Scott Francis of Strategic Pricing Solutions wrote an excellent article titled “When Size Matters” to explain why Coke and Pepsi are offering smaller sizes of sodas. I highly recommend you read his well written article. To quickly summarize, demand for sugary sodas is declining, so Coke & Pepsi created smaller sizes at lower prices (higher per ounce prices, of course).
Yet the reason isn’t so obvious. As Scott points out, it wasn’t just a tactic to lower price to hopefully sustain demand. Instead, it was a carefully crafted strategy to solve an unmet need in the market. Many more people are health conscious and don’t want to drink large quantities of soda. Hence, the smaller servings allow fans to indulge without drinking too much.
Coke and Pepsi didn’t just lower prices to keep their sales up, they looked for and discovered changing market preferences which they then addressed with a new product and new price for the new market.
Like Coke and Pepsi, we often face bad market conditions that result in declining sales. Maybe a new competitor enters the market, maybe the market turns bad, maybe tastes change. Regardless of the reason, what we see is declining sales in both units and revenue. Now the question is what should you do?
What I love about this case study is it’s a great reminder to NOT just lower prices. Sure, maybe sometimes you have to lower prices, but think very hard before you do. What is truly causing the decline? Once you know that maybe you don’t have to lower prices. Maybe you can create a new product? Maybe you can limit your price decreases to a subset of your customers.
A similar situation to the big name airlines. Their sales declined when Southwest Airlines entered their markets. The big name carriers ended up lowering prices to compete, but they didn’t lower prices across the board. They only lowered prices where necessary. After clearly understanding what they were up against, they only lowered fares on the routes that Southwest flew. There was no new competition on routes that Southwest wasn’t flying. Even on flights where they were competing with Southwest, the big name airlines only reduced prices for economy class. After all, Southwest doesn’t offer first class.
The point is: do your research to understand what is causing declining sales. Once you clearly understand that, then you can make a much smarter decision to combat it. Don’t jump to price decreases too quickly.