Thursday, 15 March 2018

Coke Zero, Coke No Sugar, and the problem of getting customers to change products

The Morning Bulletin reported recently:
In a suburban Sydney supermarket, a women approaches the wall of red that is the Coke aisle.
She picks up a bottle of Coke No Sugar, the new brand the US giant is hoping will win over consumers wary of calorific carbonated drinks.
After a few seconds she puts it down and picks up a Coke Zero instead, the very product Coke No Sugar was supposed to replace. The shelves are stacked with Zero - it's hard to even see No Sugar.
This one interaction, witnessed by, illustrates the big problem Coke has - persuading fussy shoppers to forsake Zero in favour of No Sugar.
While in some overseas markets, Zero is no more, in Australia it's stubbornly hanging on taking up far more shelf space than its successor.
Indeed, Woolworths has told they want to continue stocking Coke Zero "due to customer demand".
Coke wants us to stop drinking Coke Zero, and switch to Coke No Sugar. However, that creates a problem. To see why, consider a very simple consumer choice model, where the consumers can choose to consume Coke Zero (on the x-axis) or Coke No Sugar (on the y-axis), as in the diagram below. [*] The prices of Coke Zero and Coke No Sugar are the same, so the budget constraint has a slope equal to one (actually -1, since it is downward sloping). Assume the price of both drinks is Pc (though the actual price is not important to this example). The consumer is currently buying the bundle of goods that is on their highest indifference curve (I1), and that bundle is the corner solution E1, where the consumer buys only Coke Zero and none of Coke No Sugar. Coke wants the consumer to buy the bundle E0, which is at the other corner (where the consumer only buys Coke No Sugar, and no Coke Zero). The problem is that the bundle E0 is on a lower indifference curve (I0). Forcing consumers to switch to Coke No Sugar would make them worse off (by making them consume on a lower indifference curve).

The problem is that the consumer in the diagram above views Coke Zero and Coke No Sugar as substitutes, maybe even close substitutes, but not perfect substitutes. Perfect substitutes are goods that are, in the consumer's view, identical. They don't care which of them they have. An example that I use in my ECONS101 class is red M&Ms and blue M&Ms. The consumer probably doesn't care at all about the difference in the colour of M&Ms (unless they're Van Halen); they only care about the total number of M&Ms. With perfect substitutes, the indifference curves become straight lines. In the case of the consumer in the diagram above, the indifference curve would be identical to the budget constraint, and the consumer would be equally happy with any bundle of goods on the budget constraint, including both E0 and E1. In other words, the consumer would be perfectly happy to switch from only drinking Coke Zero to only drinking Coke No Sugar.

So, Coke's job is to convince consumers that Coke Zero and Coke No Sugar are perfect substitutes. That seems to me to be a difficult task, since if the two products were identical, why replace the old one with the new one at all? And many consumers probably feel the same way. So Coke is probably left in the uncomfortable position of having to make its customers a little bit less happy, if it really wants to get rid of Coke Zero.


[*] In this very simple model, we are ignoring that the consumer can buy other products as well as Coke Zero and/or Coke No Sugar. You can think of it as assuming that consumers have a fixed budget for those two varieties of Coke.

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