MKT362e

Pricing

Assignment 2 – Group-based Assignment January

2015 Presentation

Compiled by:

ANG YEW SHEN – Q1210006

TAN KWEE HUAT – Z1210897

ANGELA YOUNG – W1310826

Table of Contents

Question 1a.................................................................................................................................3

Question 1b................................................................................................................................5

Question 1c.................................................................................................................................7

Question 1d................................................................................................................................9

Question 2a...............................................................................................................................11

Question 2b..............................................................................................................................13

Question 2c...............................................................................................................................17

Question 3a...............................................................................................................................20

Question 3b..............................................................................................................................23

Question 3c...............................................................................................................................25

Works Cited.............................................................................................................................26

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Question 1a

The market environment for the consumption of carbonated soft drinks in Singapore remains

relatively positive, due largely to the high density of off-trade channels including

supermarkets/hypermarkets and convenience stores that continue to fuel the industry’s

growth. The extensive consumer reach of such intermediaries offering wider range of

products, coupled with regular promotional campaigns, have managed to appeal to

consumers, particularly families buying in bulk. Internet retailing is also gaining traction, as

consumers are increasingly lured by the offer of convenience and prospect of online bargains

(Euromonitor, 2014).

The industry continued to enjoy stable growth in 2013, albeit at a slower rate. Accordingly,

the total volume growth was 3%, marginally slower than that seen in 2012 (Euromonitor,

2014). The slowdown, attributed mainly to a maturing industry, has witnessed soft drink

leaders establishing themselves in alternative markets such as snacks, confections, and

printing and publishing industries (Standard Chartered Bank, 2014). Nonetheless,

profitability will remain positive, with CAGR expecting to expand to 3.6% from 2013 to

2018, driving the market to a value of $1,171.9m by end-2018 (MarketResearch, 2014).

Besides market saturation, some of the economic features found in the soft drink industry

may be further explained by its macro-environment. Within the political arena, liberal

immigration policies to expand Singapore’s total population between 5.8 and 6 million in

2020 offer greater opportunities for growth (NPTD, 2013). On the flip side, the active role

played by the Singapore government in educating the public of the effects of soft drinks has

potentially dampened market demand, especially amongst the dietary conscious.

Economically, soft-drink growth is supported by increased average monthly household

income from $8,105 in 2009 to $10,503 in 2014 (SPH, 2014). Accordingly, companies have

responded with product lines expansion to take advantage of the increased buying power to

grow their revenue (Orissa International Pte Ltd, 2013).

From the socio-cultural aspect, rising disposal incomes and the increased awareness about

healthier living has led many to switch to healthier beverage options. In light of this,

manufacturers are also seen introducing a wider range of products, including low calorie

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carbonates and reduced sugar soft drinks, to appeal to the health conscious consumers (Orissa

International Pte Ltd, 2013).

Finally, technological advancement has brought about the introduction of soda makers into

homes offering consumers speed and convenience. Additionally, cost savings are also

achieved over the longer term, as compared to their daily purchases from the on-trade

channels.

In conclusion, the most dominant force would be political due to government continual effort

to educate the public of healthier living through wellness awareness campaigns. Expectedly,

there is a higher demand for healthier products, as Singaporeans become increasingly aware

of the health and safety issues. Consequently, the added pressures will be placed on

companies to regularly introduce healthier food options to constantly appeal to the

consumers.

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Question 1b

Two main trends influencing the developments of the new home-made soda industry in

Singapore are greater health awareness amongst consumers as well as the increased

popularity of the home beverage carbonation systems.

Demand for healthier beverage options

Earlier, the market environment reveals a significant growing trend within Singapore towards

healthy eating as Singaporeans become increasingly health conscious. Consequently, many

are demanding healthier soft drinks, and manufacturers have responded with the introduction

of a wider range of healthier options such as reduced sugar soft drinks, bottled water, bottled

tea and fruit and vegetable juices. These drinks, which are typically priced 10% to 15%

higher than the other alternatives, are very well received nonetheless (Euromonitor, 2014).

Simply, the bulk of the population are middle income consumers who form the largest pool of

active customers. Accordingly, they are increasingly willing to purchase value-added food

and beverages due to higher incomes, as they continue to drive increased consumption of

healthier soft drinks within the country (Orissa International Pte Ltd, 2013).

Home beverage   carbonation systems

Home beverage carbonation systems such as SodaStream, Karbon and Fizzio are influencing

and exerting pressure on the soft drink industry, becoming indirect competitors. Essentially,

they offer consumers with the speed and convenience of customising their soft drinks from

home at low cost, as they allow them to determine the level of sugar content and flavours

while reducing plastic waste, thereby encouraging a healthier and greener beverage option.

This is especially appealing to consumers of increasingly hectic lifestyles, as they sought for

convenient and healthy products. Mirroring that of the successful business model of home-

brew coffee machines, profits are captured in the consumables rather than the countertop

machines through tying arrangement, where the machines are priced relatively low and the

consumables high to extract value from the consumers. Moreover, the machines are designed

to be incompatible with other brands of similar products. In this sense, switching costs are

high and hence greatly lowers consumers’ willingness to select an alternative firm’s products.

To conclude, the emergence of home-made soda machines has made it possible for health-

and eco-conscious consumers to enjoy soft drinks without the hassle and waste of store-

bought bottles. As for the manufacturers, it presents an opportunity for them to expand the

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market of soda lovers. The challenge is how to fully capture this market, and as for those who

fail to catch this trend, they will only suffer for the long term.

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Question 1c

The decision in determining the price of a product is very much dependent on the nature of

the product sold (Orissa International Pte Ltd, 2013).

For food products such as soft drinks, the consumers tend to be more price sensitive than

luxury goods. In this regard, major soft drink producers facing a fast growing homemade

soda segment and the migration of consumer’s preference towards the homemade variants are

likely to avoid price slashing but to resort to non-price competition. Besides the possibility of

averting a price war, they can also avoid setting incorrect price expectations for their product

offerings.

One way that major soft drink producers often compete is to constantly innovate as a way to

differentiate. Through introducing new product lines, they may be able to create new niches

so as to stay viable as new entrants join the competitive landscape. A case in point would be

that of the Coca-Cola Company, which innovation centric culture resulted in the creation of

more than 500 sparkling and still brands under its belt. As a result, it has been able to build a

sizeable market and share, selling 1.9 billion servings a day in more than 200 countries (The

Coca-Cola Company, 2015).

Besides introducing new product lines, some soft drink producers are already seeking

strategic collaborations with at-home soda machine manufacturers to extend their reach to

homemade soda drinkers. Typically, the beverage producers will supply their concentrate to

the soda machine manufacturers who will in turn produce the finished products to be used in

conjunction with their machines for consumption (Yahoo, 2014). The basis is built on the

expectation of reaching a win-win situation for both parties as they are able to tap into each

other’s brand name, expertise and customer base to expand their market shares and positions.

Finally in pricing, price segmentation in terms of order size is often used to provide discounts

to customers buying large quantities. Besides, beverage producers often also organise

promotional events to encourage spending. The Coca-Cola Company organises CNY

promotional event “Coca-Cola Happiness Greeting Machine” to celebrate Lunar New Year

with its customers. Consumers are encouraged to participate in the event to enjoy the great

offers each time they purchase any Coca-Cola products. These offers include free giveaways

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and promotional discounts on beverages, in which prices are lowered temporarily for those

with a lower willingness to pay to encourage spending.

In summary, the trend towards homemade soda drinking may eventually become prevalent as

it offers speed, convenience and variety and for many, these factors far outweigh the cost. In

the end, manufacturers will have to price their products optimally to capture the real value

from the customers as they seek to maximise profit.

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Question 1d

Earlier, we looked at the possible impact that the new homemade soda industry may have on

the pricing of major beverage providers. Now, we shall determine the SodaStream’s possible

price range, as it sets out the upper and lower limits that the company may set its prices to

optimise profit. Throughout the entire question, the Exchange Value Model (EVM) will be

used to determine both boundaries.

Product Segment Revenue (USD) Breakdown % COGS Unit SoldPer Unit Cost

(USD)Per Unit Cost

(SGD)Soda Maker Starter Kits $ 41,464,000 32.93% $ 20,229,940 818,000 $ 24.73 $ 30.91 Consumables - CO2 Refill 6,396,000 $ 1.29 $ 1.62 Consumables - Flavours 7,607,000 $ 1.54 $ 1.92 Others $ 3,229,000 2.56% $ 1,575,402 NA NA NA TOTAL $ 125,905,000 100% $ 61,428,000 14,821,000 $ 27.56 $ 34.45

$ 81,212,000 64.50% $ 39,622,658

Source: SodaStream Third Quarter 2014 Financial Reviews

Table 1: SodaStream Estimated Per Unit Cost of Product

The total revenue in third quarter 2014 was $125,905,000 while total COGS stood at

$61,428,000. Total units sold were 14,821,000 and exchange rate was about USD 1 to SGD

1.25 for the same period. Weighted average was tabulated based on the breakdown figures

provided for total revenue to derive the COGS breakdown. Thus, the cost for producing one

soda maker starter kit is $20,229,840/818,000 x SGD 1.25 = SGD 30.91. As for CO2 refill,

the cost per unit is $39,622,658/14,821,000 x $6,396,000/14,821,000 x SGD 1.25 = SGD

1.62. Finally, syrups will cost another SGD 1.92 to produce i.e. $39,622,658/14,821,000 x

$7,607,000/14,821,000 x SGD 1.25 = SGD 1.92.

A typical CO2 canister can produce 130 litres of fizzy water while a bottle of syrup can add

flavours to 12 litres of the former. This means that a total of 11 bottles of syrups are required

to produce 130 litres of flavoured drinks i.e. 130/12 = 11 bottles (round off to two decimal

places). This also means that total costs to produce the 130 litres of soft drinks will be $30.91

+ $1.62 + ($1.92 x 11) = $53.67 (marginal cost).

The average price of a regular 1.5 litres soft drink costs about $1.75. By the same token, 130

litres of soft drinks will cost 130/1.5 x $1.75 = $151.67 (reference value).

Differential value will take the value of the cost incurred by a person to commute to the

neighbouring stores to make the soft drinks purchase. Assuming that a single trip to the store

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would cost the average person $1.20, he will, in total, incur an additional $2.40 for each

round trip made. Further, we also assume that 2 bottles of the 1.5 litres soft drinks will be

bought for every trip made. Thus, the cost of commuting will be (130/1.5)/2 x $2.40 = $104

(differential value).

Exchange Value = Reference Value + Differential Value

= $151.67 + $104

= $255.67

Exhibit 2: Possible Price Range of A Typical At-Home Soda Making Machine

To conclude, the possible price range of a typical model for making home-made fizzy drinks

by SodaStream lies between $53.67 (price floor) and $255.67 (exchange value), as

represented diagrammatically in exhibit 2. SodaStream will have to take heed not to price its

offerings beyond the boundaries as they represent both the seller’s and consumers’ bottom-

line.

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Question 2a

Source: Harvey Norman website

Table 3: Coffee Machines, Attributes, Features and Benefits

SodaStream adopts in-line strategy, which involves setting prices to be in line with those of

competitive offerings (Schindler, 2012). This is even though it has a strong position in the

homemade soda segment, as it prices its machines around the same region as that of its

indirect competitors’ i.e. brewed coffee machines, taking into consideration reference

pricing effect.

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The company distributes its products in high-end departmental stores such as Takashimaya,

Tangs, Robinsons and BHG as it attempts to associate its machines with the high-end luxury

products like the designer coffee machines. Applying the framing effect, it seeks to influence

consumers’ perception and induce their willingness to pay the higher price.

As regards its consumer segment, SodaStream targets the middle to upper income group, who

are characteristically very well educated and ‘westernized’. This segment is made up the

PMETs who have higher disposable income and whose sophistication of taste comes largely

from travel, modern western cafes, the media and influence from their peers (Orissa

International Pte Ltd, 2013).

SodaStream capitalises on tying arrangement strategy to capture the market by selling its

machines at competitive prices, while deriving profits primarily from the sale of its refills.

Vendor lock-in effect is achieved as a result as consumers are forced to buy from a single

company i.e. SodaStream since its refills are not interchangeable with the other machines in

the market. For those who wish to switch to a cheaper alternative brand, they will have to

bear the brunt of the switching cost.

Profit margins

The table below calculates the profit margin of each product. Gross profit is calculated by

subtracting the retail price for the individual items with its associated cost. Estimated profit

margin is then calculated by finding the gross profit margin as a percentage of the retail price.

Carbonator SyrupRetail price $22.00 / canister $9.80 / bottle

Cost per unit# $1.62 $1.92

Gross profit $20.38 $7.88Estimated profit margin 92.66% 80.39%

# See Table 1 for computation

Table 4: Profit Margin of Carbonator and Syrup

Page | 12

Question 2b

The price-to-benefits map plots the position of the soft drinks as defined by their perceived

price and perceived benefits (Smith, 2011). It offers a visual representation of how consumers

perceive the value trade-offs.

Exhibit 5: Price-to-Benefits Map

Perceived Benefits

Per

ceiv

ed P

rice

Value Disadvantaged

Value Advantaged

Value Equivalence Line

Bottled water

SodaStream Pepsi

Gap

Gap

Each of the three soft drinks, as seen in exhibit 5, offers different benefits. All three products

deliver the fundamental benefits of hydration and thirst quenching, but Pepsi is perceived by

consumers as having the fewest benefits due to its high-sugar content. Also, positioning in the

value disadvantage zone, Pepsi has already foregone the opportunity of realising higher sales

volume had it aligned its prices with consumers’ level of expectation.

Strategically positioned within the value advantaged zone, SodaStream is perceived to offer

more benefits than Pepsi. Simply, it provides consumers with the speed and convenience of

customising their soft drinks from home at low cost while reducing plastic waste, thereby

encouraging a healthier and greener beverage option. It does however suffer from un-

harvested value where the company could have reaped higher profit from the perceived

benefits.

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Finally, for bottled water, it is positioned within the value equivalence line, and is perceived

by consumers as a beverage which offers only ‘what you pay is what you get’ and hence may

be less competitive than SodaStream.

One potential gap where new entrants like Green Mountain and Starbucks may choose to fill

is to have a machine that is capable of brewing both hot and cold beverages. With this

shortfall fulfilled, those customers who previously did not make the purchase as a result of

this limitation may soon be interested in getting one that is capable of making both. Another

possible competitive response would include the production of a less expensive variant to

cater to the mass market segment i.e. gap between bottled water and SodaStream.

Needless to say, new entrants will need to possess various sound pricing strategies and

positioning to enter the industry.

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Question 2c

Starbucks

Starbucks is a successful international coffee chain selling premium gourmet coffee.

However, it is regularly exposed to such risk as fluctuation in coffee prices and an ever

increasing number of competitors. Currently, SodaStream is the only main brand occupying

the homemade soda industry, implying that there are many more opportunities to be

exploited. Starbucks can capitalise on its strengths that it has built over the years, diversify its

product category, thereby extending its reach to a larger market segment to generate higher

profit.

Starbucks would want to position its homemade or in-store soda to portray quality, lifestyle,

and status. This ensures that its new product category communicates the same brand message

to existing and potential consumers. Viewed in this light, they are likely to adopt price

skimming strategy for its new soda segment to maintain its upmarket image. Also, the

company would also take heed to price its products to end with ‘0’ to imply quality as how

they would currently price their coffee series. Besides pricing to end in ‘0’, it should also be

mindful of the reference pricing effect, where consumers compare prices with alternative

beverages. Given this, the company should strategically price their new product segment at

the level that befits the image that it wishes to communicate i.e. framing effect.

Aside from relying on the usual sales and promotions, Starbucks can also engage in tying

arrangement to push up the demand for its new product segment. With this, the company will

be able to build long-term relationships with its consumers through offering machines and

syrups that are designed exclusively to complement each other. To entice the consumers, its

machines may be priced low or even given free to attract consumers while its refills will be

charged higher. Such pricing model assures profitability for the longer term through

increased purchase frequency of the consumables.

Besides tying arrangement, Starbucks can also employs versioning to capture those customers

who may be willing to pay extra for the additional benefits in high-end machines. Other

method would include large order discount, as they reward customers who buy in large

quantities.

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Green Mountain Coffee Roasters (GMCR)

GMCR carries a strong product portfolio which covers an extensive selection of beverages of

different brands in capsule and a strong relationship with its network of suppliers. Similarly,

it serves premium gourmet coffee and like Starbucks, it also sees the potential in homemade

soda machines, thus considering entering this market.

However, unlike Starbucks, which has outlets across the island, GMCR has limited

distribution channel and hence suffers cost disadvantage. In this regard, it should instead

adopt price penetration strategy to enter into the market as it lowers its selling price to induce

adoption.

Besides price penetration, GMCR should also focus on tying arrangement, versioning,

subscription and price segmentation; as such strategies would allow the company to compete

effectively with its rivals on the competitive landscape. Also, as GMCR is not as

conveniently located as Starbucks, it may wish to explore into bringing convenience to their

consumers by delivering consumables to their doorstep upon subscription. Price discount

should be employed to encourage consumers to sign up for a long term subscription plan.

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Question 3a

Similar to SodaStream, Starbucks and GMCR, Yeo Hiap Seng (YHS) may also set out to

target the middle to upper income consumers. Characteristically, this demographics

segment is generally well educated and has high disposable income, as they form the bulk of

the active consumers (Orissa International Pte Ltd, 2013).

Besides the mid to high income earners, the company should also take heed of the general

population becoming increasingly health conscious as a result of rising obesity levels and

Singapore’s wellness awareness campaigns which have led many to demand for healthier

food options (Orissa International Pte Ltd, 2013). As a consequence, companies are expected

to produce more healthy products to cater to this trend.

Exhibit 5: Price-to-Benefits Map

Perceived Benefits

Per

ceiv

ed P

rice

Value Disadvantaged

Value Advantaged

Value Equivalence Line

Bottled water

SodaStream Pepsi

Gap

Gap

Exhibit 6: Price-to-Benefits Map

The price-to-benefits map shows the possible shortfalls of the homemade soda market that

YHS may seek to address as it attempts to enter into the industry. For the company, its

machines and refills will be deliberately priced lower than its competitors to rapidly capture

the market (penetration pricing strategy). Tying arrangement will also be implemented

concurrently to decrease consumers’ price sensitivity towards the product offerings. This may

be done through price bundling, where products are bundled together at a single price that is

lower than the sum price of individual product to entice them to make the purchase. In terms

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of pricing, the bundles will be priced competitively. Further, prices will almost always end

with ‘9’ to give the impression of discounts given to encourage spending.

Exhibit 7: Subscription Strategy

After the initial bundle purchase, YHS could employ subscription strategy to entice

consumers to make monthly purchase of the refills. Discounts are given to customers who

make large quantity purchase or subscribe for the longer term. Accordingly, this also allows

YHS to collect customer information for customer relationship management, opportunities to

interact and increase brand image which is important for them.

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Question 3b

Offering new product range can result in cannibalisation that reduces profit. In this regard,

YHS may employ segmentation hedges to encourage consumer spending, while preventing

those who are prepared to pay the high price or higher to purchase at the low price (Smith,

2011).

One way that YHS can prevent cannibalisation is through the use of price segmentation by

purchase quantity. It works on the basis of offering incentives in the form of discounts for

orders of large quantities. However, such discounts will be capped at a maximum permissible

quantity and any further purchases beyond the stipulated amount will not entitle the buyer to

any further lowering of prices. Also, the discounted price will be similar or higher to that

offer to the commercial establishments, and as a result, the latter will be indifferent of the

discount given. On the other hand, the individual who made the purchase up to the amount to

qualify for the discount gets to enjoy the lowered price as a result of the quantity purchased.

Another form of segmentation hedge is through retail price zone strategy where pricing are

based on the retail outlet’s location. The objective is to maximise profit through correlating

consumers’ price sensitivity with the location regularly frequent. In this regard, YHS will

then be able to capture the different segments of customers through pricing or customising its

machine or capsule bundles based on the different locations. As a case in point, consumers

who frequent premium locations like Cold Storage tend to be less price sensitive vis-à-vis

those who regularly patronise neighbourhood stores such as FairPrice,

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Question 3c

Below are three recommended strategies that YHS may employ to ensure sustainability and

success in its homemade soda business.

One of the proposed plans is through product bundling, where machines and capsules are

bundled together and sold at a single price lower that the sum price of the individual products

to induce purchase.

Through versioning, the highest end machine could be bundled with more consumables than

the low end machine to induce perceived benefit from purchasing the more expensive

machine. This allows consumers to sample the new flavours, increasing both awareness and

perceived benefits.

Another promotion price plan suited for their machines will be periodic discount, also known

as the high/low pricing. It is the practice of alternating between high-price periods with low-

price period. After a period of periodic discount, YHS can set a consistent price that is

between the high and low price level. This is for customer that are not willing to wait for sale

but willing to pay a little more.

E-coupons and Trial samples can be also use to promote their favour capsules. Customers

that are more prices sensitive may be induced to purchase due to e-coupons while the less

price sensitive customer do not mind paying the retail price. Product trial can also be used as

a promotion tool. The objective of product trial is lock-in consumers after the trial period.

Limited edition flavours can be offered which is in essence final stage of product testing.

Through this discount-induced trial, YHS can gather market sentiment on new flavours. Trial

sample through booths in various retail outlets also allows consumers to experience the

convenience of its homemade carbonate series and the refreshing flavour which differs from

their mainstream offerings.

The appropriate combination of strategic penetration pricing and structure, segmentation

hedges and promotions will encourage uptake of YHS’s new carbonates series. The crux of

promotion is to induce interest and adoptions, creating the lock-in effect for long term

revenue.

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Works Cited

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http://www.euromonitor.com/soft-drinks-in-singapore/report

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2015, from MarketResearch.com:

http://www.marketresearch.com/MarketLine-v3883/Soft-Drinks-Singapore-8487746/

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White Paper. Singapore, Singapore, Singapore.

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Retrieved January 8, 2015, from Switzerland Global Enterprise:

http://www.s-ge.com/en/services/Industry%20reports

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Establishing Price Structures. South-Western Cengage Learning.

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http://www.straitstimes.com/news/singapore/more-singapore-stories/story/12-interesting-

trends-about-singapore-household-income-a

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