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Coca-Cola Calculus

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Coca-Cola

In the wake of globalization, globalizing business operations and an increasingly expatriated world population, I hereby declare that, from this moment forward, as a matter of fiduciary duty to stockholders, stakeholders and, most importantly, consumers, every marketer should know the price of a can of Coke.

Definition of Terms
The Coca-Cola Relative Value Index, a.k.a. the Coke Index, n., is a measure of consumer wealth and product affordability, and is defined by the equation: average retail price of a target good or service or target basket of goods or services divided by the average retail price of a can of Coca-Cola.

For example, in Singapore, the iPod Shuffle has a Coke Index of 110, arrived at by dividing the average retail price of the iPod Shuffle (S$110) by the average retail price of a can of Coke (S$1).

The Coke Index can be alternatively defined as the number of cans of Coca-Cola needed to barter for the target/basket of goods or services. Returning to our earlier example, we note that, in a theoretical barter economy, 110 cans of Coke will be needed to barter for an iPod Shuffle.

Forex Rate for Marketers
Forex rates are for traders what the Coke Index is for marketers.

Both these measures enable value comparison across national boundaries. However, while forex rates define the relationship in economic terms, the Coke Index defines it in consumer terms. Consider the following dilemma.

A Filipino info-tech professional is offered employment in Singapore. He currently earns 60,000 pesos net of tax. He is offered S$2,500 net of tax. To evaluate the offer, he googles the current forex rate (32 pesos to S$1), performs a few simple calculations including the straight conversion of his would-be salary in dollars to pesos, and concludes that accepting the job will effectively increase current earnings by 33%. A good deal, right? Maybe not.

Instead of comparing actual pesos with theoretical pesos using forex rates, convert both his current and prospective salaries to their Coke Index equivalents. You will discover that, today, with 60,000 pesos, our info-tech professional is able to purchase 3,000 cans of Coke. If he takes the offer, S$2,500 dollars can only afford him 2,500 cans—an effective purchasing power decline of 17%!

The missing link: defining value in terms of consumer purchasing power and not in terms of demand and supply in a global currency market that, frankly, only a very small fraction of the world’s consumers participate in and are concerned about.

Using the Coke Index
Besides helping marketers contextualize and understand purchasing power, the Coke Index defines the threshold of affordability in every market, and it facilitates transnational pricing comparisons.

The threshold of affordability is defined at a Coke Index of 1, which means that any product or service with a Coke Index of 1 or less is affordable across all consumer segments in the market. The primary pricing issue for such products or services ceases to be affordability; it becomes value.

Every consumer in the market can pay the price of a can of Coke. Therefore, their doing so becomes more a question of willingness—defined by utility and relative cost versus competition—rather than ability.

As the Coke Index increases, moving farther away from 1, affordability becomes a more pressing issue, which must be defined for each subset (high, mid, low) of the pricing market.

Furthermore, through the Coke Index, marketers are able to gauge the relative cheapness or expensiveness of particular price points for a product across markets, helping marketers make pricing decisions for new-to-the-world items, among other possible uses.

For example, if Apple were to launch the iPod Shuffle in Indonesia (where the market for portable media players is not well established) then one way to set its price is to launch at a price point that achieves a comparable product Coke Index versus the iPod in an established market.

So to sell the iPod Shuffle at Singapore’s Coke Index of 110 in Indonesia, Apple would have to price the product at Rp550,000.

Note that the actual price of an iPod Shuffle in Indonesia has been set at over a million rupiah, telling us that it is significantly cheaper for a Singapore-based consumer to buy an iPod than it is for a Jakarta-based consumer, all else being equal.

Why a Can of Coke?
Can’t we use bubble gum, a ballpoint pen, or a Nokia 3310 instead? Sure, we can. But these measures won’t be as consistently effective as the Coke Index.

A can of Coca-Cola is the ideal benchmark because it is available nearly everywhere with almost no significant differences in product type, quantity, or quality across geographies and over time. And it is marketed and priced to be universally accessible to the world’s consumers.

In contrast, not all countries sell bubble gum. Ballpoint pens come in all types, shapes, and sizes, commanding prices everywhere across the pricing spectrum. And the Nokia 3310 has already been phased out in most markets.

What about Coca-Cola, you say? It has hardly changed in its over 100-year history. Now that’s the real thing.


Image: vwb5 / Flickr
Print ed: 08/09

 

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