Coca Cola: Pricing Strategies Across Markets
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Transcript of 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
© Imperial College Business School
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?
© Imperial College Business School
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
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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)
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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.
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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
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Perceptual Positioning Map
7
Determining Price Positioning
QUALITY
PRICE
L
L
H
H
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Price Elasticity
8
How Price affects Demand
Price
Quantity
Price
Quantity
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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
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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.
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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
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Ryan Air’s Pricing Strategy
12
‘Debundling’ vs. Differentiation
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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
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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
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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.
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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.
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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
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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?
© Imperial College Business School
Case Study Analysis
19
Pricing Strategies for Soft Drinks
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
© Imperial College Business School
Case Study Analysis
20
Pricing Strategies for Soft Drinks
What further actions do you recommend Coca Cola should
take to improve its differentiated pricing strategies across the
three different markets?
© Imperial College Business School
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)