig could hope for, given its competitive challenges?
What would you do if you called the shots at Keurig?