By Jonny Lupsha, Wondrium Staff Writer
Raising prices didn’t prevent food and beverage corporations from turning a profit. McDonald’s, Coca-Cola, and Kraft Heinz all reported solid quarterly earnings despite raising prices across the board. How do companies set prices, anyway?
Three of the world’s largest food and beverage corporations managed to escape the economic traps of a global supply chain issue, pandemic restrictions, and worker shortages and still earn profits by raising their prices. McDonald’s, Coca-Cola, and Kraft Heinz turned in surprisingly positive quarterly earnings reports recently by passing the expenses on to consumers even as prices in all industries skyrocket.
Companies set prices after careful consideration and market analysis. In the video series Critical Business Skills for Success, Dr. Ryan Hamilton, Associate Professor of Marketing at Emory University’s Goizueta Business School, explained the process.
Getting the Right Information
Dr. Hamilton said that there are three types of information that a business needs to set a price that will maximize value for both the business and the customer.
“The first piece of information is internal: What are the costs associated with making and selling the offering?” he said. “Cost information is important because unless you’ve carefully tracked your costs, you could end up accidentally selling your product at a loss. It’s always important to track costs carefully and to consider costs when setting a price.”
The second type of information a business needs to know is its competitors’ prices. These are important things to know because customers will know them when they evaluate how attractive a business’s price is. Knowing the price points of your business competitors is far more important in an industry that has numerous competitors, such as the prices for all brands of a particular grocery store item.
Dr. Hamilton said it’s also important not to simply look at other brands in your category, but to look at a broader field. If you run a concert venue that holds 10,000 people, there’s no reason to compare your prices to a corner bar with a $5 cover charge that holds 50 people maximum.
“The third, and by far the most important, type of information to consider when setting your price is the value your customers place on the offering,” he said. “Ultimately, your customer’s opinion of how much your offering is worth is the most important thing. Ultimately, your goal is to price your products in such a way that your customer thinks what you’re selling is worth what you’re asking for it.”
The Customer Is Not Always Right
One of the biggest discrepancies between marketers and customers is that marketers believe customers are far more knowledgeable about prices than they seem to be. Dr. Hamilton said that to prove this, Peter Dickson from Ohio State University and Alan Sawyer from the University of Florida conducted a massive survey of grocery store shoppers.
“Dickson and Sawyer stationed survey takers in grocery aisles so they appeared to be shopping or taking inventory,” he said. “These individuals would wait until a customer had selected some product and then, immediately after they’d put it in their basket, the worker would explain they were conducting a survey and would ask customers if they could, without looking, tell them the price of the item they’d just selected.”
The results were shocking. They found that 21% of surveyed customers wouldn’t even guess the price while another 32% ventured a guess but were off by more than 15% of the actual price. In other words, fewer than half of shoppers were able to report a remotely accurate guess of the price of an item they’d placed in their shopping cart moments earlier.
This ignorance of price may have helped McDonald’s, Coca-Cola, and Kraft Heinz in their pandemic-busting profit reports.