RS 9: Why The Price Of Coke Didn't Change For 70 Years

RS 9: Why The Price Of Coke Didn't Change For 70 Years

Coca Cola 1953 Advertisement

            Everyone knows the infamous soda drink company Coca Cola.  Coca Cola has been around since 1886, and within that time they managed to keep hold of a secret recipe that makes their soda different from all other competitors.  Although that seems pretty interesting, the most interesting thing about this company is that they did not change the price of coke for 70 years.  This is rare because in a normal economy prices are supposed to fluctuate depending one what is available, how many people want it, and how much it costs to produce the product.  The fact that Coke got away with selling its soda for the same price of five cents for 70 years is economically very interesting.

            From 1886 to 1959, Coca Cola was able to sell its product for only one nickel.  Today that sounds outrageous because an average 20 ounce bottle of Coke costs on average $1.50.  So how did this nickel trend start, and how did it manage to last for seventy years?  That question was answered by Daniel Levy, an Economics professor at Emory University, after he toured the World of Coca Cola Museum.  When he was there he found it interesting that during times of economic depression, war, prohibition, and many laws being enacted that Coca Cola was able to maintain its cost at a nickel.  So he went to the Coca Cola archives where he got all of his answers.

            The five-cent Coca Cola started as an attempt to attract customers.  The nickel Coke was a competitive advantage for Coca Cola because at that time most fountain drink soda companies were selling for seven or eight cents.  By marketing itself as an affordable soda, Coca Cola was set for success.  In 1898, two lawyers from Tennessee were trying to buy bottling rights from Coca Cola.  In this contract, Coca Cola had to charge the bottlers a fixed rate for the rights to bottle Coke.  This meant that even though the prices of ingredients could increase, Coca Cola could not charge the bottlers any more for the syrup.  Technically this was not a good move on Coca Cola’s part because they could possibly lose money with deal.

            In an attempt to cover up their contract mistake, Coca Cola decided to use advertising to its advantage.  By constantly advertising Coke as five cents, Coca Cola prevented the bottlers from raising coke to any other price.  This also allowed for Coca Cola to establish brand loyalty with consumers.  This allowed for current consumers to continue purchasing the soda, as well as attracting new consumers.   Even though prices for ingredients were increasing, the advertising campaign was so successful that the higher costs of ingredients did not matter.  Coke was still selling at five cents, and Coca Cola still managed to make profits.

            The next thing that continued to trap Coca Cola in their five-cent price was the invention of the vending machine.  Vending machines were great because they made Coke more readily available for consumers.  The only problem with the machines was that they could not create change; therefore the price of Coke had to remain at five cents.  In an attempt to create more of a profit and raise prices without having to change the 400,000 Coca Cola vending machines, Coca Cola asked President Eisenhower to create a seven and a half cent coin. Clearly that idea was never successful.  However, what Coca Cola did end up doing was make every ninth bottle in the vending machine empty, so that person would have to put in another nickel in order get a full bottle of soda.  On average, a person would pay more than a nickel for a bottle of soda.

            During the 1940s inflation was inevitable because the US decided to go off of the gold standard.  As the amount of money continued to rise, prices had to increase.  This meant that Coca Cola would not be able to keep the five-cent Coke for much longer.  By 1947, Coke began to go on sale for six or seven cents.  By 1959 there were no more nickel Cokes. 

            Prices vary, and it is normal that they do so.  When prices become constant for so long, we get stuck within them.  Coca Cola could have increased their prices many times however they didn’t because it was their promise to their customers.  Prices are a psychological promise.  When a customer sees a product sell for one price and then a couple of months later the price is higher, they think that they are guaranteed to the lower price.  Companies will choose to shrink a price before they raise their prices because of this psychological promise.  Today, the nickel coke is still around, just in bigger bottles.

RS8:Manufacturing The Song Of The Summer

Manufacturing The Song Of The Summer

Rihanna's "Man Down"

            Some people may think when they are purchasing a song on iTunes that they are paying a lot for something that they just listen to.  I understand that $1.29 adds up per song; but out of the total cost it takes to produce and make a song, we are only paying a small fraction of it.  There are many economic factors that contribute to making a top song, all of which were discussed in this podcast.

            Planet Money takes Rihanna’s song “Man Down” to explain all of the costs that go into producing the most popular song of the summer.  Hit summer songs are important to people because it reminds people of the good memories from that summer.  I know that I categorize my summers by songs that were my favorite at that time and where I was when I listened to them the most.  For example, in the summer of 2009 my favorite song was “I Got a Feeling” by the Black Eyed Peas.  During that summer I was playing softball in Florida for a nationals tournament.  Every time I here this song now I constantly think of that summer.  That is why I was surprised Planet Money used “Man Down” as the song of the summer for 2011.  It is definitely not the song that reminds me of Summer 2011.  Regardless that is the song they chose to represent the hit song. 

            Creating an album starts in little sweat shops known as hit factories where writers spend two weeks trying to create lyrics to melodies that are handed to them.  At the end of the two weeks, the singer, in this case Rihanna, will come in and pick the lyrics that she likes best.  This part along cost approximately $25000 per day, which includes the cost of the writing space, room and board, salaries for the writers, and other expenses.  This alone totals to $18000 per song.  After that, the songwriter is paid around $15000, the song producer is paid around $20000, and the voice producer is paid around $10000.  At this point the total cost per song is $53000, and that is even before Rihanna’s voice is recorded on the song.

            After RI RI’s voice is recorded, the next thing record labels have to do is get the song out to the public.  This is done with marketing to radio stations and getting the singer our there to promote their own album.  Approximately $1.8 million dollars goes into marketing and promoting one song.  That does not include any extra money that record labels slip into the pockets of radio DJ's.  It has been said that in the past record labels have tried to slip radio station bribes so that there song can be played more than other songs.  Although this has been deemed illegal, it is still being done in other, not as obvious ways. 

            All together, it cost Rihanna’s record label $1,078,000 to create “Man Down”.  Once they created the music video to go along with the song, it raised the cost to $1,250,000.  A lot of money goes into producing a “hit” song.  Most of the time record labels take a chance by spending that much money to produce the song, and never end up making a profit off of it.  In this case the record label did not make as much as they hoped they would with “Man Down” because the song did not last as long in the number one spot as they thought.  The profit that these labels make is also diminishing because people do not have to purchase a whole album to listen to the one song they actually like.  With inventions like iTunes, people can pick and choose which songs they want to purchase.  Not to mention people can also illegally download music online, which also lowers profits for record labels.  Music is more than just listening to music and the singer making money.  Economics plays a big role in the production of music, a bigger role than most people would think.