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The New Coke Vending MachineThe New Coke Vending Machine

Group 5- Hitesh Kumar Singh, Natarajan Rajagopalan, Subrata Dass, Ashish Rastogi, Hitesh Kumar Singh, Natarajan Rajagopalan, Rahul Gupta, Saurav Chatterjee, Subrata DassGroup 5- Hitesh Kumar Singh, Natarajan Rajagopalan, Subrata Dass, Ashish Rastogi, Hitesh Kumar Singh, Natarajan Rajagopalan, Rahul Gupta, Saurav Chatterjee, Subrata DassGroup 5Hitesh Kumar Singh, Natarajan Rajagopalan, Subrata Dass, Ashish Rastogi, Hitesh Kumar Singh, Natarajan Rajagopalan, Rahul Gupta, Saurav Chatterjee, Subrata Dass

Group 5Group 5Group 5 6/25/20126/25/2012

This case deals with the incident of the new Coke vending machine which had caused a huge uproar around 1999. Coke was playing around with the concept of a time based price variance in its vending machine. However an untimely media leak, made Coke look like a greedy price gougere a greedy price gougere a greedy price gougerThis case deals with the incident of the new Coke vending machine which had caused a huge uproar around 1999. Coke was playing around with the concept of a time based price variance in its vending machine. However an untimely media leak, made Coke look likThis case deals with the incident of the new Coke vending machine which had caused a huge uproar around 1999. Coke was playing around with the concept of a time based price variance in its vending machine. However an untimely media leak, made Coke look lik

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Case write-up Coca-Colas New Vending Machine (A): Pricing to Capture Value, or Not? Group 5- Hitesh Kumar Singh, Natarajan Rajagopalan, Subrata Dass, Ashish Rastogi, Hitesh Kumar Singh, Natarajan Rajagopalan, Rahul Gupta, Saurav Chatterjee, Subrata Dass, Synopsis: During October 1999:, Iit was reported that CokeCoke was secretly working on a vending machine that could change prices according to the weather. In defence of this strategy, the then Chairman and CEO M. Douglas Ivester gave an explanation that Ccoke should be able to charge a higher price when the demandutility was higher. In the supermarkets, the prices of cokeCoke and Pepsi were driven down due to price wars. However, the vending machines were not part of the price wars and Ccoke was looking to extract maximum profits from their most profitable channel. When the news became public that cokeCoke might be looking to charge higher prices in summer months it caused huge uproar in public uproar. Basically, cokeCoke was thinking about this idea of charging different prices in different seasons from anto maximise economic profit maximization point of view. The economic principle they were considered hereing was price discrimination, which means selling the same good at different prices to different groups of customers. However, an important aspect that cokeCoke did not take into account was the buyers perspective and the image dilution that such an act would have on the cokeCoke brand. Eventually cokeCoke had to give up on the idea and issue a public statement mentioning that cokeit would not introduce such a vending machine. Differentiated Pricing: In first degree of price discrimination, a seller charges a separate price to each customer depending on the intensity of his demand. In the second degree, seller charges different prices based on volume bought. In the third degree of price discrimination, the seller charges different amounts to different classes of buyers. There are different kinds of third degree of price discrimination: 1. Customer segment pricing: Different customer groups groups are charged charged different pricing for the same products e.g. Museums charging different prices to students 2. Product form pricing: Ddifferent alternatives of quality, style for the same product. For example, Levis sells many varieties of jeans at its stores for various prices. 3. Image pricing: Ppricing the same product at two different levels based on image differences. E.g. cosmetics 4. Channel pricing: Aa product is sold at different prices depending on whether you buy at a restaurant or vending machine 5. Location pricing: Products are priced differently at different locations. 6. Time pricing: Prices are varied by season, day or hour. For example electricity companies charge different rates at different hours. Airlines industry use yield pricing where they use discounted early purchases. The prices change by the time of the day, day of the week and season of the year as well. Although this phenomenon is exploding, it is extremely

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tricky where consumer relationships are concerned. This works best where there is no bond between buyer and seller. For example in this case there is a symbolic value attached to the brand and if the company tries to take advantage of this relationship by charging different prices on different days, there is bound to be anger and resentment towards this idea. While passing the price increases to the customer the company must avoid looking like a price gouger. Buyers Perspective: What makes the buyers view a certain price as fair or unfair? There are contradictions galore; the Kahnemann survey (Kahnemann et all Vancouver 1986) tends to suggest that when given an option of buying tickets using different methodologies as listed below a) Auctions b) Lotteries c) Standing in queues

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People tend to perceive prices receivedgotten by standing in queues as the most fair and auctions as least fair. However, the Fairness heuristic theory turns this logic on its head; it says that once consumers have established fairness judgments, those judgments serve as heuristics for evaluating new experiences (Van den Bos et al. 1997). If consumers judge a particular pricing rule as fair, subsequent transactions using similar rules will also be perceived as fair. In particular, consumers who participate in price determination through bidding and/ or negotiating are more likely to perceive prices as fair. When consumers participate in setting the price, the onus is more directly on them to ensure price acceptability and they are more likely to make internal attributions regarding the price determination. Therefore, consumers are less likely to perceive a price as unfair, even if evidence exists to the contrary, when they are involved in the price-setting processThis assertion is consistent with findings that support attribution theory effects associated with locus and controllability (Weiner 1985). When consumers participate in setting the price, the onus is more directly on them to ensure price acceptability and they are more likely to make internal attributions regarding the price determination. Therefore, consumers are less likely to perceive a price as unfair, even if evidence exists to the contrary, when they are involved in the price-setting process. Building on these theoretical explanations, hypotheses related to both the overall and the relative importance of the pricesetter characteristic are proposed: What explains this apparent discrepancySo what factors contribute to the fairness perception? What really happened in case of CokeCoke? We have tried using the combination of following theories to explain what really happened Equity Theory As per this theory the buyer tends to compare the price he gets in a certain transactions with another referent transaction. Theis reference can be a separate transaction that the buyer himself had at a previous point in time or it can be a transaction madetaken by an acquaintance. If the buyer feels that the price that he got is more as compared to his referent transaction the buyer feels that the price is unfair and feels let down. Dual Entitlement (DE) - As per the proponents of this theory a supplier may examine the fairness of its intended pricing tactic as judged by community standards. If it is not fair, the supplier will be less likely to go ahead with its planned pricing tactic. Moreover, these researchers propose that the constraining motive could be primarily moral, and at times, dominate the purely economic motives of avoiding loss of customer goodwill and jeopardizing long-term profits.
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The DE principle implies that it is not fair for sellers to increase the price to the buyer in order to exploit increased market power (such as when demand increases). Similarly, if there is increased supply, it is not fair for prices to be lower to the consumer because it would violate the terms of the reference transaction.

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Fairness Heuristics- As per this theory people tend to judge situations on the basis of most relevant information. If the most relevant information is not available they take the most available information to judge others which leads to establishment of procedural justice as procedural information is the most available information. Theory of Distributed Justice- The principle of distributive justice maintains that people, in an exchange relationship with others, are entitled to receive a reward that is proportional to what they have invested in the relationship (Homans 1961). Purchase Context and Situation Norms The purchase context and the situation norms also play a major role in the judgment of fairness. For example during the initial stages of a buyer seller relationship a buyer may judge a seller on the basis of his competence but gradually with increase in transactions the buyer may focus on the benevolence factor. So a breach of trust in the initial stages is taken as less unfair than a breach of trust in the second stage. Similarly once norms are formed change in norms are considered to be more unfair.

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All these theories can be interconnected in a way in the following model:

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As per this particular framework once a customer perceives a particular pricing as unfair based on the different theories discussed earlier he might resort to a number of activities based on the intensity of his negative emotions, the perceived cost of action and his relative power as compared to the buyer. No Action: When buyers are slightly disadvantaged, there may be some decrease in perceived value and feelings of disappointment. If so, buyers either are not motivated to take action or believe it is not worthwhile to take action because of the cost of complaining or switching to another seller. (Urbany, Madden, and Dickson 1989). Self-protection: When buyers believe that an inequality in an exchange is unacceptable and are upset, disappointed, or regretful (if they believe that there is a better option), they may choose to complain, ask for a refund, spread negative word of mouth, and/or leave the relationship, depending on their assessment of which action is most likely to restore equity with the least cost. In addition, they may search for additional information to assess the potential switching costs or to assess their power to renegotiate with the seller. Revenge: When a strong negative emotion, such as anger or outrage, occurs with a perception of price unfairness, customers leaving the relationship or complaining may not be sufficient to address the perceived inequity. The feeling of
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anger, which is a distinct emotion from dissatisfaction or disappointment (Bougie, Pieters, and Zeelenberg 2003), typically is associated with perceived unfairness and leads to a tendency toward aggressive behaviour Correlating Buyer's perspective with the Conceptual Framework of Price Fairness: 1) Referent Talking about Transaction similarity,: aA cokeCoke buyer would treat buying a cokeCoke as a similar transaction to one done during the past summer. Keeping other factors constant, per the equity theory, he tries to compare the amount spent for this new time-based pricing transaction with the extra amount he has to shell in a hot summer month. 2) Trust: CokeCokes brand value is largely based on trust. Especially being a national brand, customer trust is an integral part of their product strategy. Even though the new vending machine was not launched, the news spread like wildfire and the company faced sanctimonious comments like Lets move to Sweden, and A machine that would X-ray peoples pockets would be next! and dented Cokes brand value. The satirical article by Jeff Brown published in the Philadelphia Inquirer is just one example of how people started venting out their frustration. Trust was inevitably shaken. 3) Social Norms: There are general norms in the market when it comes to buying specific products. Lot of consumers know these norms and unconditionally accept them. Few examples indicated in the case discuss why hard cover books are priced higher than paperback editions, or why matinee show prices for movies are cheaper than other shows. In this particular case, changing prices according to weather was not a generally accepted norm. Cokeleading to the negative reactions from the public. 4) Violation of DE principle: The DE principle implies that it is not fair for sellers to increase the price to the buyer in order to exploit increased market power (such as when demand increases).Coke was clearly violating this basic DE principle miserably failed on this front. 4)5) The above in turn gave rise to negative sentiments exaggerated through media channels. One sided views: May be the customers only looked at one aspect cokeCoke priced higher in summer months. No one looked at the other side - on cold days it would be priced lower. This clearly explains one of the ways in which marketing communications comes into play and how CokeCoke couldve done better on this front . Some customers even termed Coke as a company that wasnt customer friendly. 5) Facing flak from everywhere, CokeCoke eventually did not introduce the new vending machine. Through mere expression of withdrawal from making such expensive purchases and negative word-of-mouth publicity, CokeCoke buyers forced the company to shun this strategy. In hindsight, had CokeCoke done this while engaging its customers, who knowsits customers the ending could have been vastly different the sum total might have been positive in the end. Conclusion: We have tried to use Lens theory can used to summarize the key concepts associated with this case. From a buyers perspective, differentiated product features shape perceived relative benefits and influence preferences or perceived value of a product. A seller can affect perceived relative benefits and preferences or perceived value of a product by advertising etc. influencing customer choices.
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In order to understand the right price of a product 3 Ps namely product, promotion and place and 5 Cs customers, competitors, company skills, collaborators, context play a key role. It helps in driving perceived value and perceived prices. In this Coca Colas New Vending Machine case, information leaked much earlier in media, this lead to a lot of rumours, uproar, conspiracy theories and analysis. Improper handling of media by Mr. M.Douglas Ivester further complicated the issues. This is definitely not the best way a company would like to introduce its differential pricing to the customers. Things didnt go the way CokeCoke would have planned. A key question arises- What would have happened if things went as per CokeCokes plans? We tried to analyse this question in light of the earlier mentioned concepts present, market information available about CokeCoke and the events that unfolded when new cokeCoke was introduced in 1985. We were not able to come to any definite conclusion whether New Vending Machine would have been a success or a failure.

Bibliography: Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler (1986), Fairness and the Assumptions of Economics Lan Xia, Kent B. Monroe & Jennifer L. Cox (2004), The Price Is Unfair! A Conceptual Framework of Price Fairness Perceptions Kees van den Bos, Fairness Heuristic Theory Kelly L. Haws, William O. Bearden, Dynamic Pricing and Consumer Fairness Perceptions Rosemary Kalapurakal, Peter R. Dickson, Joel E. Urbany, Perceived Price Fairness and Dual Entitlement

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