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Coca-Cola’s New Vending Machine: Pricing to Capture Value?

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Published: Wed, 13 Sep 2017

Case Write-Up For:    

Coca-Cola’s New Vending Machine (A): Pricing to Capture Value, or Not?

Introduction:

Late October of 1999, it was reported that Coca-Cola was behind closed doors working on a vending machine that could change prices according to the weather. In defense of this tactic, the then Chairman and CEO M. Douglas Ivester gave a clarification that Coca-Cola should be able to charge a higher price when the demand for soda is higher (i.e. the hotter months of the year/summer months). But in the supermarkets, the prices of Coca-Cola and Pepsi were driven down due to price wars. However, the vending machines were not part of the price wars and Coca-Cola was looking to get maximum profits from their most profitable channel. Coca-Cola was under the impression that the vending machines would be the best option to get maximum profits.

When the news became public that Coca-Cola might be looking to charge higher prices in summer months it caused a massive public uproar. Basically, Coca-Cola was thinking about this idea of charging different prices in different seasons to maximize economic profit. The economic belief considered here was “price discrimination”, which stands for, selling the same good at different prices to different groups of customers. It was imperative that Coca-Cola take into the buyer’s perspective and the adverse reaction to its image brand if they chose to go forward with the price change. Coca-Cola had to part with the idea and issue a public statement mentioning that it would not introduce such a vending machine.

Price discrimination has three degrees of judgement, in the first degree of price discrimination, a seller charges a separate price to each customer dependent on the intensity of his demand. The second degree, a seller charges different prices based on how much the buyer bought. Finally the last and final degree of price discrimination, is when the seller charges different amounts to different classes of buyers.

Below are six possible kinds of third degree of price discrimination:

1. Customer segment pricing – Different customer groups are charged different pricing for the same products. For example, obtaining a NFTA reduced fare card to prove that you are a senior citizen.

2. Product form pricing – Different alternatives of quality, style for the same product.

  • For example, Frito-Lay sells many varieties of their products at different stores for various prices.

3. Image pricing – Pricing the same product at two different levels based on image differences. For example, wine.

4. Channel pricing – A product is sold at different prices depending on whether you buy at a restaurant, store or vending machine.

5. Location pricing – Products are priced differently at different locations. For example a Whopper in Buffalo is priced differently than a Whopper in Cleveland, Ohio.

6. Time pricing – Prices are varied by day or hour, or even season.

For example, Airlines companies use yield pricing where they use discounted early purchases. Electricity companies charge different rates at different hours. The prices change by the time of the day, day of the week and season of the year as well. Although this event is exploding, it’s extremely complicated where consumer relationships are concerned. This works best where there is no relationship between buyer and seller. For example in this case there is a symbolic value attached to the brand and if the company tries to take advantage of this relationship by charging different prices on different days and or different time of the year, there is bound to be rage and anger towards this idea.  To avoid looking like a price gouger the company must tread carefully while passing the price increases to the customer.

A buyer’s perspective answers this question; what makes the buyers view a certain price as fair or unfair? There are an abundant number of inconsistencies; one of them might be when given an option of buying tickets using different ideas, like lotteries, and auctions, finally, standing in lines. People tend to think that prices received by standing in lines as the fairest and auctions being unfair with prices.

However, if people judge a certain pricing rule as fair, the following transactions using similar rules will also be observed as fair. In particular, people who participate in price determination through bidding and/ or negotiating are more likely to think prices are fair.

When people participate in setting the price, the obligation is more directly on them to ensure price acceptable and they are more likely to make internal acknowledgements regarding the price determination. Therefore, people are less likely to perceive a price as unfair, even if there is an indication that something exists to the contrary, when they are involved in the price-setting process.

So what factors contribute to the fairness perception? What really happened in case of Coca-Cola?  The Equity Theory, it states that the buyer tends to compare the price he gets in a certain transactions with another transaction that has been made from another person. The reference can be a separate transaction that the buyer himself had at a previous point in time or it can be a transaction made by a colleague. If the buyer feels that the price that he got is inflated compared to his recent transaction the buyer feels that the price is unfair, and he feels let down because of it.

The Fairness Heuristics theory people tend to judge situations on the foundation of the most relevant information. If the most relevant information isn’t available they take the most available information to judge others, which leads to the creation of procedural justice as procedural information becomes the most available information.

There is a theory called De Broglie-Bohm (D.E.) where a supplier may examine the fairness of its intended pricing method as judged by the community standards. If it isn’t fair, the supplier will be less likely to go ahead with its planned pricing method. Furthermore, these researchers propose that the convincing reason could be primarily ethical, and at times, dominate the economic reasons of avoiding loss of customer generosity and also putting it at risk for long-term profits decreasing.

The principle attached to the theory, indicates that it isn’t fair for sellers to increase the price to the buyer in order to achieve an increased market power, such as when demand increases. Likewise, if there is an increased supply, it isn’t fair for prices to be lower to the consumer because it would violate the terms of the previous transactions prior to an influx of product.

The purchase context and the situation standards also play a major role in the judgment of fairness. For example during the beginning stages of a buyer seller relationship a buyer may judge a seller on the basis of his ability but may gradually increase in time and transactions the buyer may focus on the compassion factor. So a breach of trust in the initial stages is taken as unfair but it could be just as bad if not worse than a breach of trust in the second stage. Similarly once norms are formed change in norms are considered to be more unfair.

As per this specific outline once a customer thinks a particular pricing as unfair based on the different theories discussed earlier he might be open to a number of activities based on the intensity of his negative emotions.

One activity might be, No Action is when there is a bit of disadvantaged buyers, and there may be some decrease in value and feelings of disappointment. If so, buyers either are not motivated to take action or believe it isn’t advisable to take action because of the cost of complaining or switching to another seller.

An additional activity might be, Self-protection is when buyers think that an exchange is not equal, unacceptable and or they are upset, disappointed, or ashamed. If they have a strong feeling that there is a better option out there, they may choose to ask for a refund, say negative words by talking to people, complain, and/or leave the relationship, depending on their evaluation of which action is most likely to reestablish the relationship with the least cost. In addition, they may search for additional information to evaluate the potential switching costs or to evaluate their power to renegotiate with the seller.

Finally, Revenge is when the buyer has a strong negative emotion, such as anger or outrage, happens with an awareness of price being unfair, customers’ leaving the relationship or complaining may not be sufficient enough to address the alleged inequity.

Comparing Buyer’s perspective with the Abstract Outline of Price Fairness has multiple action, below are some of them.

Significate Transaction is when a Coca-Cola buyer would treat ‘buying a Coca-Cola’ as a similar transaction to one done during the past summer. Keeping other influences the same, per the equity theory, he tries to compare the amount spent for this new ‘time-based pricing’ transaction with the extra amount he has to give out in a hot summer month.

Trust is when Coca-Cola’s brand value is largely based on belief. Especially being a national brand, customers trust is an essential part of their product strategy. When the news hit the public it spread like a wildfire and hurt Coca-Colas brand value even though the new vending machine was never launched. The article by Jeff Brown which was very sarcastic, published in the Philadelphia Inquirer is just one example of how people started venting out their frustration; trust was certainly shaken.

Facing flak from everywhere, Coca-Cola eventually didn’t introduce the new vending machine. Through a mere expression of withdrawal from making purchases and negative word-of-mouth publicity, Coca-Cola buyers forced the company to turn away from this strategy. In retrospection, had Coca-Cola done this while engaging its customers the ending could have been much different.

The violation of DE principle concludes that it isn’t fair for sellers to increase the price to the buyer in order to achieve increased market power, such as when demand increases or the product has an influx of product. Coca-Cola was clearly violating this basic DE principle.

There are general social standards in the market when it comes down to buying specific products. Lot of people know these standards and totally accept them. A few examples show in the case discuss why hard cover books are priced higher than paperback editions, or why matinee show prices for movies are cheaper than evening show prices. In this specific case, changing prices according to weather was not a largely accepted standard leading to the negative reactions from the public.

Maybe the customers only looked at one side of the spectrum instead of both sides, i.e. Coca-Cola priced higher in summer months. No one looked at the other side of the spectrum, on cold days Coca-Cola would be priced lower. This obviously explains one of the ways in which marketing communications comes into play and how Coca-Cola could have done better on this front if they had communicated better.

Some recommendation to this case can be that going public with the new idea being thrown around wasn’t a good promotion strategy. It was really bad and it created a bad image for Coca-Cola. Maybe if you did implement the idea, maybe put it in strategic location, for example high traffic areas where you will not get repeat customers. Like in restaurants, tourist traps, theatres, outlet malls.

Also if you decided to go forward with the idea, maybe you should emphasize that Coca-Cola products will be cheaper in the cold weather, then maybe the shock of the increase of price in hot weather won’t be as bad if you didn’t emphasized it like you did to start with. I also think that it would be a highly profitable strategy if it was executed with the up most caution it might be very profitable for you. Also increase the value of Coca-Cola to the consumers, then it also might increase the profits for the company. If they take these recommendation it might help them in the long run in actually creating a weather based pricing vending machine.

To conclude, from a buyer’s perspective, differentiated product features shape understanding of relative benefits and influence preferences or apparent value of a product. A seller can affect the apparent benefits and preferences or apparent value of a product by advertising etc. influencing customer selection of products.

In order to understand the right price of a product, the promotion of the product and place where you decide to sell the product play a contributing role in driving the value and prices in the market. Also the customers you sell the product to, competitors that sell comparable products, company skills, collaborators, all play a key role in driving the value and prices in the market.

In this Coca Cola’s New Vending Machine case, information leaked much earlier in media, this lead to a lot of uproar, rumors, and analysis and conspiracy theories. The improper handling of media by Mr. M.Douglas Ivester further complicated the issues at hand. This’s definitely not the best way a company would like to introduce its differential pricing to the consumers. Things didn’t go the way Coca-Cola would have liked it to happen in the first place.

A crucial question rises; what would have happened if things went as per Coca-Cola’s plans? I tried to analyze this question in light of the earlier stated concepts present, market information available about Coca-Cola and the events that unfolded when new Coca-Cola was introduced in 1985. I wasn’t able to come to any confident conclusion whether “New Vending Machine” would have been a success or a failure. But, if they maybe take the recommendation that I mentioned above, it might help them implement this idea.

Bibliography     

Procedural justice. (2017, March 13). Retrieved March 15, 2017, from https://en.wikipedia.org/wiki/Procedural_justiceDe Broglie-Bohm theory. (2017, March 13). Retrieved March 15, 2017, from https://en.wikipedia.org/wiki/De_Broglie%E2%80%93

Bohm_theoryDynamic pricing. (2017, March 06). Retrieved March 15, 2017, from https://en.wikipedia.org/wiki/Dynamic_pricing

Equity Theory of Motivation in Management: Definition & Examples – Video & Lesson Transcript. (n.d.). Retrieved March 15, 2017, from http://study.com/academy/lesson/equity-theory-of-motivation-in-management-definition-examples-quiz.html

Fairness heuristic theory: valid but not empirical. (n.d.). Retrieved March 15, 2017, from https://www.ncbi.nlm.nih.gov/pubmed/12361103

Price Discrimination. (n.d.). Retrieved March 15, 2017, from http://www.digitaleconomist.org/pd_4010.html

Ravi Kumar Tiwary, Assistant Manager at Sports Line Follow. (2012, September 01). Coca cola new vending machine. Retrieved March 15, 2017, from https://www.slideshare.net/ravikumartiwary/coca-cola-new-vending-machine

Third Degree Price Discrimination. (n.d.). Retrieved March 15, 2017, from http://www.economicshelp.org/microessays/pd/third-degree-price-discrimination/


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