MKT362e

Pricing
Assignment 2 Group-based Assignment January
2015 Presentation

Compiled by:
ANG YEW SHEN

Q1210006

TAN KWEE HUAT Z1210897

ANGELA YOUNG

W1310826

Table of Contents
Question 1a.................................................................................................................................3
Question 1b................................................................................................................................5
Question 1c.................................................................................................................................7
Question 1d................................................................................................................................9
Question 2a...............................................................................................................................11
Question 2b..............................................................................................................................13
Question 2c...............................................................................................................................17
Question 3a...............................................................................................................................20
Question 3b..............................................................................................................................23
Question 3c...............................................................................................................................25
Works Cited..............................................................................................................................26

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Question 1a
The market environment for the consumption of carbonated soft drinks in Singapore remains
relatively positive, due largely to the high density of off-trade channels including
supermarkets/hypermarkets and convenience stores that continue to fuel the industrys
growth. The extensive consumer reach of such intermediaries offering wider range of
products, coupled with regular promotional campaigns, have managed to appeal to
consumers, particularly families buying in bulk. Internet retailing is also gaining traction, as
consumers are increasingly lured by the offer of convenience and prospect of online bargains
(Euromonitor, 2014).
The industry continued to enjoy stable growth in 2013, albeit at a slower rate. Accordingly,
the total volume growth was 3%, marginally slower than that seen in 2012 (Euromonitor,
2014). The slowdown, attributed mainly to a maturing industry, has witnessed soft drink
leaders establishing themselves in alternative markets such as snacks, confections, and
printing and publishing industries (Standard Chartered Bank, 2014). Nonetheless,
profitability will remain positive, with CAGR expecting to expand to 3.6% from 2013 to
2018, driving the market to a value of $1,171.9m by end-2018 (MarketResearch, 2014).
Besides market saturation, some of the economic features found in the soft drink industry
may be further explained by its macro-environment. Within the political arena, liberal
immigration policies to expand Singapores total population between 5.8 and 6 million in
2020 offer greater opportunities for growth (NPTD, 2013). On the flip side, the active role
played by the Singapore government in educating the public of the effects of soft drinks has
potentially dampened market demand, especially amongst the dietary conscious.
Economically, soft-drink growth is supported by increased average monthly household
income from $8,105 in 2009 to $10,503 in 2014 (SPH, 2014). Accordingly, companies have
responded with product lines expansion to take advantage of the increased buying power to
grow their revenue (Orissa International Pte Ltd, 2013).
From the socio-cultural aspect, rising disposal incomes and the increased awareness about
healthier living has led many to switch to healthier beverage options. In light of this,
manufacturers are also seen introducing a wider range of products, including low calorie

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carbonates and reduced sugar soft drinks, to appeal to the health conscious consumers (Orissa
International Pte Ltd, 2013).
Finally, technological advancement has brought about the introduction of soda makers into
homes offering consumers speed and convenience. Additionally, cost savings are also
achieved over the longer term, as compared to their daily purchases from the on-trade
channels.
In conclusion, the most dominant force would be political due to government continual effort
to educate the public of healthier living through wellness awareness campaigns. Expectedly,
there is a higher demand for healthier products, as Singaporeans become increasingly aware
of the health and safety issues. Consequently, the added pressures will be placed on
companies to regularly introduce healthier food options to constantly appeal to the
consumers.

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Question 1b
Two main trends influencing the developments of the new home-made soda industry in
Singapore are greater health awareness amongst consumers as well as the increased
popularity of the home beverage carbonation systems.
Demand for healthier beverage options
Earlier, the market environment reveals a significant growing trend within Singapore towards
healthy eating as Singaporeans become increasingly health conscious. Consequently, many
are demanding healthier soft drinks, and manufacturers have responded with the introduction
of a wider range of healthier options such as reduced sugar soft drinks, bottled water, bottled
tea and fruit and vegetable juices. These drinks, which are typically priced 10% to 15%
higher than the other alternatives, are very well received nonetheless (Euromonitor, 2014).
Simply, the bulk of the population are middle income consumers who form the largest pool of
active customers. Accordingly, they are increasingly willing to purchase value-added food
and beverages due to higher incomes, as they continue to drive increased consumption of
healthier soft drinks within the country (Orissa International Pte Ltd, 2013).
Home beverage carbonation systems
Home beverage carbonation systems such as SodaStream, Karbon and Fizzio are influencing
and exerting pressure on the soft drink industry, becoming indirect competitors. Essentially,
they offer consumers with the speed and convenience of customising their soft drinks from
home at low cost, as they allow them to determine the level of sugar content and flavours
while reducing plastic waste, thereby encouraging a healthier and greener beverage option.
This is especially appealing to consumers of increasingly hectic lifestyles, as they sought for
convenient and healthy products. Mirroring that of the successful business model of homebrew coffee machines, profits are captured in the consumables rather than the countertop
machines through tying arrangement, where the machines are priced relatively low and the
consumables high to extract value from the consumers. Moreover, the machines are designed
to be incompatible with other brands of similar products. In this sense, switching costs are
high and hence greatly lowers consumers willingness to select an alternative firms products.
To conclude, the emergence of home-made soda machines has made it possible for healthand eco-conscious consumers to enjoy soft drinks without the hassle and waste of storebought bottles. As for the manufacturers, it presents an opportunity for them to expand the
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market of soda lovers. The challenge is how to fully capture this market, and as for those who
fail to catch this trend, they will only suffer for the long term.

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Question 1c
The decision in determining the price of a product is very much dependent on the nature of
the product sold (Orissa International Pte Ltd, 2013).
For food products such as soft drinks, the consumers tend to be more price sensitive than
luxury goods. In this regard, major soft drink producers facing a fast growing homemade
soda segment and the migration of consumers preference towards the homemade variants are
likely to avoid price slashing but to resort to non-price competition. Besides the possibility of
averting a price war, they can also avoid setting incorrect price expectations for their product
offerings.
One way that major soft drink producers often compete is to constantly innovate as a way to
differentiate. Through introducing new product lines, they may be able to create new niches
so as to stay viable as new entrants join the competitive landscape. A case in point would be
that of the Coca-Cola Company, which innovation centric culture resulted in the creation of
more than 500 sparkling and still brands under its belt. As a result, it has been able to build a
sizeable market and share, selling 1.9 billion servings a day in more than 200 countries (The
Coca-Cola Company, 2015).
Besides introducing new product lines, some soft drink producers are already seeking
strategic collaborations with at-home soda machine manufacturers to extend their reach to
homemade soda drinkers. Typically, the beverage producers will supply their concentrate to
the soda machine manufacturers who will in turn produce the finished products to be used in
conjunction with their machines for consumption (Yahoo, 2014). The basis is built on the
expectation of reaching a win-win situation for both parties as they are able to tap into each
others brand name, expertise and customer base to expand their market shares and positions.
Finally in pricing, price segmentation in terms of order size is often used to provide discounts
to customers buying large quantities. Besides, beverage producers often also organise
promotional events to encourage spending. The Coca-Cola Company organises CNY
promotional event Coca-Cola Happiness Greeting Machine to celebrate Lunar New Year
with its customers. Consumers are encouraged to participate in the event to enjoy the great
offers each time they purchase any Coca-Cola products. These offers include free giveaways

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and promotional discounts on beverages, in which prices are lowered temporarily for those
with a lower willingness to pay to encourage spending.
In summary, the trend towards homemade soda drinking may eventually become prevalent as
it offers speed, convenience and variety and for many, these factors far outweigh the cost. In
the end, manufacturers will have to price their products optimally to capture the real value
from the customers as they seek to maximise profit.

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Question 1d
Earlier, we looked at the possible impact that the new homemade soda industry may have on
the pricing of major beverage providers. Now, we shall determine the SodaStreams possible
price range, as it sets out the upper and lower limits that the company may set its prices to
optimise profit. Throughout the entire question, the Exchange Value Model (EVM) will be
used to determine both boundaries.

Source: SodaStream Third Quarter 2014 Financial Reviews

Table 1: SodaStream Estimated Per Unit Cost of Product

The total revenue in third quarter 2014 was $125,905,000 while total COGS stood at
$61,428,000. Total units sold were 14,821,000 and exchange rate was about USD 1 to SGD
1.25 for the same period. Weighted average was tabulated based on the breakdown figures
provided for total revenue to derive the COGS breakdown. Thus, the cost for producing one
soda maker starter kit is $20,229,840/818,000 x SGD 1.25 = SGD 30.91. As for CO 2 refill,
the cost per unit is $39,622,658/14,821,000 x $6,396,000/14,821,000 x SGD 1.25 = SGD
1.62. Finally, syrups will cost another SGD 1.92 to produce i.e. $39,622,658/14,821,000 x
$7,607,000/14,821,000 x SGD 1.25 = SGD 1.92.
A typical CO2 canister can produce 130 litres of fizzy water while a bottle of syrup can add
flavours to 12 litres of the former. This means that a total of 11 bottles of syrups are required
to produce 130 litres of flavoured drinks i.e. 130/12 = 11 bottles (round off to two decimal
places). This also means that total costs to produce the 130 litres of soft drinks will be $30.91
+ $1.62 + ($1.92 x 11) = $53.67 (marginal cost).
The average price of a regular 1.5 litres soft drink costs about $1.75. By the same token, 130
litres of soft drinks will cost 130/1.5 x $1.75 = $151.67 (reference value).
Differential value will take the value of the cost incurred by a person to commute to the
neighbouring stores to make the soft drinks purchase. Assuming that a single trip to the store
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would cost the average person $1.20, he will, in total, incur an additional $2.40 for each
round trip made. Further, we also assume that 2 bottles of the 1.5 litres soft drinks will be
bought for every trip made. Thus, the cost of commuting will be (130/1.5)/2 x $2.40 = $104
(differential value).
Exchange Value = Reference Value + Differential Value
= $151.67 + $104
= $255.67

Exhibit 2: Possible Price Range of A Typical At-Home Soda Making Machine

To conclude, the possible price range of a typical model for making home-made fizzy drinks
by SodaStream lies between $53.67 (price floor) and $255.67 (exchange value), as
represented diagrammatically in exhibit 2. SodaStream will have to take heed not to price its
offerings beyond the boundaries as they represent both the sellers and consumers bottomline.

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Question 2a

Source: Harvey Norman website

Table 3: Coffee Machines, Attributes, Features and Benefits

SodaStream adopts in-line strategy, which involves setting prices to be in line with those of
competitive offerings (Schindler, 2012). This is even though it has a strong position in the
homemade soda segment, as it prices its machines around the same region as that of its
indirect competitors i.e. brewed coffee machines, taking into consideration reference
pricing effect.
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The company distributes its products in high-end departmental stores such as Takashimaya,
Tangs, Robinsons and BHG as it attempts to associate its machines with the high-end luxury
products like the designer coffee machines. Applying the framing effect, it seeks to influence
consumers perception and induce their willingness to pay the higher price.
As regards its consumer segment, SodaStream targets the middle to upper income group, who
are characteristically very well educated and westernized. This segment is made up the
PMETs who have higher disposable income and whose sophistication of taste comes largely
from travel, modern western cafes, the media and influence from their peers (Orissa
International Pte Ltd, 2013).
SodaStream capitalises on tying arrangement strategy to capture the market by selling its
machines at competitive prices, while deriving profits primarily from the sale of its refills.
Vendor lock-in effect is achieved as a result as consumers are forced to buy from a single
company i.e. SodaStream since its refills are not interchangeable with the other machines in
the market. For those who wish to switch to a cheaper alternative brand, they will have to
bear the brunt of the switching cost.

Profit margins
The table below calculates the profit margin of each product. Gross profit is calculated by
subtracting the retail price for the individual items with its associated cost. Estimated profit
margin is then calculated by finding the gross profit margin as a percentage of the retail price.

# See Table 1 for computation

Table 4: Profit Margin of Carbonator and Syrup

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Question 2b
The price-to-benefits map plots the position of the soft drinks as defined by their perceived
price and perceived benefits (Smith, 2011). It offers a visual representation of how consumers
perceive the value trade-offs.

Each of the three soft drinks, as seen in exhibit 5, offers different benefits. All three products
deliver the fundamental benefits of hydration and thirst quenching, but Pepsi is perceived by
consumers as having the fewest benefits due to its high-sugar content. Also, positioning in the
value disadvantage zone, Pepsi has already foregone the opportunity of realising higher sales
volume had it aligned its prices with consumers level of expectation.
Strategically positioned within the value advantaged zone, SodaStream is perceived to offer
more benefits than Pepsi. Simply, it provides consumers with the speed and convenience of
customising their soft drinks from home at low cost while reducing plastic waste, thereby
encouraging a healthier and greener beverage option. It does however suffer from unharvested value where the company could have reaped higher profit from the perceived
benefits.

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Finally, for bottled water, it is positioned within the value equivalence line, and is perceived
by consumers as a beverage which offers only what you pay is what you get and hence may
be less competitive than SodaStream.
One potential gap where new entrants like Green Mountain and Starbucks may choose to fill
is to have a machine that is capable of brewing both hot and cold beverages. With this
shortfall fulfilled, those customers who previously did not make the purchase as a result of
this limitation may soon be interested in getting one that is capable of making both. Another
possible competitive response would include the production of a less expensive variant to
cater to the mass market segment i.e. gap between bottled water and SodaStream.
Needless to say, new entrants will need to possess various sound pricing strategies and
positioning to enter the industry.

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Question 2c
Starbucks
Starbucks is a successful international coffee chain selling premium gourmet coffee.
However, it is regularly exposed to such risk as fluctuation in coffee prices and an ever
increasing number of competitors. Currently, SodaStream is the only main brand occupying
the homemade soda industry, implying that there are many more opportunities to be
exploited. Starbucks can capitalise on its strengths that it has built over the years, diversify its
product category, thereby extending its reach to a larger market segment to generate higher
profit.
Starbucks would want to position its homemade or in-store soda to portray quality, lifestyle,
and status. This ensures that its new product category communicates the same brand message
to existing and potential consumers. Viewed in this light, they are likely to adopt price
skimming strategy for its new soda segment to maintain its upmarket image. Also, the
company would also take heed to price its products to end with 0 to imply quality as how
they would currently price their coffee series. Besides pricing to end in 0, it should also be
mindful of the reference pricing effect, where consumers compare prices with alternative
beverages. Given this, the company should strategically price their new product segment at
the level that befits the image that it wishes to communicate i.e. framing effect.
Aside from relying on the usual sales and promotions, Starbucks can also engage in tying
arrangement to push up the demand for its new product segment. With this, the company will
be able to build long-term relationships with its consumers through offering machines and
syrups that are designed exclusively to complement each other. To entice the consumers, its
machines may be priced low or even given free to attract consumers while its refills will be
charged higher. Such pricing model assures profitability for the longer term through increased
purchase frequency of the consumables.
Besides tying arrangement, Starbucks can also employs versioning to capture those customers
who may be willing to pay extra for the additional benefits in high-end machines. Other
method would include large order discount, as they reward customers who buy in large
quantities.

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Green Mountain Coffee Roasters (GMCR)

GMCR carries a strong product portfolio which covers an extensive selection of beverages of
different brands in capsule and a strong relationship with its network of suppliers. Similarly,
it serves premium gourmet coffee and like Starbucks, it also sees the potential in homemade
soda machines, thus considering entering this market.
However, unlike Starbucks, which has outlets across the island, GMCR has limited
distribution channel and hence suffers cost disadvantage. In this regard, it should instead
adopt price penetration strategy to enter into the market as it lowers its selling price to induce
adoption.
Besides price penetration, GMCR should also focus on tying arrangement, versioning,
subscription and price segmentation; as such strategies would allow the company to compete
effectively with its rivals on the competitive landscape. Also, as GMCR is not as
conveniently located as Starbucks, it may wish to explore into bringing convenience to their
consumers by delivering consumables to their doorstep upon subscription. Price discount
should be employed to encourage consumers to sign up for a long term subscription plan.

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Question 3a
Similar to SodaStream, Starbucks and GMCR, Yeo Hiap Seng (YHS) may also set out to
target the middle to upper income consumers. Characteristically, this demographics
segment is generally well educated and has high disposable income, as they form the bulk of
the active consumers (Orissa International Pte Ltd, 2013).
Besides the mid to high income earners, the company should also take heed of the general
population becoming increasingly health conscious as a result of rising obesity levels and
Singapores wellness awareness campaigns which have led many to demand for healthier
food options (Orissa International Pte Ltd, 2013). As a consequence, companies are expected
to produce more healthy products to cater to this trend.

Exhibit 6: Price-to-Benefits Map

The price-to-benefits map shows the possible shortfalls of the homemade soda market that
YHS may seek to address as it attempts to enter into the industry. For the company, its
machines and refills will be deliberately priced lower than its competitors to rapidly capture
the market (penetration pricing strategy). Tying arrangement will also be implemented
concurrently to decrease consumers price sensitivity towards the product offerings. This may
be done through price bundling, where products are bundled together at a single price that is
lower than the sum price of individual product to entice them to make the purchase. In terms
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of pricing, the bundles will be priced competitively. Further, prices will almost always end
with 9 to give the impression of discounts given to encourage spending.

Exhibit 7: Subscription Strategy

After the initial bundle purchase, YHS could employ subscription strategy to entice
consumers to make monthly purchase of the refills. Discounts are given to customers who
make large quantity purchase or subscribe for the longer term. Accordingly, this also allows
YHS to collect customer information for customer relationship management, opportunities to
interact and increase brand image which is important for them.

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Question 3b
Offering new product range can result in cannibalisation that reduces profit. In this regard,
YHS may employ segmentation hedges to encourage consumer spending, while preventing
those who are prepared to pay the high price or higher to purchase at the low price (Smith,
2011).
One way that YHS can prevent cannibalisation is through the use of price segmentation by
purchase quantity. It works on the basis of offering incentives in the form of discounts for
orders of large quantities. However, such discounts will be capped at a maximum permissible
quantity and any further purchases beyond the stipulated amount will not entitle the buyer to
any further lowering of prices. Also, the discounted price will be similar or higher to that
offer to the commercial establishments, and as a result, the latter will be indifferent of the
discount given. On the other hand, the individual who made the purchase up to the amount to
qualify for the discount gets to enjoy the lowered price as a result of the quantity purchased.
Another form of segmentation hedge is through retail price zone strategy where pricing are
based on the retail outlets location. The objective is to maximise profit through correlating
consumers price sensitivity with the location regularly frequent. In this regard, YHS will
then be able to capture the different segments of customers through pricing or customising its
machine or capsule bundles based on the different locations. As a case in point, consumers
who frequent premium locations like Cold Storage tend to be less price sensitive vis--vis
those who regularly patronise neighbourhood stores such as FairPrice,

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Question 3c
Below are three recommended strategies that YHS may employ to ensure sustainability and
success in its homemade soda business.
One of the proposed plans is through product bundling, where machines and capsules are
bundled together and sold at a single price lower that the sum price of the individual products
to induce purchase.
Through versioning, the highest end machine could be bundled with more consumables than
the low end machine to induce perceived benefit from purchasing the more expensive
machine. This allows consumers to sample the new flavours, increasing both awareness and
perceived benefits.
Another promotion price plan suited for their machines will be periodic discount, also known
as the high/low pricing. It is the practice of alternating between high-price periods with lowprice period. After a period of periodic discount, YHS can set a consistent price that is
between the high and low price level. This is for customer that are not willing to wait for sale
but willing to pay a little more.
E-coupons and Trial samples can be also use to promote their favour capsules. Customers that
are more prices sensitive may be induced to purchase due to e-coupons while the less price
sensitive customer do not mind paying the retail price. Product trial can also be used as a
promotion tool. The objective of product trial is lock-in consumers after the trial period.
Limited edition flavours can be offered which is in essence final stage of product testing.
Through this discount-induced trial, YHS can gather market sentiment on new flavours. Trial
sample through booths in various retail outlets also allows consumers to experience the
convenience of its homemade carbonate series and the refreshing flavour which differs from
their mainstream offerings.
The appropriate combination of strategic penetration pricing and structure, segmentation
hedges and promotions will encourage uptake of YHSs new carbonates series. The crux of
promotion is to induce interest and adoptions, creating the lock-in effect for long term
revenue.

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Works Cited
1. Euromonitor. (2014, September). Soft Drinks in Singapore. Retrieved January 8, 2015,
from Euromonitor International: http://www.euromonitor.com/soft-drinks-insingapore/report
2. MarketResearch. (2014, September 30). Soft Drinks in Singapore. Retrieved January 8,
2015, from MarketResearch.com: http://www.marketresearch.com/MarketLinev3883/Soft-Drinks-Singapore-8487746/
3. NPTD. (2013, January). A Sustainable Population for a Dynamic Singapore: Population
White Paper. Singapore, Singapore, Singapore.
4. Orissa International Pte Ltd. (2013, June). Food And Beverage Market Singapore.
Retrieved January 8, 2015, from Switzerland Global Enterprise: http://www.sge.com/en/services/Industry%20reports
5. Schindler, R. M. (2012). Pricing Strategies: A Marketing Approach. SAGE Publications.
6. Smith, T. (2011). Strategy: Setting Price Levels, Managing Price Discounts, &
Establishing Price Structures. South-Western Cengage Learning.
7. SPH. (2014, September 18). 12 interesting trends about Singapore household income and
spending. Retrieved January 8, 2015, from The Straits Times:
http://www.straitstimes.com/news/singapore/more-singapore-stories/story/12-interestingtrends-about-singapore-household-income-a
8. Standard Chartered Bank. (2014, April 30). Fraser & Neave. Retrieved January 8, 2015,
from Equity Research: https://research.standardchartered.com/configuration/ROW
%20Documents/Fraser___Neave_%28initiating_coverage_with_UNDERPERFORM
%29__Pricey_picture_30_04_14_12_05.pdf
9. The Coca-Cola Company. (2015). Our Company. Retrieved January 8, 2015, from The
Coca-Cola Company: http://www.coca-colacompany.com/history/
10. Yahoo. (2014, February 10). How Coke's new Keurig machine stacks up to Sodastream.
Retrieved January 8, 2015, from Yahoo Finance: http://finance.yahoo.com/news/here-swhat-the-new-coke-keurig-soda-machine-will-cost-you-225303377.html

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