By Cesar Perez-Carballada
Coca-Cola is one of the iconic companies of our time.
Created in 1886, the company managed to expand globally and its brand has captured our
social psyche.
To say that one can replicate that success may sound oblivious of reality and overly ambitious. But, actually, if one analyzes all the factors that are behind Coca-Cola success, one comes to the realization that it’s not only possible but also
likely.
By replicating Coca-Cola success I don’t mean to have a mere good brand or nice advertising but rather to build a global $ 180 Bn business that generates $ 6+ Bn of pure profits every year, one that leads a large non-monopolistic category and that enjoys large
competitive advantages (
a “moat”) to guarantee its long term survival.
The answer is neither secretive nor complicated, it’s actually rather simple, however it requires many dissimilar elements to be achieved at the same time:
a combination of human psychological tendencies with business fundamentals, and that is where the complexity resides.
Let’s start by dissecting the elements that would be required for your business to replicate Coca-Cola’s success. We can think of 7 key elements as follows:
- Huge market size
- Branded business with conditioned reflexes
- Product with operant conditioning
- Brand with classical conditioning
- Social-proof effect
- Efficient logistics and distribution
- IP protection
Let’s cover one by one.
(1) Select a category with huge potential market
This is a variable that Venture Capitalists consider to be the most important in any new endeavor.
(1) As the founder of Sequoia Capital and pioneer Dom Valentine said: “Give me a giant market - always”.
(2)
In order to achieve not a mere large success but a huge one, at the level of Coca-Cola´s, we need a product with
universal appeal. Just a niche segment will not do. Only a product with universal appeal will harness powerful elemental forces to attract a large number of people.
The need to select a huge market will probably limit our selection to mass
B2C categories such as food (Nestle), beverage (Coca-Cola), clothing (Levis), shoes (Adidas), mobile phones (Samsung), Internet services (Google) or intermediaries selling any of the above (Walmart, Amazon).
This requirement will also force us to target the
world. Of course we cannot start global operations from day one but once we achieve product/market fit we need to have a clear/aggressive growth strategy.
As
McDonalds started in Pasadena, California
(13) and spent 15 years there before opening a store in a different state (its first franchising licensee was in Phoenix, Arizona in 1952) and 28 years until its first international expansion attempt (Central America in 1965)
(3), as
Starbucks started in Seattle, WA and did not open the first store outside North America until 25 years later (in Japan in 1996)
(4),
Coca-Cola also started small in Atlanta, Georgia but did not expanded globally until 41 years later
(5). All of these companies seem to us giant mastodons today but all of them started as fragile local operations. Even when the lapse of time required to achieve global leadership is becoming shorter and shorter, no company becomes a global leader overnight. The key is to dominate a local market, then move to the regional/national level and finally to the global level.
To confirm that the potential global market is large enough, we can use the following formula:
# of consumers x quantity consumed x % market share x unit price x % margin = size of our business
In the case of Coca-Cola, the calculation is straightforward. The average person in the US consumes 3.18 liters of water per day, or 1,160 liters per year (48% of which is coming from beverages other than plain water and 18% from food)
(6). If the new cola beverages captures 15% of that water consumption (which is closed to the real average consumption of soda per capita: 44 gallons per year)
(7) and if we can get 40% of that soda market, then our estimated annual volume is 20.9 billion liters only in the US (considering 300 million people older than 5). Assuming a wholesale average price of $ 0.87 per liter and a profit margin of 22% (both numbers close to reality), then we can generate $ 18.2 billion in revenues and $ 4 billion in profits every year, only in the US, thus the global numbers will be adequately large.
(2) Choose a ‘branded’ business
We will never be able to build such a huge business by selling some generic product. We must make our brand name into a strong, legally protected trademark. Then we must
avoid losing even part of our trademarked name (Coca-Cola made some mistakes in this respect since it allowed other companies to use half of its brand name “-cola”).
Equally importantly, we need to achieve a strong
brand positioning in consumers’ mind. Basically, we need to create and maintain
conditioned reflexes (8). A brand name (like “Coca-Cola”) and its visual identity elements such as logo, symbols and color will act as the
stimuli and the purchase and usage (ingestion in the case of Coca-Cola) will be the
desired responses. And how do we create and maintain conditioned reflexes? Psychology text gives two answers: operant conditioning and classical conditioning. Let’s see how to apply both of them.
(3) Develop a product that achieves operant conditioning
Operant conditioning theory (sometimes called “instrumental” conditioning) was largely advanced by the great American psychologist B.F. Skinner
(9) and it basically says that the strength of a behavior is modified by the behavior's consequences such as reward or punishment: behavior that is reinforced tends to be repeated (i.e. strengthened) while behavior that is not tends to die out-or be extinguished (i.e. weakened).
In other words, behavior can be shaped by the use of
positive reinforcements that occur after the desired response. Therefore, in our company, we need to maximize the rewards of our product and minimize possibilities that those reflexes will be extinguished through operant conditioning by competing products.
To do so, we need to develop a product whose consumption generates as many rewards as possible. The specifics will vary by category. In the case of Coca-Cola, there are 4 elements than can be considered:
- Food value in calories
- Flavor, texture and aroma
- Stimulus such as sugar and caffeine
- Cooling effect
We need to get as many positive reinforcements as possible thus, if we were developing Coca-Cola, we would need to be fanatic about determining, through trial and error, the flavor and other organoleptic characteristics that would maximize human pleasure while taking in the sugared water and caffeine. Furthermore, we’d need to develop a flavor with
no aftertaste to avoid the protective, cloying, stop-consuming effects of aftertaste that are a standard part of psychology developed through Darwinian evolution.
Finally, to avoid that the desired reflexes might be extinguished by operant conditioning employing competing products, we must obsessively expand our distribution to make sure that our product is available at all times. If there is no opportunity for trial, then there will be no operant conditioning by competitors.
However, operant conditioning can take us only so far, we need also to apply classical conditioning.
(4) Build an emotional connection with the brand via classical conditioning
Classical conditioning, also known as “Pavlovian” in honor of its major proponent the Russian psychologist Ivan Pavlov
(10) who discovered it via experiments with dogs (i.e. the famous Pavlov’s dogs), is a learning procedure that works as follows.
One biologically potent stimulus (e.g. the taste of food) typically generates an
involuntary reflex response (e.g. salivation). This reaction is “hard wired” in our nature. Classical conditioning implies
pairing the stimulus that provokes the reflex with another stimulus, neutral and independent form the reflex (e.g. the sound of a bell). Every time the organism is exposed simultaneously to the two stimuli, the reflex response is generated (even when only one of the two stimuli creates that response: we salivate because of the tasted of the food, not because of the sound of the bell). However, after pairing of the stimuli is repeated, if we removed the original stimulus (e.g. taste of food), the organism still exhibits the response in what is now a “
conditioned reflex” (salivation from listening to the bell).
In the same way, the sound of a door slam comes to signal an angry parent, causing a child to tremble. Therefore, according to classical Pavlovian conditioning, behaviors can be modified through via association of stimuli. This is a very powerful concept and
most modern advertising relies on it.
In our case, we can use classical conditioning in a number of areas. In advertising and other communications, we can associate our brand with whatever our consumers want to get/achieve to achieve an effect like that of the brain of man that yearns for the type of beverage held by the pretty woman he can’t have.
Thus, for as long as we are in business, we must use every sort of decent, honorable
Pavlovian conditioning we can think of so that our brand is associated in consumer minds with all other thing consumers like or admire like Coca-Cola does with the concepts of “happiness”, “popular” and “youth”. As one Coke advertiser liked to remind his creative staff (perhaps exaggerating a little bit to make the point): “
we´re selling smoke, they´re drinking the image, not the product” (5).
This classical conditioning will create such a powerful set of associations in consumers’ mind that the company can risk to lose all its assets and still be able to re-generate its business (if Coca-Cola company disclosed its recipe, destroyed its factories, fired every employee and burned every hard asset, it would still be able to borrow against the value of its brand and rebuild it all).
Such extensive Pavlovian conditioning will be expensive, especially for advertising (Coca-Cola was already spending $1 million in generating demand by 1911, equivalent to $24 Bn in 2016, making it the best-advertised product in the world)
(5), but we need to
invest as much as we can for such activity since, as we expand, it will create a gross disadvantage of scale for our competitors to create the conditioning they need (not to mention the advantage of being the first in associating our brand with the most desired attribute in our category).
Considering Pavlovian effects, we need to choose an exotic and expensive-sounding
brand name (like “Coca-Cola”) instead of a pedestrian name (like “Peter’s sugared, caffeinated water”). Similar Pavlovian effects from mere association may help us choose the product features. In the case of Coca-Cola, its flavor, texture and color: it would be wise to artificially color the beverage so that it looks like wine instead of sugared water and to carbonate the water so that it seems champagne or some other expensive beverage, while also making its flavor better and imitation harder to arrange for competing products.
Lastly, since we are attaching so many expensive physiological effects to specific product features such as the flavor, we should avoid making any huge and sudden change to it. Even if a new flavor performs better in blind tests, changing to that new flavor would be foolish because, under such conditions, our old flavor will be so entrenched in consumer preference by psychological effects that a flavor change can do immense harm (as Coca-Cola experienced in the 1985 when it tried to launch the “New Coke”) by triggering in consumers a standard deprival super-reaction syndrome
(8) also known as “loss aversion” by Nobel Prize winners Amos Tversky and Daniel Kahneman
(11). Moreover, such chance may allow our competitors to copy our old flavor to take advantage of the conditioning effects created by our prior work.
(5) Develop “social-proof” effects
There is another tactic that we can implement from the psychological textbook, a powerful “monkey-see, monkey-do” aspect of human nature called “social proof”
(12). This effect makes us behave following the
observed behavior of others. We assume that if other people are doing something, then that’s the right thing to do and we mimic their behavior. For instance, if we are undecided between two unknown restaurants and one of them is empty while the other has a waiting list with a crowd out front anxiously waiting, we instantly assume that the latter one must be better and we feel a strong urge to go there.
This principle generally works on our favor (that’s why we have adopted it after millennia of evolutive adaptation) but it can sometimes work against us. If we are walking towards the exit in a building and we see two glass doors, one open with people taking turns to go through it and another door next to the prior one which is closed and nobody is using it, we naturally assume that the former door is the only one working, until some venturous individual decides to try the closed door only to discover that it works perfectly, then we realize that we were wasting our time waiting in the line to use the former door (and perhaps we move to use the new door, but only now when we have seen other person doing so, being affected by “social-proof” again).
Social proof is the principle behind the herd mentality. It is also the reason why the lists of “top 10” sell so many records, why bartenders put some bills in the ‘tip jar’ when the night begins, why many advertisers use “testimonials” or show other people happily consuming their products in their TV ads and why nightclubs sometimes keep people visibly waiting in line outside even when there is plenty of room inside.
Social proof works better in uncertain situations: when we face an unfamiliar circumstance, it’s more likely that we act based on others’ behavior. Also, the more similar the people are to us, the more we will be inclined to mirror their behavior (which is why we need to adapt the ads to each culture).
In summary, social proof -imitative consumption triggered by mere sight of consumption- will not only help induce trial of our product but it will also bolster perceived rewards from consumption, increasing in turn the impact of the classical conditioning.
Therefore, we must always take this powerful social-proof factor into account when designing advertising and sales promotion.
As we can see now, by combining (i) wonderful-tasting, energy-giving, stimulating and desirably-cold beverage that causes much
operant conditioning, (ii)
Pavlovian conditioning via brand associations (i.e. brand positioning) and advertising, and (iii) powerful
social-proof effects, we are going to get sales that speed up for a long time due the huge mixture of psychological factors that we have chosen in which will resemble an autocatalytic reaction in chemistry, for as long as we dedicate a large portion of the revenues to advertising and sales promotion.
(6) Optimize logistics and distribution
The logistics and distribution of our business must be simple in order to maximize market coverage in an efficient way. In the case of Coca-Cola there are two practical ways to sell the beverage, as syrup to fountains/restaurants, or as a completed carbonated-water product in containers. In order to maximize distribution, both ways are required. Coca-Cola always strove to place his drink “within arm´s reach of desire” via an obsession to provide outlets virtually everywhere. As old-time Coke evangelist Harrison Jones put it in 1923: “let´s make it impossible ever to escape Coca-Cola”.
(5)
A few syrup-making plants can serve the world but, to avoid needless shipping of mere space and water, the company requires many bottling plants scattered over the world. The best way to arrange these independent bottlers is as subcontractors, not a buyer of syrup, and definitely not a buyer of syrup under a perpetual franchise at fixed syrup prices (as Coca-Cola did in 1899 and regretted for the next 20 years).
(5)
In the same way, our company must utilize a distribution system that makes our product widely available and that, at the same time, minimizes the logistics and distribution costs.
(7) Protect your IP
A strong single IP (intellectual property) right will give an edge to our new venture thus it´s critical to
trademark the brand and all its visual elements. For instance, a ordinary can of Coke is protected by no less than 10 federal trademark registrations covering both words and designs.
It is also important to get a patent of the key aspects of our product but if that’s not possible (like in Coca-Cola´s case) we need to work obsessively to keep our recipe or ingredients secret. This secrecy not only will protect our product but it will also enhance other psychological effect known as “scarcity effect” (humans place a higher value on an object that is scarce). Eventually, technology (like food-chemical engineering in Coca-Cola´s case) will advance so that our product can be copied with near exactitude but by that time we will be so far ahead, with such strong brand and broad distribution, that just product (e.g. flavor) copying won’t bar from our objectives. Actually, the Coca-Cola´s “secret” recipe has been identified in the past decades and it has been published as follows
(5):
Syrup:
- Fluid Extract of Coca: 4 oz
- Citric Acid: 3 oz
- Citrate Caffein: 1 oz
- Sugar: 30 pounds
- Water: 2.5 gal
- Lime Juice:1 qrt
- Vanilla: 1 oz
- Caramel: 1.5 oz (or color sufficient)
7X flavoring formula:
- Alcohol: 8 oz
- Orange Oil: 20 drops (0.5 grams)
- Lemon Oil: 30 drops (0.75 grams)
- Nutmeg Oil: 10 drops (0.25 grams)
- Corriander Oil: 5 drops (0.125 grams)
- Neroli Oil: 10 drops (0.25 grams)
- Cinnamon Oil: 10 drops (0.25 grams)
Mix 5 gals of syrup with 2 oz of 7X flavor and then combine it with carbonated water at a ratio of 1-to-5 (one part syrup to five parts bubbly water) to make the soda. You can find detailed instructions
here.
That´s the “secret” recipe and it has been already published in a few books. However, no other company has replicated this recipe because what will be its price? Without Coca-Cola scale, it will probably more expensive. And what about its distribution? Most likely not as broad as Coca-Cola’s. But then, why would a consumer purchase a beverage that is similar to Coca-Cola but it’s more expensive when she can purchase the original cheaper version in almost every corner of the world?
Thus, these are the seven elements that explain Coca-Cola’s success and that can help you to replicate it in your company:
- Huge market size
- Branded business with conditioned reflexes
- Product with operant conditioning
- Brand with classical conditioning
- Social-proof effect
- Efficient logistics and distribution
- IP protection
*****
Those seven elements explain the success of Coca-Cola, from its origin until today.
You can use them to build an equally successful company. That success is all built in well understood principles: the difficult part is to be consistent in implementing all of them at the same time without being sidetracked while chasing distractive or divergent opportunities.
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Sources:
(1) “12 things about product-market fit”, Tren Griffin, Andreeseen Horowitz blog (a16z.com), February 18th, 2017
(2) “Donald T. Valentine. Early bay area venture capitalists: shaping the economic and business landscape”, interviews conducted by Sally Smith Hughes, University of California, 2009
http://digitalassets.lib.berkeley.edu/roho/ucb/text/valentine_donald.pdf
(3) “McDonald's: Behind The Arches”, John F. Love, Bantam Rev Sub edition, 1995. Note: The McDonalds brothers opened their first (tiny) drive-in restaurant in Arcadia, a suburb of Pasadena, California, northeast of Los Angeles, in 1937. Due to its success, then they moved and opened a larger store (600 square feet), the now famous store in San Bernardino in 1940 (at 14th and E Streets) which is considered by most reviews as McDonald´s first store, when in reality it was the second one (and it would not be until December 1948 that they would switch to the quick cheap self-service model that characterizes the chain nowadays).
(4) “Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time”, Howard Schultz and Dori jones Yang, Hachette Books, 1999; Company website https://www.starbucks.com/about-us/company-information/starbucks-company-timeline , http://www.starbucks.co.jp/en/company.html
(5) “For God, Country, and Coca-Cola”, Mark Pendergrast, Basic Books; Enlarged 2nd edition, 2000
(6) “The Average Consumption of Water Per Day”, Angela Ogunjimi, livestrong.com, November 11, 2015 http://www.livestrong.com/article/338496-the-average-consumption-of-water-per-day/
(7) “How Much Water Do People Drink?”, James Hamblin, The Atlantic, March 12, 2013 https://www.theatlantic.com/health/archive/2013/03/how-much-water-do-people-drink/273936/
(8) “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger”, Janet Lowe, Apendix D, Wiley; New edition edition, 2003; via “Charlie Munger: Turning $2 Million Into $2 Trillion “, Mungerisms, April 2010
(9) “The Behavior of organisms: An experimental analysis”, B.F. Skinne, New York: Appleton-Century, 1938, with the influence of “The elements of psychology”, E.L.Thorndike, New York: A. G. Seiler, 1905
(10) “Conditioned reflexes: an investigation of the physiological activity of the cerebral cortex”, I.P. Pavlov, Oxford, England: Oxford Univ. Press Conditioned reflexes: an investigation of the physiological activity of the cerebral cortex, xv 430 pp., 1927
(11) “Choices, Values, and Frames”, Kahneman, D. & Tversky, A. , American Psychologist. 39 (4): 341–350, 1984
(12) “Influence: The Psychology of Persuasion”, Robert B. Cialdini, Harper Business; Revised edition, 2006
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Author: César Pérez Carballada
Article published in http://www.marketisimo.com/
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