1. Coca-Cola & The “Smart” Vending Machines
By:
Ajay Jagsi
Devon Choo
May Huang

2. A Little Experiment …
V.S.

3. Today’s Agenda: Background Mechanics of Coke’s Pricing Strategy
Economic Rationale
Critique of Coke’s Pricing Strategy
Recommendations
Conclusion

4. Background Importance of vending machines
Accessibility and convenience
“Smart” vending machines

5. Media’s Reactions …
“A cynical ploy to exploit the thirst of faithful customers”
(San Francisco Chronicle)
“Lunk-headed idea” (Honolulu Star-Bulletin)
“Soda jerks” (Miami Herald)
“Latest evidence that the world is going to hell in a handbasket” (Philadelphia Inquirer)
“Ticks me off” (Edmonton Sun)

6. Mechanics of Coke’s Strategy/ Economic Rationale
Price Discrimination
Selling the same product to different groups of buyers at different prices.
“Hot” day v.s. “Cold” day prices
Economic Rationale
Higher price (hot)  higher profit
Lower price (cold) induces sales  higher profit
The “Numbers” Game …
Economists use the term "price discrimination" to describe the practice of selling the same product to different groups of buyers at different prices in recognition of the fact that consumers assign a different value to the same product based on varying degrees of need. If possible, a company would prefer to charge a high price to those who place a high value on the good, while charging less to those that do not.
In the case of Coke, its consumers were segmented based on their buying habits during hot & cold days. Based on these buying habits, Coke would adjust its prices accordingly.  
When it was hot outside, Coke earned a higher profit by selling its products at a higher price. Similarly, Coke could generate higher profits even when it was cold outside by sufficiently lowering its prices to induce customers to buy more of its products (See Appendix I for detailed calculations).

7. The “Numbers” Game (Slide 1 of 3)
Demand function when temperature is high:
QH = p , where p is price
Demand function when temperature is low:
QL = p
The demand functions were derived from empirical studies based on budget lines and utilities of overall consumers.
Assumption:
high temperature / low temperature day is equally likely
the marginal cost (c) of a can of Coke is assumed to be $0.20.
Lastly, Coke is assumed to be risk neutral.

8. The “Numbers” Game (Slide 2 of 3)
Normal Vending Machines
Expected price is 70 cents per can.
Expected profit is 5,000 cents per machine.
“Smart” Vending Machines
Price on a HOT day is 85 cents per can
Price on a COLD day is 55 cents per can
Expected profit is 5,450 cents per machine.

9. The “Numbers” Game (Slide 3 of 3)
Incremental profit per day per machine
= 5,450 – 5,000 = 450 cents
Assuming 200,000 “smart” vending machines,
Annual incremental profit
= 450 * 200,000 * 365 days
= $328.5 million

10. Critique of Coke’s Strategy
Similar to strategy employed by
Book publishers
Airlines
Flaws
Failure to recognize availability of substitutes
Public announcement of its plans

11. Recommendations No public announcement
Execute pricing strategy discretely like
Crate & Barrel
Victoria’s Secret
Strategic placement of machines
High traffic areas with few repeat customers
Examples: Rest areas & tourist traps

12. Conclusion Highly profitable strategy if: Applies to both:
Executed with extreme caution
Greed is NOT good
Applies to both:
Dot coms
“Bricks & mortar” companies