February 20, 2014
Well, not anymore. But, did you know that Coca-Cola held its price at 5 cents for 70 years?!
In 1890, a nickel. In 1917, a nickel. In 1940, a nickel. In 1959, a nickel. Through the Spanish-American War, World War I, the Great Depression, World War II, the beginning of the Cold War, and Coke was still a nickel! Why?
Well, as the story goes, back in 1899, two lawyers came to the office of the President of Coca Cola, and were trying to sell him on the idea of bottling Coke (at the time, it was only sold in Soda fountains). They wanted to purchase the bottling rights for Coke. And, since the President didn’t really believe in the whole bottling thing, he probably signed the worst contract in history – they could sell Coke in bottles, and they could buy the syrup at a fixed price – forever! (Man, I need lawyers like this!)
This put Coca-Cola in a precarious position, because when bottled drinks took off, they couldn’t raise the price. If a store decided to raise the price of a bottle of Coke, that would cut down on Coca-Cola’s profits, because since they couldn’t raise prices, they had to make it up on volume – in a big way!
So, what did Coca-Cola do?
They blanketed the entire country with advertising for “5 cent” Coke, and “Drink Coca-Cola, 5 Cents” was prominently displayed on buildings next to storefronts everywhere. The public was so brainwashed with the “5 cent” Coke, that it was hard for any of the storefronts or bottlers to raise their prices.
Not surprisingly, Coca-Cola benefitted greatly from this sell more volume approach, and they experienced substantial profit margins throughout this period. However, by the early 1960’s, the nickel Coke finally came to an end.
So, is this a good strategy for your company? To recover from a bad pricing decision – sell more volume? Does that work?
The first thing is, you’re probably NOT Coca-Cola. The second thing is, you’re probably NOT Coca-Cola. The third thing is, if you’re trying to make up for a bad pricing decision by increasing volume, this is very likely a bad pricing strategy to increase profits.
Let me explain – like many people, you may have taken an “Econ 101” course in college where you learned that if you cut price (or kept it low), you could make the revenue up in volume. So to recover from a 3% decrease in price, you only have to increase volume by 3%. Well, if you look at making up the “profit” lost from a price cut, if you are like most companies, you will likely have to grow volume by ten times the amount you cut in price. And since this level of volume increase is generally untenable in a b2b business environment, a more sophisticated pricing strategy where you strategically decide to hold or raise prices micro-segment by micro-segment based on customers’ willingness-to-pay, is the best way to increase your profits.
And when your profits grow – that will be worth a Coke and a smile