Coca Cola: Pricing Strategies Across Markets

© Imperial College Business School

Tutorial: Coca Cola

Strategic Marketing – SUMMER SCHOOL 2013 1

Pricing Strategies in Different Market Contexts


Today’s Session

2

What we are going to cover…

• Three things from last week’s lecture on pricing?

• Case Study Analysis: Coca Cola

– What were the main differences between pricing strategies in

USA, India and China?

– Which strategies out of cost-based, value-based and

competitor-based pricing do you believe work best in the

soft drinks market and why?

– What further actions do you recommend Coca Cola should

take to improve its differentiated pricing strategies?


Last week’s Session

3

Key Marketing Concepts

Three things from last week’s lecture on pricing?

1) Name TEN factors which influence pricing decisions?

(Draw the Perceptual Positioning Map)

2) What is price elasticity?

3) Describe THREE key and SIX alternative pricing

strategies


Price Decision Influencers

4

Internal and External Influences

• Organisational / Marketing objectives

• Pricing objectives

• Costs

• Other Marketing Mix variables

• Channel member expectations

• Buyer’s perceptions

• Perceived value for money

• Competition

• Legal and regulatory issues

• Inflation / Currency fluctuations

INTERNAL

EXTERNAL

(Market &

Environment)


The Big Mac Index

5

What’s right and wrong with the Big Mac Index?

The Big Mac index is a light-hearted guide to whether

currencies are at their “correct” level. It is based on the

theory of purchasing-power parity (PPP), the notion that

global exchange rates should eventually adjust to make the

price of identical baskets of tradable goods the same in

each country.

http://www.economist.com/content/big-mac-index


The Big Mac Index

6

What’s right and wrong with the Big Mac Index?

Important consideration for pricing across markets:

PURCHASING POWER

- Law of one price: Big Mac should cost the same across different

markets (currency differences factored in). The fact this isn’t the

case suggests currencies are over/under valued (side point)

- The important question is: Is it a reliable indicator?

YES: Standardised product. Includes inputs from range of

local economy sectors i.e. labour (white and blue), agricultural

commodities, advertising, real estate, transportation.

NO: In some emerging economies, western fast food

represents an expensive niche product price. Hence

product differentiation isn’t factored in. Also, the variety of

input prices could be result of government regulations


Perceptual Positioning Map

7

Determining Price Positioning

QUALITY

PRICE

L

L

H

H


Price Elasticity

8

How Price affects Demand

Price

Quantity

Price

Quantity


Price Elasticity

9

How Price affects Demand

Price

Quantity

ELASTIC INELASTIC

- Small change leads to

significant increase/decrease.

- Low customer loyalty

- Easy to switch (alternatives)

e.g. Cereal

- Large change upwards

or downwards leads to

small increase/decrease.

- Willing to pay any price

e.g. Luxury

Price

Quantity


Key Pricing Strategies

10

Three Basic Strategies

SKIMMING

PENETRATION

PRICING

MARKET

PRICING

H

L

- Charging premium price, top end of market

- New, Unique or Luxury products

- Risky when strong competition or low

perception of value

- Set as going market rate (by competitors)

- To preserve stability. Activity focused on

product, distribution and promotions

e.g. Coca Cola / Cereals

- Charging a low price to achieve highest

possible sales.

- Facing high competition & low incomes

- Long term profit if high market share.

- Can result in low profits / undermine

brand image.


Alternative Pricing Strategies

11

Six Alternative Strategies

• Cost plus: Cost of manufacturing plus small margin

• Target Profit: To achieve specific % profit (margin)

• Breakeven: Price at which revenue covers cost

• Perceived Value: what customer will pay

• Sealed bidding: b2b / house purchases

• Internet based: comparison with others

ILLEGAL: Grey market / Dumping / Price Fixing


Ryan Air’s Pricing Strategy

12

‘Debundling’ vs. Differentiation

http://www.youtube.com/watch?feature=player_detailpage&v=oJCuYNvrE8g




Case Study Analysis

13

The importance of context

What were the main differences between Coca Cola pricing

strategies in the USA, India and China?

10 MINUTES: DISCUSS IN PAIRS


INDIA

14

Cost-Plus (Penetration) Pricing Strategy

RURAL CONTEXT

– Untapped market due to:

• Low incomes, geographically dispersed

• Lower purchasing power compared to urban consumers

– Strategy motivated by COST-REDUCTION

• Low price strategy

• Packaging? Smaller bottle size Reduces cost (and price)

• Penetration pricing i.e. increase per capita consumption

Wall Street Journal on Coca Cola’s Growth Strategy in India

http://live.wsj.com/video/coca-cola-tackles-rural-indian-market/46E2152A-3BFC-4FA7-9ACC-062188281DCF.html


FMCG EXAMPLES

15

Cost-Plus (Penetration) Pricing Strategy

Nestlé Popularly Positioned Products

- PPP strategy focuses on lower income

consumers by offering them relevant,

high-quality nutritious products at daily

affordable prices. Sales = £7.5bn/year

Hindustan Lever (Unilever)

- Sachet marketing involves selling

shampoos, soapa etc. in smaller more

affordable packet sizes, suited to rural

distribution channels.


CHINA

16

Value-based Pricing Strategy

URBAN CONTEXT

– Consolidating position in big and medium sized cities:

• Higher incomes. Focus on buyers perception.

• Convince them that product’s value justifies price. HOW?

– Strategy motivated by VALUE-BUILDING

• Loyalty created by high level of marketing/advertising campaigns

• Local companies like Wahaha (Future Coke) focus on low priced

product for rural consumers.


USA

17

Value and Competition-based Pricing Strategy

MATURE MARKET CONTEXT

– Competing with Pepsi:

• Mature carbonated drinks market with limited growth opportunities

• Checks price/quality of each major branded competitors’ offer.

– Strategy motivated by COMPETITION

• Indirect & direct discrimination in pricing strategy vs. competition

• BEWARE: Pepsi winning back restaurant business by combinign

fountain drinks with Frito Lays snacks

• BEWARE: low-cost private labels from Wal-Mart.

• Brand maintains high customer loyalty through marketing activity


Case Study Analysis

18

Pricing Strategies for Soft Drinks

Which strategies out of cost-based, value-based and

competitor-based pricing do you believe work best in the

soft drinks market and why?


Case Study Analysis

19


What further actions do you recommend Coca Cola should

take to improve its differentiated pricing strategies across the

three different markets?

10 MINUTES: DISCUSS IN PAIRS


Case Study Analysis

20


What further actions do you recommend Coca Cola should

take to improve its differentiated pricing strategies across the

three different markets?


How ‘Value’ Determines Price

21

How do you value a company?

• Market defines aggregate perceived

value, hence the share price of a

company

• Instagram (private company) was

bought by Facebook for $1bn last year.

• A pre-revenue company (peanuts on its

income statement), a small office in

Silicon Valley with about twelve people.

Q. Use pricing concepts to explain

Zuckerberg’s willingness to pay such a

high price for Instagram

Kevin Systrom & Mike Krieger

(Founders of Instagram. Stanford

University Graduates)