Dynamic Pricing Technology at Coca Cola

In late 1999, the Wall Street Journal reported that Coca-Cola Company was working to develop technology that would enable its vending machines to price products based on demand, increasing prices during major events such as hot days, or lowering them when it made sense, such as in colder weather.

This technology could in theory be used to adjust prices on a larger scale (i.e. many vending machines at once) or at a more granular level (i.e. at one specific machine). According to a Harvard Business School case on Coca-Cola, during a public appearance, M. Douglas Ivester, the company’s CEO confirmed they were looking to roll out this pricing structure, emphasizing that “Coca-Cola is a product whose utility varies from moment to moment” and at times when utility is higher such as at a stadium, “it is fair that it should be more expensive.” Ivester’s comments, and the idea of this technology in general, created quite a stir with the general public; and in response, Coca-Cola quickly issued a press release stating that they were “not introducing vending machines that raise the price of soft drinks in hot weather”, and that technologies being explored would “enhance their ability to deliver on their promise to offer products that people want at affordable prices”. Ultimately, while not necessarily tied to this incident directly, this likely contributed to Ivester leaving Coca-Cola early the following year.

Economist Richard Thaler’s book Misbehaving: The Making of Behavioral Economics explains that the above-mentioned pricing structure, known as “dynamic pricing” is in line with what “economic theory says will and should happen”. Illustrating this concept via an example of snow shovels following a blizzard, he explains that the price would go up “enough so that everyone who is willing to pay the price will get one” as this is the “only way to assure that the snow shovels will end up being owned by those who value them the most (as measured by their willingness to pay)”. However, Thaler states that he has found through research that this type of situational adjustment to prices – specifically companies profiting on events such as blizzards – generally angers consumers and highlights Coca-Cola as a case in which a CEO “discovered the hard way that violating the norms of fairness can backfire”.

In this reader’s opinion, one area where Ivester went wrong was in explicitly stating that this increase in price was “fair”. Perhaps he overestimated his understanding of how consumers think and ability to convince the public that hiking up prices at points of high demand as reasonable. Or perhaps Ivester was overconfident and believed that people’s love for Coca-Cola would trump any intolerance for what some might consider price gouging. Had he considered the perspective of the average consumer, Ivester may have realized that even if a soda is not critical for a person’s survival, the public might feel it was unjust for a company to increase a beverage’s prices when it is very hot outside and capitalize on consumers’ thirst.

Given that Coca-Cola is a popular product that has been around for over a century, it makes sense that the company would look for opportunities to increase its prices, especially to maintain a favorable profit margin as the cost of doing business increases. This is something consumers would likely understand if it was openly addressed and framed in the right way. However, Ivester did not take this approach when announcing the intended change in vending machine pricing and while his comments may have seemed accurate and certainly logical to him, the average Coca-Cola consumer is unlikely to believe that something is “fair” solely because it is supported by an economic theory.

Given that Ivester’s statements were clearly not demonstrating a customer-centric mindset, it was wise of Coca-Cola to emphasize that product affordability and customer experience were most critical, and distance itself from the CEO quickly once these arguably insensitive comments had been made. However, they could have done more to reinforce that they would not pursue opportunities for dynamic pricing purely for the purpose of profit maximization, if this were truly the case. While consumers would likely tolerate dynamic pricing if a product or service is a staple in their everyday life or truly required (as demonstrated by the popularity of ride services apps with similar pricing models), this may not be the case for an indulgence such as a soda. As a refreshment company, Coca-Cola relies on consumers making repeat purchases, and the brand should strive to remain a top choice over the life of those customers. Therefore, looking for opportunities such as this to quickly boost profits could be somewhat short-sighted. Thaler points out, the “seller has to trade off short-term gain against possible long-term loss of good will, which can be hard to measure”.

It is certainly possible to raise prices and still be perceived “fairly” by consumers, however, Thaler suggests that the public’s reaction to such a change is highly dependent on “on who it helps or harms” as well as “how it is framed”. If I were Ivester, I would have strived to be more thoughtful about how to best introduce the roll out of dynamic pricing, starting with trying to understand what our target customers would be most receptive to when it came to raising prices.

In order to change the public’s perceptions of fairness related to Coca-Cola’s introduction of dynamic-pricing vending machines, the announcement and subsequent roll out would need to be more intentional than Ivester’s public remarks were. If I were implementing the change in pricing, I would have emphasized the company’s need to cover rising costs if possible or point out other new, technological features of the new vending machines as customer-friendly improvements that need to be paid for somehow. I’d increase prices across the board and then look for opportunities to allocate Marketing budget towards promotions in areas where sales were not as high, given that it is generally a better practice to highlight a discount rather than pricing up. Ideally the company would be able to prevent consumers from experiencing effects of loss aversion by offering these discounts, as the new reference point would be higher – ultimately consumers would feel they were getting a deal when prices dropped.

I’d also search for opportunities to spin the negative press and work to make customers’ experience at vending machines more exciting as they become more interactive and capable of dynamic-pricing adjustments; perhaps by enabling them to market these “discounts” as flash sales to generate excitement when appropriate. Finally, I’d recommend that Coca-Cola work to decouple payment by promoting credit card purchases at vending machines. By doing so, customers will not feel as much loss when parting with their cash and therefore, may not feel the increase in price.

Ultimately, if Coca-Cola were to insist on implementing dynamic pricing, I’d recommend that they cap prices at a reasonable level that consumers are able to tolerate. Coca-Cola is not a product that is vital to survival, people purchase it because they enjoy it. Even if a consumer is willing to pay a higher price does not mean the company should take advantage, as they risk the leaving consumers with a bad taste in their mouths (figuratively speaking) which could decrease long term brand loyalty.