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Coca-Cola & The “Smart” Vending Machines

Coca-Cola & The “Smart” Vending Machines. By: Ajay Jagsi Devon Choo May Huang. A Little Experiment …. V.S. Today’s Agenda:. Background Mechanics of Coke ’ s Pricing Strategy Economic Rationale Critique of Coke ’ s Pricing Strategy Recommendations Conclusion. Background.

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Coca-Cola & The “Smart” Vending Machines

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  1. Coca-Cola & The “Smart” Vending Machines By: • Ajay Jagsi • Devon Choo • May Huang

  2. A Little Experiment … V.S.

  3. Today’s Agenda: • Background • Mechanics of Coke’s Pricing Strategy • Economic Rationale • Critique of Coke’s Pricing Strategy • Recommendations • Conclusion

  4. Background • Importance of vending machines • Accessibility and convenience • “Smart” vending machines

  5. Media’s Reactions … • “A cynical ploy to exploit the thirst of faithful customers” (San Francisco Chronicle) • “Lunk-headed idea” (Honolulu Star-Bulletin) • “Soda jerks” (Miami Herald) • “Latest evidence that the world is going to hell in a handbasket” (Philadelphia Inquirer) • “Ticks me off” (Edmonton Sun)

  6. Mechanics of Coke’s Strategy/ Economic Rationale • Price Discrimination • Selling the same product to different groups of buyers at different prices. • “Hot” day v.s. “Cold” day prices • Economic Rationale • Higher price (hot)  higher profit • Lower price (cold) induces sales  higher profit • The “Numbers” Game …

  7. The “Numbers” Game (Slide 1 of 3) Demand function when temperature is high: QH = 300 - 2p , where p is price Demand function when temperature is low: QL = 180 - 2p

  8. The “Numbers” Game (Slide 2 of 3) Normal Vending Machines • Expected price is 70 cents per can. • Expected profit is 5,000 cents per machine. “Smart” Vending Machines • Price on a HOT day is 85 cents per can • Price on a COLD day is 55 cents per can • Expected profit is 5,450 cents per machine.

  9. The “Numbers” Game (Slide 3 of 3) • Incremental profit per day per machine = 5,450 – 5,000 = 450 cents • Assuming 200,000 “smart” vending machines, Annual incremental profit = 450 * 200,000 * 365 days = $328.5 million

  10. Critique of Coke’s Strategy • Similar to strategy employed by • Book publishers • Airlines • Flaws • Failure to recognize availability of substitutes • Public announcement of its plans

  11. Recommendations • No public announcement • Execute pricing strategy discretely like • Crate & Barrel • Victoria’s Secret • Strategic placement of machines • High traffic areas with few repeat customers • Examples: Rest areas & tourist traps

  12. Conclusion • Highly profitable strategy if: • Executed with extreme caution • Greed is NOT good • Applies to both: • Dot coms • “Bricks & mortar” companies

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