Coke’s Segmentation Error

Coca Cola brilliantly created a unique price segmentation method and then completely botched the execution.

As you can read in this 2005 New York Times article, Coke created vending machines so that on hot days, a can of Coke costs more than on cold days.  This was superb price segmentation.  We can see why when we look at the 2 steps of price segmentation.

1.  Segment the market – People are willing to spend more for a can of cold Coke on a hot day than they are on a cold day.  Notice that the segmentation doesn’t have to be different people.  In this case the same person’s willingness to pay changes with the weather.

2.  Create a pricing mechanism.  They created smart vending machines.  These machines could sense the outside temperature and adjust the prices accordingly.  Simple and perfect.

So how did they completely ruin this wonderful idea?  The first sentence in the article reads “Remember the plan to charge more for a Coke on a hot day?”  That’s the problem.  They charged more for a Coke on a hot day.  People thought they were being gouged.  How dare Coke take advantage of the heat to extract more money from me.

What they should have done is charge less for a Coke on a cold day.  Functionally and practically, this is the exact same thing as charging more on a hot day.  The BIG difference is the perception of the customer.  If Coke is giving me a discount to motivate me to buy on a cold day, that’s a great thing.  Thank you Coke.

How could they have done this?  Not only should all of their public relations emphasized the discount, the front of the vending machines could have had an LED display that showed “Outside temperature is only 45 degrees.  Please accept a 10 cent discount.”  Everybody loves a discount.

Recall from a previous blog that almost all price segmentation should be done by setting a standard price (the highest price) and then offering discounts from there.  This case is no exception.  Because Coke ignored this little detail, they were ridiculed, lost a little brand equity, and were not able to implement this price segmentation.

Action:  Memorize and internalize this fact.  People love discounts.  People hate surcharges.  If you are going to charge different prices for the exact same thing (which you should), always make your standard price the highest and offer discounts from there.  Have you started price segmentation yet?  Are you using discounts?