IIM CALCUTTA

The New Coke Vending Machine

Saurav Chatterjee, Subrata Dass

Group 5

6/25/2012

This case deals with the incident of the new Coke vending machine which had caused a huge uproar around 1999. Coke was playing around with the concept of a time based price variance in its vending machine. However an untimely media leak, made Coke look like a greedy price gouger

Case write-up

Coca-Cola’s New Vending Machine (A): Pricing to Capture Value, or Not?

Synopsis:

October 1999: It was reported that Coke was secretly working on a vending machine that could change prices according to

the weather. In defence of this strategy, the then Chairman and CEO M. Douglas Ivester gave an explanation that Coke

should be able to charge a higher price when the demand was higher.

In the supermarkets, the prices of Coke and Pepsi were driven down due to price wars. However, the vending machines

were not part of the price wars and Coke was looking to extract maximum profits from their most profitable channel.

When the news became public that Coke might be looking to charge higher prices in summer months it caused huge public

uproar.

Basically, Coke was thinking about this idea of charging different prices in different seasons to maximise economic profit.

The economic principle considered here was “price discrimination”, which means selling the same good at different prices

to different groups of customers. However, an important aspect that Coke did not take into account was the buyer’s

perspective and the image dilution that such an act would have on the Coke brand. Eventually Coke had to give up on the

idea and issue a public statement mentioning that it would not introduce such a vending machine.

Differentiated Pricing:

In first degree of price discrimination, a seller charges a separate price to each customer depending on the intensity of his

demand. In the second degree, seller charges different prices based on volume bought. In the third degree of price

discrimination, the seller charges different amounts to different classes of buyers.

There are different kinds of third degree of price discrimination:

1. Customer segment pricing: Different customer groups are charged different pricing for the same products e.g. Museums

charging different prices to students

2. Product form pricing: Different alternatives of quality, style for the same product. For example, Levi’s sells many varieties

of jeans at its stores for various prices.

3. Image pricing: Pricing the same product at two different levels based on image differences. E.g. cosmetics

4. Channel pricing: A product is sold at different prices depending on whether you buy at a restaurant or vending machine

5. Location pricing: Products are priced differently at different locations.

6. Time pricing: Prices are varied by season, day or hour. For example electricity companies charge different rates at

different hours. Airlines industry use yield pricing where they use discounted early purchases. The prices change by the

time of the day, day of the week and season of the year as well. Although this phenomenon is exploding, it is extremely

tricky where consumer relationships are concerned. This works best where there is no bond between buyer and seller. For

example in this case there is a symbolic value attached to the brand and if the company tries to take advantage of this

relationship by charging different prices on different days, there is bound to be anger and resentment towards this

idea. While passing the price increases to the customer the company must avoid looking like a price gouger.

Buyers Perspective:

What makes the buyers view a certain price as fair or unfair? There are contradictions galore; the Kahnemann survey

(Kahnemann et all Vancouver 1986) tends to suggest that when given an option of buying tickets using different

methodologies as listed below

a) Auctions b) Lotteries c) Standing in queues

People tend to perceive prices received by standing in queues as the most fair and auctions as least fair.

However, the Fairness heuristic theory turns this logic on its head; it says that once consumers have established fairness

judgments, those judgments serve as heuristics for evaluating new experiences (Van den Bos et al. 1997). If consumers

judge a particular pricing rule as fair, subsequent transactions using similar rules will also be perceived as fair. In particular,

consumers who participate in price determination through bidding and/ or negotiating are more likely to perceive prices as

fair. When consumers participate in setting the price, the onus is more directly on them to ensure price acceptability and

they are more likely to make internal attributions regarding the price determination. Therefore, consumers are less likely

to perceive a price as unfair, even if evidence exists to the contrary, when they are involved in the price-setting process

So what factors contribute to the fairness perception? What really happened in case of Coke?

We have tried using the combination of following theories to explain what really happened

Equity Theory – As per this theory the buyer tends to compare the price he gets in a certain transactions with

another referent transaction. The reference can be a separate transaction that the buyer himself had at a

previous point in time or it can be a transaction made by an acquaintance. If the buyer feels that the price that

he got is more as compared to his referent transaction the buyer feels that the price is unfair and feels let

down.

Dual Entitlement (DE) - As per the proponents of this theory a supplier may examine the fairness of its

intended pricing tactic as judged by community standards. If it is not fair, the supplier will be less likely to go

ahead with its planned pricing tactic. Moreover, these researchers propose that the constraining motive could

be primarily moral, and at times, dominate the purely economic motives of avoiding loss of customer goodwill

and jeopardizing long-term profits.

The DE principle implies that it is not fair for sellers to increase the price to the buyer in order to exploit increased market

power (such as when demand increases). Similarly, if there is increased supply, it is not fair for prices to be lower to the

consumer because it would violate the terms of the reference transaction.

Fairness Heuristics- As per this theory people tend to judge situations on the basis of most relevant

information. If the most relevant information is not available they take the most available information to

judge others which leads to establishment of procedural justice as procedural information is the most

available information.

Theory of Distributed Justice- The principle of distributive justice maintains that people, in an exchange

relationship with others, are entitled to receive a reward that is proportional to what they have invested in the

relationship (Homans 1961).

Purchase Context and Situation Norms – The purchase context and the situation norms also play a major role

in the judgment of fairness. For example during the initial stages of a buyer seller relationship a buyer may

judge a seller on the basis of his competence but gradually with increase in transactions the buyer may focus

on the benevolence factor. So a breach of trust in the initial stages is taken as less unfair than a breach of trust

in the second stage. Similarly once norms are formed change in norms are considered to be more unfair.

All these theories can be interconnected in a way in the following model:

As per this particular framework once a customer perceives a particular pricing as unfair based on the different theories

discussed earlier he might resort to a number of activities based on the intensity of his negative emotions, the perceived

cost of action and his relative power as compared to the buyer.

No Action: When buyers are slightly disadvantaged, there may be some decrease in perceived value and feelings of

disappointment. If so, buyers either are not motivated to take action or believe it is not worthwhile to take action because

of the cost of complaining or switching to another seller. (Urbany, Madden, and Dickson 1989).

Self-protection: When buyers believe that an inequality in an exchange is unacceptable and are upset, disappointed, or

regretful (if they believe that there is a better option), they may choose to complain, ask for a refund, spread negative word

of mouth, and/or leave the relationship, depending on their assessment of which action is most likely to restore equity with

the least cost. In addition, they may search for additional information to assess the potential switching costs or to assess

their power to renegotiate with the seller.

Revenge: When a strong negative emotion, such as anger or outrage, occurs with a perception of price unfairness,

customers’ leaving the relationship or complaining may not be sufficient to address the perceived inequity.

Correlating Buyer's perspective with the Conceptual Framework of Price Fairness:

1) Referent Transaction: A Coke buyer would treat ‘buying a Coke’ as a similar transaction to one done during the past

summer. Keeping other factors constant, per the equity theory, he tries to compare the amount spent for this new ‘time-

based pricing’ transaction with the extra amount he has to shell in a hot summer month.

2) Trust: Coke’s brand value is largely based on trust. Especially being a national brand, customer trust is an integral part of

their product strategy. Even though the new vending machine was not launched, the news spread like wildfire and dented

Cokes brand value. The satirical article by Jeff Brown published in the Philadelphia Inquirer is just one example of how

people started venting out their frustration. Trust was inevitably shaken.

3) Social Norms: There are general norms in the market when it comes to buying specific products. Lot of consumers know

these norms and unconditionally accept them. Few examples indicated in the case discuss why hard cover books are priced

higher than paperback editions, or why matinee show prices for movies are cheaper than other shows. In this particular

case, changing prices according to weather was not a generally accepted norm. leading to the negative reactions from the

public.

4) Violation of DE principle: The DE principle implies that it is not fair for sellers to increase the price to the buyer in order

to exploit increased market power (such as when demand increases).Coke was clearly violating this basic DE principle

5) One sided views: May be the customers only looked at one aspect – Coke priced higher in summer months. No one

looked at the other side - on cold days it would be priced lower. This clearly explains one of the ways in which marketing

communications comes into play and how Coke could’ve done better on this front

Facing flak from everywhere, Coke eventually did not introduce the new vending machine. Through mere expression of

withdrawal from making such ‘expensive’ purchases and negative word-of-mouth publicity, Coke buyers forced the

company to shun this strategy. In hindsight, had Coke done this while engaging its customers the ending could have been

vastly different

Conclusion:

We have tried to use Lens theory to summarize the key concepts associated with this case. From a buyer’s perspective,

differentiated product features shape perceived relative benefits and influence preferences or perceived value of a product.

A seller can affect perceived relative benefits and preferences or perceived value of a product by advertising etc.

influencing customer choices.

In order to understand the right price of a product 3 P’s namely product, promotion and place and 5 C’s customers,

competitors, company skills, collaborators, context play a key role. It helps in driving perceived value and perceived prices.

In this Coca Cola’s New Vending Machine case, information leaked much earlier in media, this lead to a lot of rumours,

uproar, conspiracy theories and analysis. Improper handling of media by Mr. M.Douglas Ivester further complicated the

issues. This is definitely not the best way a company would like to introduce its differential pricing to the customers. Things

didn’t go the way Coke would have planned.

A key question arises- What would have happened if things went as per Coke’s plans? We tried to analyse this question in

light of the earlier mentioned concepts present, market information available about Coke and the events that unfolded

when new Coke was introduced in 1985. We were not able to come to any definite conclusion whether “New Vending

Machine” would have been a success or a failure.

Bibliography:

Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler (1986), “Fairness and the Assumptions of Economics”

Lan Xia, Kent B. Monroe & Jennifer L. Cox (2004), “The Price Is Unfair! A Conceptual Framework of Price Fairness

Perceptions”

Kees van den Bos, “Fairness Heuristic Theory”

Kelly L. Haws, William O. Bearden, “Dynamic Pricing and Consumer Fairness Perceptions”

Rosemary Kalapurakal, Peter R. Dickson, Joel E. Urbany, “Perceived Price Fairness and Dual Entitlement”