Friday, April 25, 2008

Utility Pricing For Maximum Profit

In 1999 Coca Cola experimented with vending machines that altered their prices based on local temperature. Utility is the relative satisfaction or derived value a customer receives from a purchase. Coke's logic was that the utility of a cold Coca Cola on a hot summer day is higher than usual. Customer reaction was decidedly negative. The media had a field day with such nasty headlines as:
  • "A cynical ploy to exploit the thirst of faithful customers" (San Francisco Chronicle)

  • "Lunk-headed idea", (Honolulu Star-Bulletin)

  • "Soda jerks" (Miami Herald)

So, can you apply revenue management principles (i.e. utility pricing) to fast moving consumer goods? And what should Coca Cola have done to avoid the backlash?

To really study how it is done right, look at the Universal theme parks. In addition to your normal entrance fee, you can opt to purchase an Express Plus Pass. This pass allows you to skip the lines at rides and attractions. The price for this pass fluctuates based on time of year and occupancy of the park. This is a prime example of utility pricing.

The problem Coke experienced is in managing customer expectation. Everyone knows what the price of a Coke from a vending machine should be. When that expectation is not met, customers will react accordingly. Therefore, utility pricing is only viable when customer expectations are still flexible.

So, to answer the first question, yes, you can apply revenue management to fast moving consumer goods, as long as price expectations are not pre-set.

But determining what Coca Cola could have done better is tougher. Everyone knows what a Coke should cost, therefore any changes to that price must include additional value. It isn't enough to offer just a cold Coke on a hot day. Offer something more and the value proposition must be recalculated by the consumer. If you can provide greater perceived value then your adjusted price will be accepted. That's why everyone doesn't shop at Walmart. Perception of value will always rule the day.

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