Coca-Cola needs to master simple lessons about price discrimination

Coca-Cola really blew it recently when it said it developed a new vending machine with a thermometer that will raise prices when the weather is hot. You don’t need an MBA to know that the public is going to look askance at any innovation that seems designed to take more money out of their pocket. Any bright undergraduate marketing major could’ve suggested a better way of presenting the machine.

Coke should’ve said that it developed a vending machine with a thermometer that would lower prices when the weather was cold.

The company then could quietly ratchet up their normal price by a nickel or so and achieve the same pricing structure as the one disclosed in their wrongheaded announcement.

Coke isn’t the first company to discover that you can make more money if you charge different prices to groups with different demand for the product. Economists call this practice “price discrimination.”

Successful businesses have been doing that for years. The smart ones know that to be successful at it you must ensure that the public thinks you are doing someone a favor.

Take my favorite neighborhood tavern. The owners know that people are more likely to eat on Friday or Saturday night, regardless of price. But they have enough sense not to charge higher prices on those nights. Instead they offer a wide range of specials every night from Sunday through Thursday.

Yes, Friday and Saturday prices are higher for the entrees that make up 70 percent or more of their business. But no one feels ripped off. And customers that come in on a weekday night appreciate the generosity of the specials.

The same thing applies to the chain restaurants that offer senior citizen specials. Now how could you feel anything but admiration for a business that has a warm spot in its heart for the older generation?

Government sanctions double-pricing in federal dairy-marketing orders. Milk marketing takes place under arcane rules that even only a few agricultural economists understand well.

Recently, the tier of prices based on distances from Eau Claire, Wis., has come under attack by farmers, politicians and editorial writers in the Midwest.

But no one seems to have noticed another provision that lets marketing orders arbitrarily set higher prices for milk that will be used for fresh, fluid consumption rather than for milk that will go into cheese, butter or nonfat dried milk.

This two-tiered price system increases total revenue for processors and farmers but means higher milk prices for consumers than would be the case if this price discrimination weren’t allowed. But the milk-drinking public is blissfully unaware of the practice.

All these common marketing practices have the effect of lowering prices to customers who are price-sensitive while keeping them at a higher level for those who are less particular about price.

So does selling non-refundable airplane tickets purchased 30 days in advance for $200 while tickets purchased the day of the flight cost $800.

To use one of the phrases that drive some freshmen screaming from econ courses, a firm can maximize its profits by charging different prices to customers with different elasticities of demand. In everyday words, charging different prices puts more bucks on the bottom line.

Now there’s nothing more all-American in the 1990s than maximizing profits. More and more businesses are finding ways to charge at least two prices for the same product.

But nearly everybody knows that you do it by charging a “regular” price and a “discount” price. You never charge a “regular” price and a “higher” price.

Of course people will pay more for a Coke when it is 95 degrees in the shade. Charge whatever you think the market will bear under those conditions. But call it your “everyday low price.” Then offer “cool weather discounts” that kick in as the temperature drops.

© 1999 Edward Lotterman
Chanarambie Consulting, Inc.