Looking for that ‘perfect’ media article to use as a mini case study is always difficult and time consuming. What we would like to present out students with is an engaging article that isn’t too long and too complex, but one that has depth and substance, while covering a range of business topics and adding personal interest to a potentially dry topic … oh, and one that can also stimulate debate. If the article has ToK issues as well; more the better. Too often newspaper articles are either long and stodgy, or too short to have anything on which to hang business analysis and evaluation. However, my colleague e-mailed me a link to an excellent business article from The Guardian newspaper, which I think is a little gem, because it adds a piquancy to the potentially dry topic of pricing and a slightly different focus by going beyond the mere practicalities of pricing strategies. The article is in the form of an interview with Andrea Illy: family businessman who’s raising the bar for premium coffee.

The Business and Management syllabus expects that students are able to analyse pricing strategies and to be able to explain and analyse the relationship between price elasticity and sales revenue. In addition to this, students should be able to apply the elements of a marketing mix to a given situation, construct an appropriate mix for a particular firm or product and discuss the effectiveness of a marketing mix in achieving marketing and strategic objectives. It is this latter requirement concerning all of the elements of the mix and how they complement each other, which students find challenging and perhaps are not asked to address adequately in their studies.

Pricing is part of the marketing mix. It is rare for a student to appreciate fully the need to blend pricing with the other elements of the mix. Pricing is treated as some kind of structural activity where a firm uses a specific approach, such-as cost plus, and runs with it independently of changes in other factors such as competitor actions, customer tastes, geographic influence, costs and the market place. Students must also appreciate that changing price cannot be used as an elixir to address the issue of low profitability. Over the years as an examiner I have seen far too many answers that suggest increasing price a ‘little bit’ was the answer; as if the customer won’t notice a small change and competitors will not react either. I always say to students that ‘price and elasticity’ go together like a’ horse and carriage’ or some other combination! There will always be some effect on demand, possibly far larger than the student imagines; depending on the price sensitivity of the consumer. It is up to the student to consider, in an examination or project, the likely effect on demand of any price change, but also to recognise that price changes have other effects other than on immediate demand.  Price is symbolic – a representation of the essence of the product – for Andrea Illy price is about quality, and compromising on price means compromising on brand values and reputation; he has very strong views on discounting premium brands such as his coffee range. In the article he rails against a discount offered on Ferrari sparkling wine in the luxury restaurant, where the interview was being conducted.

‘If you want to get a price deal, you go to McDonald’s, you don’t come here,’ says the 47-year-old chief executive of Illycaffè. ‘A price deal on a luxury product is a contradiction.” Illy believes his firm is selling more than just coffee: ‘It is a sensorial experience.’

The question is whether students fully appreciate the subtlety of the pricing process and the psychological impact on consumers. In the 1980s in the UK, Woolworths decided to move their product range slightly upmarket, resulting in an increase in average price levels across their stores. The problem was that consumers did not link the price increase to better quality; instead they thought they were being charged more for the same products and Woolworth’s profits for that year melted away forcing them to resume their original pricing strategy and reducing the quality of new stock. The lesson is that changing price must always be ‘sold’ to consumers as part of an entire package – the elements must support each other; get one ingredient wrong and the whole package can be negatively affected (rather like making custard without sugar).  If quality is improving then the perception of consumers must be altered so they recognise that price is in line with the new package on offer. Skoda, for example, were the butt of so many jokes for appalling quality in the 1980s that they were close to collapse until they were taken over by Volkswagen. The German conglomerate modernised the whole production process in a state-of-the-art factory in the Czech Republic, with TQM processes introduced across all business operations. Although the new product was clearly excellent and vastly improved, it took many years of focused marketing to persuade potential customers that the package had truly changed, and to raise the brand out of the ‘undesirable’ waste bin. Of course, Skoda is just one product in the VW range, where pricing and quality is used to place the product in the consumer consciousness. Students should be encouraged not only to relate a product to its rivals using a perception map, but also to consider where a particular product fits into the entire range of a business. Volkswagen for instance, would not like Skoda’s newly found reputation for superb ‘value for money’ to encourage purchasers of the Passat to trade down to lower price Skoda’s, as this would have a detrimental effect on the group’s total revenues. Again, a delicate balance in the marketing mix must be established to help a firm achieve its marketing and strategic objectives.

IB Style Questions

Read the article Andrea Illy: family businessman who’s raising the bar for premium coffee and answer the following questions:

1. Define the following terms:

• Premium price
• Promotion

2. Explain how a perception map can be used to analyse a firm’s product range and support its marketing plan.

3. Analyse the relationship between price elasticity and sales revenue.

4. Discuss the effectiveness of Illy’s marketing mix in achieving its marketing and strategic objectives.

Extension activities

The question above focuses on marketing issues. However, the article could be used to support questions and debate on HR issues, ethics and operations management.

The issue surrounding Fairtrade, marketing methods and perception could also underpin a TOK debate asking questions such as:

In what ways do values affect our representations of the world, for example, in language, maps, visual images, or statistics? When might a persuasive representation be praised as “effective”, or, in contrast, condemned as “manipulative”?

What are the main difficulties human scientists confront when trying to provide explanations of human behaviour? What methods have been invented to circumvent these difficulties and to minimize their influence on the results that are obtained?

In what ways might a moral judgment differ from other judgments?

What is meant by Akio Morita’s claim that “You can be totally rational with a machine. But if you work with people, sometimes logic has to take a back seat to understanding”?