8/13/2019 Cocacola Case Solution

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Coca-ColaCase Solution

Submitted by Group 21: Arjun A(B13076), Gaurav Dadlani(B13086), Rajaram P R(B13105)

Case Summary

In Oct 1999, it was reported that Coke was secretly working on a vending machine that

could change prices according to the weather. In his defence, the then Chairman and CEO

M. Douglas Ivester gave an explanation that Coke should be able to charge a higher price

when the demand was higher. In supermarkets, the prices of Coke and Pepsi were driven

down due to price wars. However, the vending machines were not part of the price wars

and Coke was looking to extract maximum profits from their most profitable channel.

When the news became public that Coke might be looking to charge higher prices in

summer months it caused huge public uproar. Basically, Coke was thinking about this idea

of charging different prices in different seasons to maximise economic profit.The economicprinciple considered here was price discrimination, which means selling the same good at

different prices to different groups of customers. However, an important aspect that Coke

did not take into account was the buyers perspective and the image dilution that such an

act would have on the Coke brand. Eventually Coke had to bury the idea and issue a public

statement that it would not introduce such a vending machine.

Differentiated Pricing:

In first degree of price discrimination, a seller charges a separate price to each customer

depending on the intensity of his demand. In the second degree, seller charges different

prices based on volume bought. In the third degree of price discrimination, the seller

charges different amounts to different classes of buyers.

There are different kinds of third degree of price discrimination:

1. Customer segment pricing:Different customer groups are charged different pricing for

the same products e.g. Museums charging different prices to students

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

example, Levis sells many varieties of jeans at its stores for various prices.

3. Image pricing:Pricing the same product at two different levels based on imagedifferences. E.g. cosmetics

4. Channel pricing: A product is sold at different prices depending on whether you buy at a

restaurant or vending machine

5. Location pricing:Products are priced differently at different locations.

6. Time pricing: Prices are varied by season, day or hour. For example electricity companies

charge different rates at different hours. Airlines industry use yield pricing where they use

discounted early purchases. The prices change by the time of the day, day of the week and

season of the year as well. Although this phenomenon is exploding, it is extremely trickywhere consumer relationships are concerned. This works best where there is no bond

8/13/2019 Cocacola Case Solution

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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, there is bound to be anger and resentment towards this idea.

While passing the price increases to the customer the company must avoid looking like a

price gouger.

Questions

1.Where ,how and for whom this technology create/destroy value?

Increased competitiveness in the market through price discrimination for the welfareof all: Price discrimination is used in order to increase the economic efficiency. In

principle, the temperature sensitive vending machine is no different from any other

form of price discrimination.

Increase profitability for Coke: vending machines are an extremely profitableresource and channel and have the opportunity to be more profitable for Coca Cola.More profitability could be achieved through differential pricing.

Lowering the price at off-peak buying time in order to increase the overall sales. By providing information when a machine is out of stock, the new machine

2. Are there any pricing related issues that can adversely affect the firm?

Damage to the brand image: Cocacola could be perceived as making profits out ofcustomers misery and helplessness! Coke cannot claim to be customer-friendly.

Risk of price war: automatic price adjustments will provide the capability to ignitethe price war e.g. over a holiday weekend.

3.How does the new technologies such as Internet affect the ability of firms to discriminate

across consumers?

New technologies such as the internet facilitate micro marketing by providinginformation about which drinks are selling and, at what rates in a particular location

is relayed by internet, helps salespeople to figure out which drinks will sell best in

which locations.