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Coca-Cola & The “Smart” Vending Machines

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Presentation on theme: "Coca-Cola & The “Smart” Vending Machines"— Presentation transcript:

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

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