Controlled Market Studies

In April 1985, the Coca-Cola Company announced it would change the formulation of the world’s best-selling soft drink to an improved formula: New Coke. This move followed nearly five years of market research and planning— perhaps the most intensive and costly program in history. In some 190,000 taste tests conducted by the company, consumers favored New Coke consistently over the old (by 55 to 45 percent in blind tests) and, perhaps more important, over Pepsi. In the 1980s, the company’s market share had fallen due to competition from Pepsi. Moreover, Pepsi had beaten the old Coke convincingly in highly publicized taste tests.

With the advantage of 20–20 hindsight, we all know that the taste tests were wrong. (It just goes to show that you can succeed in doing the wrong thing, even with 190,000 people backing you up.) New Coke did not replace the old Coke in the hearts and mouths of soft-drink consumers. Why? The tests failed to measure the psychological attachment of Coke drinkers to their product. In response to the protests of die-hard old-Coke drinkers and evidence that the old Coke was outselling New Coke by four to one, Coca-Cola Company revived the old Coke (three months after announcing its discontinuance) and apologized to its customers. With its quick about-face, CocaCola minimized the damage to its flagship product, now called Coke Classic. In the last 26 years, Coca-Cola has greatly expanded its cola offerings: Diet Coke, Cherry Coke, Caffeine-free Coke, among other offerings. On the advertising, image, taste, and new-product fronts, the cola wars between PepsiCo and Coca-Cola continue.

Firms can also generate data on product demand by selling their product in several smaller markets while varying key demand determinants, such as price, across the markets. The firm might set a high price with high advertising spending in one market, a high price and low advertising in another, a low price and high advertising in yet another, and so on. By observing sales responses in the different markets, the firm can learn how various pricing and advertising policies (and possible interactions among them) affect demand.

To draw valid conclusions from such market studies, all other factors affectingdemand should vary as little as possible across the markets. The most common—and important—of these “other” demand factors include population size, consumer incomes and tastes, competitors’ prices, and even differences in climate. Unfortunately, regional and cultural differences, built-up brand loyalties, and other subtle but potentially important differences may thwart the search for uniform markets. In practice, researchers seek to identify and control as many of these extraneous factors as possible.

Market studies typically generate cross-sectional data—observations of economic entities (consumers or firms) in different regions or markets during the

Business Behavior: New Coke