Earlier this week, we ran a post about some of the challenges facing the revenue growth in the food and beverage industry. In the spirit of that post, I would like to contribute a coffee-flavored story about pricing and promotions.
I live in a small town of about 3000 in the Finger Lakes region of Upstate New York. The town is just south of I-90. We have three gas stations, all between the town and the interstate.
I’m pretty agnostic about which gas station I use. There are two on one side of the road (heading away from the Interstate), and one on the other (heading to the Interstate). The biggest part of my decision, then, is my direction of travel. I was filling up the other day, at the station that is furthest from the freeway, heading away from it. As I was pumping, I noticed the following sign.
This got me thinking about one of the common misconceptions about pricing, and I want to discuss it here. The misconception is that lowering prices will drive volume.
It seems that there’s a key belief held by the initiator of this promotional pricing and management ploy: that someone who might be driving by the station (and, crucially, has stopped) would not buy gas station coffee at the regular price but would buy at 99 cents.
Let think about the clientele for a moment. Who buys coffee in the evening? I can think of a number of customer segments:
-People who are on a road trip -People who work a night shift -People who just love coffee
Now, it is my contention that each of those segments will not be swayed by this particular promotion, at this particular gas station three miles from I-90.
-The road trippers – well, this particular station is the second of the two on the side of the road heading away from the Interstate. I struggle to think that road trippers get off the highway in search of gas when there are pit stops right on the highway. Cheaper fuel? Possibly? Even if that were true, they would stop at one of the two stations they’d have already passed. Okay, let’s think about the direction of travel…what is south of this station on Route 96? It’s the Finger Lakes, which would be the likely destination for anyone heading in this direction. People that are close to their destination are not as likely to need a caffeine injection, and even less likely between 4pm and 7pm.
-The people on night shift. I suppose it’s possible that if someone happened to be heading to work a night shift, that they might want coffee to keep them rocking. I would expect that they’d make coffee at home in preparation for that. Gas station coffee feels like an impulse sort of purchase, doesn’t it?
-People who love coffee. Well, they don’t drink gas station coffee, do they!
Okay, no surprises: I think this is a pretty lousy promotion. I have to believe that anyone who would consider buying coffee from a gas station in the early evening is not all that price sensitive, because they clearly feel like they need a hit of coffee. We don’t have a Starbucks for the more discerning coffee drinker, but there is a Dunkin Donuts, a McDonalds, and Tim Horton’s nearby.
What’s a good reason to do this? Well, actually, I can see the logic of wanting to empty the coffee pots towards the end of the day when demand evaporates. This is a common pricing technique in the process industries, where supply exceeds demand, prices decrease to equilibrium. I’m not really sure that applies to coffee, though. It could be that McDonald’s 99-cent any-size coffee has created a perception that price-matching is required… but the nearest competitor to this gas station is Dunkin Donuts, which don’t do the 99-cent deal.
Another thing that occurs to me is that it’s a promotion by the manufacturer: you see their name pretty prominently on the promotional information. Perhaps they’re trying to drive brand preference in a bid to enter the lucrative K-Cup market (although a gas station might not be the best location for such brand-building efforts). They might share the burden of the decreased prices with the station owner (who is, in effect, a channel partner to the coffee manufacturer), and the station owner thinks they might sell a couple of Snickers bars at good margin if the driver comes in the shop.
It’s pretty straightforward really, to calculate the break-even for a price promotion. Of course, I’d recommend that anyone involved in any kind of price setting activity have this kind of tool at their fingertips at all time. Naturally, I fully support pricing being integral to any broader, more strategic initiatives, such as my K-Cup penetration through brand preference speculation. More and more, we’re seeing pricing people more tightly integrated with product marketing, sales, and commercial excellence organizations, and very often those situations are correlated with superior results.
Now, all this talk about my favorite beverage has made me thirsty. I’m just going to grab my car keys…
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