From Mistake to Marketing Masterpiece

There has been much discussion on how Coca-Cola became so dominant. Could it be that it was all from a mistake?

From 1886 to the mid 1950’s the price of a 6.5 oz bottle of Coke was a nickel. The price didn’t change for 70 years. In 1950, you had 460,000 Coke vending machines across the US dispensing Coke at the same low price as your grandfather bought it. That is how you build a brand. Make it a tradition.

How did this happen?

In 1899, two lawyers visit the president of Coca-Cola. They tell him they’re interested in selling Coke in bottles (normally sold as fountain drinks). They want to buy the bottling rights. The president of Coke tells them they are out of their minds, but he signs a piece of paper agreeing to sell them the syrup concentrate for 90c a gallon.. forever.

The Coke bottles took off. People loved them. Coca-Cola found themselves in a pinch. They’ve agreed to sell Coke at fixed price forever. If the bottlers and retailers increase the price, they make all the margin. In fact, if they raise the price aggressively it makes Coca-Cola look bad, so what does Coca-Cola do? 

They blanket the United States in advertising. Radio, billboards, buildings, magazines, “Coca-Cola at 5c is delicious and refreshing”. Make it impossible for the bottlers and retailers to increase the price without significant backlash from the consumer. You can still find tons of historical 5c signs from this era. 

Genius. The marketing move by Coca-Cola should be on the Mount Rushmore of turning lemons into lemonade. 

Since 1992, AriZona Iced Tea company has kept the price of its 23-ounce can at 99c. 30 years. Even though his costs are higher, Don Vultaggio, founder of the company said, “I don’t want to do what the bread guys and the gas guys and everybody else are doing,” Vultaggio said. “Consumers don’t need another price increase from a guy like me.”

Vultaggio has the power to keep the price low. AriZona is one of the few independent private companies remaining in a consolidating industry. The company sells 1 billion 99-cent cans each year, roughly 25% of its total revenue. It has allowed it to capture the #2 market share spot behind PepsiCo’s slate of tea brands that include Lipton, Pure Leaf and Brisk. 

We all know about Nick Sleep’s Scale Economics Shared or what Josh Tarasoff calls the Volume-Price Virtuous Circle. The companies that keep prices low, margins low and in doing so share their growing scale with their customers. Customers then reciprocate by purchasing even more goods or services from the company, which provides the company even more scale and more cost savings to share with the customer. This is the flywheel effect.

You can see it all around us. Costco, Amazon, the local diner that’s been around for 50 years still serving 40c coffee. Henry Ford lowering the price of the Model-T seven years in a row to increase demand and production. Elon Musk lowering the price of Tesla’s to increase global adoption. Keeping prices low has always been a great lever for loyalty. 

Back in 2018, HBO did a special on Warren Buffett. Buffett talks about why he likes Coca-Cola and how the company and its affiliates serve 2 billion 8 oz servings worldwide per day. He says something like, “If you just get an extra 1 penny per day that is $20 million more profit per day, just 1 penny more”. This is a classic way he looks at a brand and its potential. Ironically, it was the opposite way Coca-Cola built the brand.

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