(Tiểu luận) a comprehensive analysis of price elasticity ofdemand for soft drinks implications for pricingstrategies

Trang 1 FOREIGN TRADE UNIVERSITYMajor: International Economics---o0o---Topic: Trang 3 TABLE OF CONTENTSINTRODUCTION...4A BRIEF LOOK AT THE VIETNAM BEVERAGE INDUSTRY………5CHAPTER 1: BASIS

FOREIGN TRADE UNIVERSITY Major: International Economics

TABLE OF CONTENTS

INTRODUCTION 4

A BRIEF LOOK AT THE VIETNAM BEVERAGE INDUSTRY………5

CHAPTER 1: BASIS ANALYZE PRICE ELASTICITY OF DEMAND…….7

Price Elasticity of Demand 7

CHAPTER 2 ANALYSIS 10

Availability of Substitutes 10

Proportion of income spent……… 11

Price Sensitivity………12

Brand Loyalty……… 13

Implications for Pricing Strategies……… 14

CHAPTER 3: CONCLUSION……….16

REFFERENCES………17

3

It is undeniable that soft drinks are one of the most consumed commodities in Vietnam each year They have become a significant influence in the Vietnamese market The soft drink market is also one of the relatively stable and rapidly developing markets, with both local and international brands competing for marketshare

In recent years, the production of soft drinks has been steadily increasing, showing

no signs of slowing down in the near future This is primarily due to the changing consumer preferences and lifestyle trends Notably, customers now seek healthier options and products made from natural sources or fruits, which are gaining popularity As a result, many brands are adapting their product lines to better meet consumer demands These changes will impact both pricing and the way consumers perceive the current products Hence, we have chosen the topic

"Analyzing Price Elasticity of Demand for Soft Drinks: Implications for Pricing Strategies" to provide readers with insights into the soft drink market and how pricing affects the products

We hope that this article can enhance your understanding of microeconomics and offer a fresh perspective on this subject Thank you for your valuable time, and we sincerely appreciate your input and contributions

4

A BRIEF LOOK AT THE VIETNAM BEVERAGE INDUSTRY

According to the latest reports, in 2022, the production of beverages in Vietnam experienced a slight increase compared to 2021, with a total production volume reaching approximately 10 million liters

Similar to other beverage products, the production of beverages faced difficulties

As for segments, Pepsico also leads in segments namely carbonated drinks, fruitjuices, bottled water, and sports drinks 2nd place in 2022 belongs to, Coca-colaVietnam; which accounted for a large market share in the segments of carbonateddrinks, bottled water, and fruit juices

5

Discover more from:

Document continues below

10

CHAPTER 1: BASIS ANALYZE PRICE ELASTICITY OF DEMAND

Price Elasticity of Demand

Definition

Price elasticity of demand is a measurement of the change in the consumption of aproduct in relation to a change in its price Expressed mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded

÷ Percentage Change in Price

Economists use price elasticity to understand how supply and demand for a product change when its price changes

Like demand, supply also has an elasticity, known as price elasticity of supply Price elasticity of supply refers to the relationship between change in supply and change in price It’s calculated by dividing the percentage change in quantity supplied by the percentage change in price Together, the two elasticities combine to determine what goods are produced at what prices

Determinants of Price Elasticity of Demand

1 Availability of Substitutes : If there are close substitutes available for a product, consumers have more options to choose form In such cases, the demand for a product tends to be more elastic as consumers can easily

7

switch to alternative products if the price of the current product changes Forexample, when people have 2 options for buying mobile phones: Androids and iPhones If the price of iPhones goes up, people will immediately switch

to Androids, therefore the demand for coffee will fall and vice versa This is because they are considered good substitutes for each other sAvailable substitutes for a good or service makes an item more sensitive to price changes If the price of Android phones increases by 10%, this could shift demand from Androids to iPhones, for instance

2 Necessity or Luxury Good : The nature of the product also affects its price elasticity of demand Necessity goods, such as food or basic healthcare, tend

to have inelastic demand because consumers are less likely to reduce their consumption even if prices rise On the other hand, luxury goods or non-essential items often have more elastic demand as consumers are more sensitive to price changes and can easily reduce their consumption

3 Proportion of Income Spent : The proportion of income spent on a product influences its price elasticity of demand Goods that represent a significant portion of consumers' income, such as houses or cars, tend to have more elastic demand Consumers are more likely to adjust their consumption if theprice changes, as it has a substantial impact on their overall budget During aperiod of job loss, people may save their money rather than upgrading their

8

smartphones or buying designer purses, leading to a significant change in the consumption of luxury goods.

4 Time Horizon : The elasticity of demand can also vary depending on the timehorizon considered In the short run, consumers may have limited options to adjust their consumption patterns, leading to relatively inelastic demand However, in the long run, consumers can make more significant

adjustments, and demand becomes more elastic

5 Brand Loyalty : Products with strong brand loyalty often exhibit inelastic demand Consumers who are loyal to a particular brand are less likely to switch to alternatives, even if there are price changes Therefore, the price elasticity of demand for such products tends to be lower

6 Market Definition : The elasticity of demand can also be influenced by how narrowly or broadly the market is defined Narrowly defined markets, such

as specific brands or models, tend to have more elastic demand as consumershave more readily available alternatives In contrast, broadly defined markets, such as entire product categories, may have more inelastic demand

as it becomes harder for consumers to find close substitutes

9

CHAPTER 2 ANALYSIS Analysis

1 Availability of Substitutes

Viet Nam has a really competitive market in terms of soft drinks, with products ranging from carbonated soft drinks to ready-to-go coffee For this reason, a large number of companies have emerged to accommodate the rising demands for soft drinks The image below shows the leading enterprises in soft drinks industry in Viet Nam

With a variety of options readily available at their disposal, Vietnamese customers can easily satisfy their tastes by switching between different brands and types of

10

soft drinks This increased substitutability makes the demand for soft drinks more elastic If the price of soft drinks increases, consumers can easily switch to substitute beverages, resulting in a larger decrease in the quantity demanded Conversely, if the price of a soft drink decreases, consumers may be more inclined

to switch back to another one, leading to a larger increase in quantity demanded

2 Proportion of income spent

Soft drinks are considered non-essential products in Viet Nam, which means thatpeople do not need soft drinks to operate on a daily basis It is also noteworthy thatsoft drinks do not take a significant amount of income of a person, so they tend to

be quite inelastic in general However, since Viet Nam is a tropical country, inscorching summer, soft drinks may be more favourable compared to normal drinks

In fact, according to Vnexpress, Vietnamese people spend more on drinks than ontheir main meals The image below shows how much a vietnamese person iswilling to pay for drinks

11

12

3 Price sensitivity

The soft drink industry is experiencing significant growth in revenue and profitability, making it a promising sector in the economy's future As a result, many businesses and soft drink manufacturers have emerged, constantly improvingthe quality of their products and offering competitive prices in the market

It is clear that the prices of various soft drink options have been steadily increasing over the years, but never exceeding a 10% rise from their initial prices

Interestingly, this price hike has not hindered the consumption process On the contrary, consumer buying power has been swiftly on the rise Consequently, this has sparked a remarkable surge in the production of soft drinks

Example:

2021 Coca-cola price: 220.000đ/ 24 cans => Total Revenue: $38.655B

2023 Coca-cola price: 280.000đ/ 24 cans => Total Revenue: $43.493B

According to statistics from the Association of Soft Drink in Vietnam, the consumption figures are steadily increasing From 2017 until now, the numbers have skyrocketed from 20 billion to 50 billion Vietnamese dong This indicates a highly competitive and fiercely contested market

13

4 Brand Loyalty

Brand loyalty refers to a consumer's unwavering commitment to a particular brand

or product In essence, it is the consumer's behavior of repeatedly purchasing and advocating for a specific brand Brand loyalty is a crucial factor for businesses as ithelps drive sales, increase customer satisfaction and build a positive brand reputation

This holds particularly true for the beverage market when considering whether price changes dissatisfy consumers or not

Table 1: Brand preference of soft drinks Table 2: Factors influencing the purchase of

soft drinks

Source: Survey on 15 October 2017 by Dr Stalin

Out of the 150 respondents, majority of the respondents purchase soft drinks on brand image, 21.33% of respondents purchase with considering price and 20% of respondents consider quality for making purchase decision

14

Implications for Pricing Strategies

Competitive Pricing: Given the relatively elastic demand for soft drinks in Vietnam, companies need to be mindful of their pricing strategies to remain competitive Pricing soft drinks too high compared to substitute beverages may result in a significant shift in demand towards substitutes It is crucial for companies to monitor the pricing of substitute beverages and ensure that their soft drinks offer competitive value for money to attract and retain customers

The price for soft drinks should scale according to the net weight of the bottle itself Take Coke as a prime example, Coca Cola is the leading enterprise in the soft drinks industry, and the price for a bottle of 330ml stays at 6.000VND per bottle The capacity and price of Coke has set the standards for other soft drinks products, with prices ranging from 6.000 VND to 8.000VND based on the demand for each flavour

Market Research and Consumer Insights: Conducting regular market research and gathering consumer insights is crucial for soft drink companies to understand changing preferences, price sensitivities, and demand dynamics in Vietnam By staying updated on consumer trends and preferences, companies can tailor their pricing strategies to meet consumer expectations and maintain a competitive edge.For instance, the trends for 2023 is functional drinks with active nutrition Productsconcepts that serve this Active Nutrition trend includes:

alternative, low-sugar energy drinks

BCAA & EAA enriched drinks

functional juice shots

Value-added Differentiation: Soft drink companies can differentiate their products

by focusing on value-added attributes that go beyond price This can includepromoting health benefits, unique flavors, sustainable packaging or localingredients By highlighting these distinctive features, companies can attract

15

consumers who are willing to pay premium for specific qualities and reduce theemphasis on price alone.

Many natural bottled waters come from truly unique sources as water enthusiast Michael Mascha describes in his writings on natural Fine Waters Besides for rare types of natural spring water, there are also glacier waters, rain water, iceberg water, aquifer sourced water, and many others This can make the price much higher than ordinary brands (which can go up to $1390 per liter) because transportation, measures to offset the carbon footprint, purity maintenance, and ensuring the sustainability of the sources can be expensive

Promotional Pricing and Bundling: Companies can utilize promotional pricing and bundling strategies to stimulate demand and increase sales This can include offering discounts, special offers, or value packs to incentivize consumers to choose soft drinks over substitute beverages By providing attractive pricing and packaging options, companies can influence consumer choices and encourage repeat purchases Promotional Pricing Examples:

CHAPTER 3: CONCLUSION

In conclusion, the analysis of price elasticity of demand for soft drinks reveals important implications for pricing strategies in the industry By carefully considering how consumers respond to changes in price, soft drink companies can make informed decisions to maximize their revenue and market share

Understanding whether demand for soft drinks is elastic or inelastic allows companies to adjust their prices strategically Lowering prices can attract price-sensitive consumers, leading to a larger increase in quantity demanded and potentially higher overall revenue On the other hand, increasing prices may have asmaller impact on quantity demanded for products with inelastic demand, enabling companies to capture higher profits

Considering cross-price elasticity, which examines the impact of complementary orsubstitute goods, provides additional insights for pricing decisions Soft drink companies can assess how changes in the prices of related beverages affect the demand for their products, enabling them to adjust their prices accordingly to maintain competitiveness

Furthermore, market segmentation based on price elasticity helps identify specific consumer segments with different responsiveness to price changes By tailoring pricing and marketing strategies to these segments, companies can effectively meetthe diverse preferences and behaviors of their target customers

It is essential to acknowledge the limitations and challenges associated with measuring and applying price elasticity in practice The dynamics of consumer preferences, market conditions, and other external factors necessitate continuous monitoring and adaptation of pricing strategies to stay relevant and responsive to changing trends

Overall, a comprehensive understanding of price elasticity of demand empowers soft drink companies to make informed decisions that optimize their

competitiveness, maximize profitability, and cater to the varying needs of consumers in this ever-evolving industry By striking the right balance between price and consumer demand, companies can effectively navigate the competitive landscape and achieve long-term success

17

%20survey%20found

4. MarketIntello’s report of Vietnam’s soft drinks consumer behavior:https://www.slideshare.net/marketintello/vietnams-soft-drink-consumer-behavior

5. Overview and Prospect of Vietnam’s beverage market in 2022:https://viracresearch.com/overview-and-prospect-of-vietnam-beverage-market/

6. Soft-drinks Vietnam: drinks/soft-drinks/vietnam

https://www.statista.com/outlook/cmo/non-alcoholic-7. Giá nước giải khát và thị trường tiêu thụ tại Việt Nam:https://khaisanfood.vn/gia-nuoc-giai-khat-va-thi-truong-tieu-thu-tai-viet-nam/#ftoc-heading-1

8. Coca-Cola Price: https://beecost.vn/bang-gia-coca-cola.html

9. The Most Expensive Water Bottle: the-most-expensive-water-in-the-world

https://svalbardi.com/blogs/news/what-is-18