Late last month there was an article in the Wall Street Journal, Smaller Sizes Add Pop to Soda Sales, describing the attempts by Coke and Pepsi to sell more soda in smaller cans. The article further points out that the price per ounce is higher for the small cans than for larger cans. If that is a surprise to anyone, it shouldn’t be. The real message should be that these actions are not pricing tricks, they are adaptations to customer needs. The things valued by customers are changing, and Coke and Pepsi are simply trying to address those changes. They are being smart about it, and the rest of us should pay attention.
Everyone realizes markets are constantly changing. Customer tastes evolve, new competitors enter the markets, new products are introduced, the economy expands, the economy contracts, cost structures change, etc. Each of those market changes can affect the market participants, and how the participants deal with the changes has implications for whether or not the business thrives. Too often, weaker or poorly managed businesses react out of fear and damage their long-term profitability. In this example, Coke and Pepsi are not being fearful, they are being thoughtful.
Over the past several years, consumers have been increasingly attentive to the fact that too much sugar in one’s diet is harmful. Unfortunately, soda is loaded with sugar. Although sugar-free sodas were created more than 40 years ago, the acceptance of them as substitutes for regular soda has come under fire. There is a growing school of thought that artificial sweeteners are also harmful, and as a result, regular soda drinkers are not simply switching to diet. So the challenge for Coke, Pepsi, and others was how to stimulate demand.
A traditional way of thinking (also a fearful way) would be that soda prices need to drop in order to bolster demand. However, Coke and Pepsi realized that many customers still want to drink some soda, just not as much as they previously drank. So Coke and Pepsi offered smaller sizes. This let adults still have a sweet drink and parents still allow their children a treat, but in lower volumes. They could feel good about cutting back their consumption, while still satisfying a desire. This became a new segment for the soda makers.
If we look back to the 2008-2009 recession, the casual dining and fast casual restaurant chains faced a similar challenge. Many chains responded by lowering prices on existing products with some items as low as $1.00. They simply generated lower traffic and lower sales per person to many customers who were already going to buy those items at the old prices. They also left money on the table by offering lower prices than necessary to customers who were trading down from finer dining. The more creative chains, like Darden Restaurants, created new items with healthier, smaller portions at new low prices, and new bundled meals. Those chains also maintained their prices on existing items. This enabled the restaurants to preserve their profitability on customers who wanted the existing items, and provide new alternatives to the segment focused on healthier food or lower prices.
We can learn something from Coke and Pepsi. When markets change unfavorably, pay attention to how and why they are changing. Maybe size really will matter. Look for new segment and product opportunities to buoy your demand. You will get much better results than if you simply lower your prices.
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