The Fight Against Inflation - AriZona Iced Tea Casestudy...
AriZona Iced Tea has had their price at 99cents since they launched in 1992. Their competitor Snapple was 99cents when they started and is now $1.79. Here's how/why AriZona has stayed at 99cents...
Happy New Week,
With inflation at 10.1%, prices of everything have increased. Energy prices are increasing, groceries, transport even the price of my haircut! The 99p McDonald’s cheeseburger is now £1.19. Fredo which used to be 10p is now 49p. However, one brand that has never increased its price since its launch in 1992 is AriZona Iced Tea, one of America’s favorites for Iced Tea.
Earlier this year, a tweet went viral stating that the famous 99 cents drink had increased its price to $1.29 and AriZona had to confirm that it’s still 99 cents and the $1.29 is in Canadian dollars.
It is still a shock to many how AriZona Iced Tea has managed to retain its 99 cents price since its launch, even though the price of everything including production has gone up. For example, the price of aluminum, used to make cans, has increased recently due to the Russian invasion of Ukraine as Russia is one of the world’s biggest aluminum producers. AriZona Iced Tea is able to keep prices stable by being very efficient with its production.
Founder Don Vultaggio said
"When we started out in 1992, we were running the cans on fillers that run 150 a minute. Today we run 1500 a minute. That’s a big move from an efficiency point of view,".
Innovation can be a great tool for keeping costs low. If packaging, manufacturing, or transportation can be streamlined to be more affordable, that leaves more profit for the company.
The reason why $1 deals stick around is because of how they can maintain the volume and consistency of their customers walking through doors, ready to spend. For example Costcos’ famous hotdog meal. Since 1985, the membership club has offered a beef hotdog with a refillable drink for just $1.50. Once the founder Jim Sinegal threatened the company CEO, saying “If you raise the [price of the] effing hot dog, I will kill you." This price is nowhere in line with inflation, and should actually cost around $4. But the store is still able to extract value from the deal.
Deals like these are loss leaders, meaning that they are priced below cost because these are the products that bring people into the store. Family's will come into the store to eat that hotdog meal but are more likely to pick up other products when they go into the store. AriZona is able to operate with a similar approach. Retailers that sell AriZona Iced Tea are able to benefit because it brings people in and those people are going to pick up complimentary products like sweets or crisps.
AriZona 99 cents is part of the brand's marketing. They also get a lot of good PR because they haven’t raised their price since its beginning. Vultaggio believes that “consumers deserve a break and don’t need another price increase from a guy like him”. Consumers hearing this from a brand makes people buy into them and also want to support the brand by purchasing. Pricing still has a huge impact on purchasing decisions. The subconscious mind still views 99 cents as much cheaper than $1 even though it's just 1 cent cheaper. The key to psychological pricing is to simplify the decision-making process for consumers and make them think they have walked away with a bargain - or at the very least made a purchase that offers good value for money.
It is important to maintain the margins in your business. At the end of the day, the aim of the game is to be a profitable business. Big brands like AriZona and Costco are able to afford loss leaders. You might also be able to afford some loss leaders in your business or have some products you can charge relatively lower to drive in more volume and traffic to your business. However, if there isn’t, there’s no pressure to keep your prices the same and operate at a loss, make sure you still maintain your margins by having your prices reflect the current rate of inflation.