Pricing Strategy of Soft Drinks Today Essay

We will basically focus on the pricing strategies adopted by these two affluence companies, how the change in the strategy of one of them reflects in the strategy of the other. {text:bookmark-start} Entry barriers in soft drink Market: {text:bookmark-end} The several factors that make it very difficult for the competition to enter the soft drink market include: Network Bottling: Both Coke and PepsiCo have franchisee agreements with their existing bottler’s who have rights in a certain geographic area in perpetuity. These agreements prohibit bottler’s from taking on new competing brands for similar products. Also with the recent consolidation among the bottler’s and the backward integration with both Coke and Pepsi buying significant percent of bottling companies, it is very difficult for a firm entering to find bottler’s willing to distribute their product. The other approach to try and build their bottling plants would be very capital-intensive effort with new efficient plant capital requirements in 2009 being more than $500 million. The advertising and marketing spend in the industry is very high by Coke, Pepsi and their bottler’s. This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility. Coke and Pepsi have a long history of heavy advertising and this has earned them huge amount of brand equity and loyal customer’s all over the world. This makes it virtually impossible for a new entrant to match this scale in this market place. Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. These margins are quite significant for their bottom-line. This makes it tough for the new entrants to convince retailers to carry/substitute their new products for Coke and Pepsi. To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it could lead to price wars which affect the new comer. {text:bookmark-start} SWOT Analysis: {text:bookmark-end} Strength: Weakness: Opportunities: Threats: {text:bookmark-start} Various cola brands products Available: {text:bookmark-end} {text:bookmark-start} Pricing Strategy: {text:bookmark-end} {text:bookmark-start} Coke – Price {text:bookmark-end}. {text:bookmark-start} Pepsi – Price {text:bookmark-end} {text:bookmark-start} Pricing strategy for Buyer and Suppliers: {text:bookmark-end} Suppliers: The soft drink industry have a negotiating advantage from its suppliers as most of the raw materials needed to produce concentrate are basic commodities like Color, flavor, caffeine or additives, sugar, packaging. The producers of these products have no power over the pricing hence the suppliers in this industry are weak. This makes the soft drink industry a cheap input industry which helps in increasing their gross margin. Buyers: The major channels for the Soft Drink industry are food stores, Fast food fountain, vending, convenience stores and others in the order of market share. The profitability in each of these segments clearly illustrate the buyer power and how different buyers pay different prices based on their power to negotiate. These buyers in this segment are somewhat consolidated with several chain stores and few local supermarkets, since they offer premium shelf space they command lower prices, the net operating profit before tax (NOPBT) for concentrate producer’s is high. This segment of buyer’s is extremely fragmented and hence has to pay higher prices. This segment of buyer’s are the least profitable because of their large amount of purchases they make, it allows them to have freedom to negotiate. Coke and Pepsi primarily consider this segment â€Å"Paid Sampling† with low margins. NOPBT in this segment is very low. Vending: This channel serves the customer’s directly with absolutely no power with the buyer. {text:bookmark-start} Effect of competition and Price War on Industry profits: {text:bookmark-end} In the early 1990’s Coke and Pepsi employed low price strategy in the supermarket channel in order to compete with store brands. Coke and Pepsi however in the late 90’s decided to abandon the price war, which was not doing industry any good by raising the prices. Coke was more successful internationally compared to Pepsi due to its early lead as Pepsi had failed to concentrate on its international business after the world war and prior to the 70’s. Pepsi however sought to correct this mistake by entering emerging markets where it was not at a competitive disadvantage with respect to Coke as it failed to make any heady way in the European market. {text:bookmark-start} Pricing Strategy used for market capitalization: {text:bookmark-end} Price is a very important part of the marketing mix as it can affect both the supply and demand for soft drinks. The price of soft drinks products is one of the most important factors in a customer‘s decision to buy. Price will often be the difference that will push a customer to buy our product over another, as long as most things are fairly similar. For this reason pricing policies need to be designed with consumers and external influences in mind, in order to effectively achieve a stable balance between sales and covering the production costs. Till the late 1980s, the standard SKU (Stock Keeping Unit) for a soft drink was 200 ml. In 1989, when Indian government opened the market to multinationals, Pepsi was the first to come in. Thums Up (a product of Parle) went up against the international giant for an intense onslaught with neither side giving any quarter. Around 1989, Pepsi launched 250 ml bottles and the market also moved on to the new standard size. When Coke re-entered India in 1993, it introduced 300 ml as the smallest bottle size. Soon, Pepsi followed and 300 ml became the standard. With large population and low consumption the rural market represented a significant opportunity for penetration and market dominance. Competitive pricing was the key. Then the capacity went from 250ml to 300ml, aptly named MahaCola. This nickname gained popularity in smaller towns where people would ask for â€Å"Maha Cola† instead of Thums Up. The consumers were divided where some felt the Pepsi’s mild taste was rather bland. In 1993 Coca-Cola re-entered India after prolonged absences from 1977 to 1993. But Coca-Cola’s entry made things even more complicated and the fight became a three-way battle. That same year, in a move that baffled many, Parle sold out to Coke for a meager US$ 60 million (considering the market share it had). Further, as the demand changed, both Pepsi and Coke introduced 1 liter returnable glass bottles. RGB 250ml 1989 Rs 8 RGB 300ml 1993 Rs 9 RGB 300ml, 1994 Rs 9 RGB 300ml 1996 Rs 11 Pet bottles 1 liter, 2 liter 1996 Rs 25, Rs 42 RGB 300ml 1997 Rs 7 Pet bottles 1 liter, 2 liter 1997 Rs 20, Rs 38 RGB 200ml, 300ml (negligible) 2002-03 Rs 5, Rs 11 Pet bottles 500ml, 1 liter, 1. 5 liter, 2 liter 2002-03 Rs 18, Rs 25 Can 330ml 2002-03 Rs 35. {text:bookmark-start} Penetration pricing: {text:bookmark-end} In the past (in 2002-03), Coke had already targeted rural consumers by bringing down the entry price (Rs 5 a bottle) for its product. Now, it has stepped up distribution of its 200-ml (priced at Rs 7 and Rs 8) returnable-glass-bottles. To surmount the penetration policy of Coke, Pepsi too came up with the same Price penetration policy by launching products like â€Å"Chota Pepsi† with the price of Rs 5 to challenge the coke product. The small size was basically used to target rural market to make new customer habitual to it. {text:bookmark-start} Conclusion: {text:bookmark-end}.