Rafi Mohammed

Why Coca-Cola Should Raise Prices

Posted on August 8th, 2011 (1 Comments)

Reprinted from the Harvard Business Review website.

This post is part of the HBR Insight Center Marketing That Works.

Even as a kid growing up in Cincinnati, I was interested in pricing. I remember the grand opening of a new superstore in the early 1980's: two-liter bottles of Coca-Cola were on sale for 88 cents. "Wow, that's cheap," I recall thinking. Thirty years later, the sales price for two-liter Coca-Cola products remains under a dollar. Just recently, my local supermarket in Boston held an 88 cent Coke sale. So much for pricing power...

It's not surprising that earlier this summer, analysts claimed "100% of the questions" they receive from Coke investors are about its U.S. pricing strategy. In particular, why isn't the company able or willing to charge more?

Despite its flat pricing in the U.S., Coke has kept profits growing by steadily increasing sales volume. Coke's recent Q2 financial results reveal 7.5% volume growth in Continental Europe, and sales of my personal favorite—Coke Zero—rocketed by 15%. Coca Cola is the number one U.S. soft drink, with a 17% share. Last year Beverage Digest reported that Diet Coke (9.9% share) surpassed Pepsi (9.5% share) to become the industry's number two brand. Remember those famous "Pepsi Challenge" commercials where Pepsi confidently encouraged consumers to make their buying decisions after sampling both Pepsi and Coke? Well, the people have spoken: Coke is the clear winner.

Enter any retail establishment and you'll likely find identical prices for Coca-Cola and Pepsi products. Maintaining price parity is a safe strategy. But safety isn't necessarily what Coke investors want. That's why I think Coke should premium price its products. At the very least, it should increase prices on its more differentiated drinks such as Dr. Pepper, Zero, and Sprite. Ditto for Pepsi: Since its Mountain Dew (6.8% share) soft drink is differentiated, there's probably a pricing opportunity too. In soft drinks as in other markets, companies that achieve product innovation should command higher prices.

That's true only at the retail level, however: I'm not advocating similar hikes for Coca-Cola's large volume syrup sales to say, fast food restaurants. Why? In the wholesale syrup channel, Coke and Pepsi are virtual commodities; buyers like restaurant chains shop on price, because they know few people will switch preferences because a store switches from Coke to Pepsi. Differentiated food products are what matter to diners —not the soft drink provider.

For Coke, this situation may feel like a managerial conundrum: its product is a commodity in one market, and a premium product in another. That situation is not unique to Coca-Cola. Most products have different pricing opportunities based on channel and geography. The key to better pricing is to embrace and capitalize on these market nuances. And while it's easy for executives to realize and execute on "higher prices will be more profitable" advantages, the flip side is more challenging. Companies tend to take pride in high margins as a signal of "we are better," but even if that's true, there are some markets where you can't command that premium. My advice is to set aside pride. Lower your margins in these commodity-like markets and enjoy the resulting increased growth and profit. Profit trumps margin-based pride.

If a brand like Coke increased its prices to be slightly more than Pepsi, would you switch? Should Coca-Cola charge premium prices in the retail channel? What instances do buyers view your product (or service) as highly differentiated or a commodity? I'm eager to hear your opinions.

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Readers' Comments on This Blog Entry

From Alan on August 11th, 2011
I agree with your assessment on Coke being able to increase pricing. I've witnessed many times when someone ordered a Coke, was told by the waiter that they only served Pepsi, and then the person promptly changed their drink order to tea. While price wasn't a factor in this example, it shows how strongly people feel abut their brand. If both Pepsi and Coke were available I'm sure the person would have spent a significant premium to get Coke. By the way, I love your book. I just bought it Monday and am part-way through. Yours is the best book I've ever found on the topic of pricing. Great ideas for us to implement! Also of note I grew up in southern Indiana an hour from Cincinnati. Go Reds!