On the 28th October 1999, the New York Times carried an interview with the then Chairman of Coca-Cola (“Variable Price Coke Machine Being Tested”, by Constance L Hayes) in which he mentioned that the company was testing temperature sensitive vending machine that would automatically raise the price of vended cans of Coke in hot weather.
An outcry subsequently followed in internet chat rooms and on the Op-Ed pages of newspapers around the world. To this day, one still wonders what would have happened if Douglas Ivester had said the company he chaired was testing vending machines that would lower the price of Coke on cold days.
But you can’t really blame Coca-Cola for trying. In the mid-1980’s, Richard Thaler conducted what has become known as the “beer on the beach” study. In it, he found that a thirsty sub-bather would pay $2.65 (in 1986 dollars) for a beer delivered from a nearby resort hotel, but only $1.50 when the same beer came from a nearby grocery store.
You can read more about this in Thaler’s paper “Mental Accounting Matters” (published in the Journal of Behavioural Decision Making, Vol 12, Issue No 3), 1999). It is also briefly mentioned in Steven D Levitt and Stephen J Dubners’ fascinating new book: “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything”.
There is are some interesting pricing challenges and considerations here: it seems it’s OK for consumers to self-select when and where they buy and what they pay for it, but perhaps its not acceptable for companies selling products and service to make this decision for its customers…especially when the product is coming from the one source: a vending machine. There are also interesting insights into psychological pricing, and how customer reference prices change with the purchasing environment. Do you take these factors into account with you own pricing?
But back to the New York Times: Six year later, journalist David Leonhardt has re-visited the topic of variable pricing in his story “Why Variable Pricing Fails at the Vending Machine” (27th June 2005). He points out that variable pricing is much more widespread than it was in 1999: airline tickets and electricity have utilised variable pricing for years, but today that practice is found with “restaurant meals to clothing and books sold on the internet, to the toll on the George Washington Bridge”.
What new industries will variable pricing touch in the next six years?