How Much Would You Pay for Air? It Sounds Absurd at First - But They Already Got You to Pay for Water
The following is an excerpt from the new book All You Can Pay: How Companies Use Our Data to Empty Our Wallets by Anna Bernasek and D. T. Mongan (Nation Books, 2015):
How much would you pay for air? It’s an absurd question. After all, air is free. There’s no reason to pay for it. Air seems a poor choice for a commercial product. But what if you were in a place with limited air—the top of a mountain, underwater, or in a sealed room? In those places, you’d pay a lot for air, maybe even everything you have.
If not air, then how about water? For a moment water seems absurd too. It’s available nearly everywhere, and it’s so cheap it’s often given away for free. But if you’re thirsty and you’re out of options, you’ll pay plenty for water. Both air and water are so important that after a short time—minutes in the case of air, a few days in the case of water—humans can’t live without them. We derive an immense beneï¬t from those plentiful commodities and yet we generally pay very little for them.
The diï¬€erence between how much you would pay for something if you had to and how much you actually pay in the current market is called economic surplus. The story of business, from the very ï¬rst barter trade right through to the latest ï¬nancial transaction a millisecond ago, is a story of economic surplus. People and businesses buy or sell goods and services because what they get—whether it’s air or a car or a dollar—is worth more to them than what they give in exchange. The diï¬€erence between what something is worth to you and what you actually give in exchange for it can be very personal. Surplus varies from person to person, from time to time, and from situation to situation.
The surplus captured by consumers is known as the consumer surplus, and the proï¬ts from businesses are known as the producer surplus. The total economic surplus is the sum of both the consumer surplus and the producer surplus. The surplus is always up for grabs as consumers try to pay less, get more, and maximize enjoyment while businesses try to charge more, deliver less, and minimize cost.
Take water, for example. In most parts of the world, clean water occurs naturally. Sometimes minor ï¬ltration or chemical adjustment is necessary, but unless you’re in a spaceship, nobody makes water. Yet despite the fact that water is available from taps throughout the United States for next to nothing, today there exists a $13 billion bottled-water industry that sells water to consumers. Bottled-water companies don’t create water; it comes from nature. At the source it could contain a few minerals, maybe even some ï¬zz. Sometimes it’s just the same as regular tap water but in a bottle. What the companies have ï¬gured out, though, is that people drink water all the time, and it’s very important to them. So the bottled-water industry actually sells packaging. Thirsty Americans could easily ï¬nd a tap nearby if they went to a little trouble, but they’ll pay for a bottle from the newsstand at the corner if it’s just a bit easier to get. So nearly everywhere, water is sold in convenient resealable bottles. When you think about it, that’s all there is to bottled water: a little bit of convenience. And throughout the global beverage market, bottled water is by far the fastest-growing product. Some people—typically those with fewer means or more time—will still seek out taps and drinking fountains, but many others will willingly pay a few dollars for a cup or two of water in a bottle.
The total surplus that could be captured from selling water is probably inï¬nite because nobody can survive for long without it. However, so far nobody has monopolized the product. It’s a commodity and it sells into a mass market. Today there are many diï¬€erent brands of bottled water. The creation of the bottled-water industry shows how businesses have ï¬gured out ways to charge for something that previously was considered a public good and provided to all at no cost. In eï¬€ect, bottled-water companies have nibbled away at the consumer surplus by enticing consumers to pay for what they once got for free.
Bringing Water to the Mississippi
The large bottled-water market didn’t happen overnight. It began almost half a century ago in New York City when an American marketing genius and a savvy French businessman teamed up to launch America’s ï¬rst successful bottled water. A forty-year-old ambitious marketing executive, Bruce Nevins was on the lookout for the next big thing when he met Gustave Leven. At the outset Nevins was skeptical. Bottled water? From France? It seemed fanciful to get Americans to pay for something that was already piped into their homes.
Deep down, however, Nevins sensed an opportunity. Next to air, water represented the ultimate commodity: cheap, universal, and essential for life. It had inherent value, value without limit. At certain times people would be willing to pay almost anything for it. The trick was how to capture even just a little bit of that value. A small fraction of the value consumers derived from water would add up to a fortune. It was the mid-1970s, and Nevins had just left Levi Strauss at the top of its game. Every young person around the world, from Moscow to Manila, wanted a pair of Levi’s, in part due to Nevins’s international marketing eï¬€orts. But Nevins possessed an entrepreneurial streak and left it all behind to strike out anew, founding Pony Sporting Goods with a former colleague from Levi Strauss. Through friends, acquaintances, and friends of friends, the pair scrambled to ï¬nd a group of investors to back the company. One investor, Gustave Leven, was chairman of the board of the French water company Perrier and the man who single-handedly turned a long-forgotten mineral water into one of France’s premier brands.
Leven warmed to Nevins immediately. It was Nevins’s sense of openness to ideas that initially attracted Leven. The Frenchman was looking for an ally, someone who believed in Perrier as much as he did, and he thought he could convince Nevins to do what many considered impossible at the time: change American habits. Leven believed he could sell bottled water that was distinctly French and foreign to a population accustomed to drinking good old American-made soft drinks like Coke and 7UP.
Leven was as passionate as ever about sparkling water. He had come across Perrier as a young stockbroker right after World War II. After visiting the natural springs where Perrier is sourced in VergÃ©ze in Southern France for a client, he decided to buy the company himself. Perrier boasted a decorated history. A local doctor named Louis Perrier bought the springs in 1898 and operated a spa, oï¬€ering bottled water for sale. A few years later St. John Harmsworth, a wealthy Englishman, bought the springs and sold Perrier throughout the British Empire. It was served at Buckingham Palace and became popular with the royal family, making it an instant hit in Britain and earning Perrier a reputation as the “champagne” of waters. But once Harmsworth died and the war started, Perrier languished. Losing its main market and without capital investments, Perrier struggled to produce and sell bottled water. For fourteen years Perrier remained largely abandoned until Leven ï¬rst visited its springs in the late 1940s. Leven saw an opportunity to resurrect Perrier and seized it. Perrier had been better known in Britain and the colonies than in France, but under Leven, Perrier became France’s leading sparkling water. After three decades of growth, Leven believed Perrier was ready for something bigger and bolder, and he turned his sights on launching the bottled water in the huge U.S. market. But ï¬rst, he needed someone who really knew the ropes.
Leven had been after Nevins for months to take a look at his proposal. But Nevins dragged his feet. McKinsey, the world’s leading management consultant, had just done a detailed study about Perrier’s prospects in the United States and concluded it wasn’t a viable proposition. That seemed to make Leven even more determined, but it only discouraged Nevins. What could Nevins possibly ï¬nd that McKinsey hadn’t?
Nevins ï¬nally agreed to do some research. Perrier was already sold in high-end restaurants in Manhattan and Los Angeles but otherwise, at that point, the pear-shaped green bottles were largely ignored, collecting dust on American shelves. Nevins began by conducting focus groups, searching for insights into how to get consumers to buy water. After the ï¬rst one or two, he became intrigued. There was something there after all, and he could sense a purpose for the product.
In the 1970s a growing health awareness among Americans increasingly drew many to diet drinks. But diet drinks used saccharine, which was believed to be carcinogenic, and that scared a lot of people oï¬€. That’s when Nevins realized Perrier wasn’t in the bottled-water business after all—it was a mistake to think about Perrier in that way. Perrier was actually in the alternative-beverage business, a healthy alternative to everything else out there: soft drinks, diet drinks, and alcohol. What could be not only as healthy to drink as water but also a real pleasure to drink? The bubbles made Perrier seem luxurious without any guilt. Distinctive packaging made it both convenient and unique.
Leven, thrilled that Nevins had become excited about Perrier’s American prospects, made Nevins the head of Perrier in the United States. Perrier was oï¬ƒcially launched in 1977, ï¬rst in New York City and then in Los Angeles, San Francisco, Florida, Chicago, and eventually the rest of the country. Nevins coordinated the launch with a splashy ad campaign featuring one of the nation’s best-known and most-celebrated stars of the day, Orson Welles. Welles became the face, or rather the voice, of Perrier. At around 350 pounds, Welles remained oï¬€ camera, narrating the commercial. “Pure Perrier,” Welles said in his distinctive voice, “enjoy it in good health. Naturally sparkling water from the center of the earth.”
Marathon sponsorships accompanied Perrier’s ad campaign. By the late 1970s, thousands of people ran the New York City marathon wearing Perrier T-shirts. At the same time, Nevins worked on the press. He ï¬‚ew a group of American journalists to France to see Perrier for themselves. First in Paris, then at the natural springs where Perrier is sourced, the journalists were treated to the best of everything. But Nevins also worked on making the bottled water aï¬€ordable. His vision of Perrier did not include champagne prices. He wanted to make Perrier an approachable product for most Americans, so he negotiated shipping prices down, to oï¬€er a lower retail price, and sold Perrier in supermarkets around the country.
Perrier became a huge success and has been hailed as one of the great marketing triumphs of the twentieth century. In the ï¬rst three years, sales of Perrier increased more than 3,000 percent and kept on climbing. By 1988 Americans were buying 300 million bottles of Perrier a year and the company had captured 80 percent of the market. Looking back on it now, Nevins, in his eighties, admits Perrier represented the pinnacle of his career.
So what had Nevins really done? He took springwater, packaged it, shipped it halfway around the world, and convinced many American consumers that water is worth paying for. Imagine selling water to people living on the banks of the Mississippi or the shores of the Great Lakes. Nevins was selling French water very proï¬tably in a country blessed with plentiful water resources of its own. What’s more, selling water ï¬‚ew in the face of a long-standing American civic tradition of providing water to everyone for free, or nearly free.
In the process, Nevins captured a piece of the surplus formerly owned by consumers. With his marketing genius, Nevins took over the high end of the market for water: consumers who were willing to pay to get something more than they got from tap water. Formerly, all those Perrier customers drank ordinary water, and the cost of Perrier stayed in their wallets. By communicating his vision of Perrier as an aï¬€ordable luxury, Nevins captured a part of the greatest prize in business: a portion of the consumer surplus, a sliver of the value consumers derive from water.
A Bottled-Water Industry
With the success of a single product, Nevins touched oï¬€ an explosion in the beverage industry, paving the way for others to follow. And many brands have followed with great success. Since Perrier ï¬rst launched, the bottled-water industry has never looked back. After soft drinks and alcohol, bottled water now comprises the third-biggest category of beverages consumed in the United States by number of gallons. It accounted for 17 percent of all beverages consumed in the United States in 2012, ahead of coï¬€ee at 15 percent and just behind alcoholic drinks, which had 19 percent of the market.
It’s amazing how fast the bottled-water industry has grown. Although soft drinks still make up 27 percent of the entire beverage market, bottled water is catching up. In the past decade, the consumption of bottled water in the United States grew steadily while the consumption of soda fell. Per capita consumption of bottled water increased 50 percent from 2002 to 2012, according to the Beverage Marketing Corporation, while the consumption of soda has declined slightly. Still, Americans overall consume more soda than bottled water: about 30.8 gallons of water versus 47 gallons of soda in a year. But if the trend of increasing bottled-water consumption continues, it won’t be long before bottled water outsells soda nationwide. Those in the bottled-water business predict that day may come sooner rather than later. Tim Brown, president and CEO of NestlÃ© Waters North America, contends that by 2017 Americans will be drinking more bottled water than soft drinks. And he expects that trend to follow all around the world.
It’s already happening in the biggest regional market in the United States: the New York metro area, a region of more than 20 million people spanning New York state, Connecticut, and New Jersey. Without a secret formula or a glitzy ad campaign, a single brand of water, Poland Spring, outsells Coke and Pepsi by a huge margin. In 2013, in the New York metro area, sales of all varieties of Coca-Cola added up to $374 million. In comparison, sales of Poland Spring in the same area totaled $507 million. Poland Spring is the only major beverage brand that increased its 2013 sales in the New York metro area. Sales of both Coke and Pepsi declined. Other markets around the country show signs of following. Bottled water outsells soda in supermarkets in ï¬fteen other major U.S. cities, according to the Nielsen Company. That includes Las Vegas, Boston, Dallas, Phoenix, and Houston.
Nevins could never have guessed how big the bottled-water market would eventually become. In fact, it was Nevins who bought Poland Spring for Perrier in the late 1980s. And he admits today that he is as surprised as anyone by America’s thirst for bottled water. “We had hoped the US market would catch up to Europe but we never expected it to be a $13 billion business,” he says.
So why do Americans buy bottled water when they can drink water virtually for free from the tap? In Perrier’s case, the bubbles and the story of its source in France made it unique and enticing. But Perrier itself isn’t a premium product—it comes out of the ground for next to nothing. Rainwater and carbon dioxide are naturally forced up through limestone, creating bubbling water, an eï¬€ect that gave Perrier’s source the name les bouillens, “boiling waters” in French. In an unadvertised twist, the water and the gas are actually collected separately and then combined back at a bottling plant to provide consistent carbonation. Perrier contains a few naturally occurring minerals: a bit of calcium, potassium, and magnesium as well as about half a dozen or more other minerals in trace amounts. But in essence it’s a very simple product. Leven, the French founder of modern-day Perrier, took a low-cost product and marketed it as a luxury. Then Nevins sold that image to Americans. In eï¬€ect, Leven and Nevins gave consumers who would willingly pay more for water a reason to do so. Still, or “ï¬‚at” water as it is also called, is somewhat diï¬€erent, with no bubbles or frills to separate it from what comes out of the tap. Yet today, still water outsells sparkling water around the country. Two of the leading still-water brands in the United States, Dasani and Aquaï¬na, are essentially sourced from the public system. There’s virtually nothing unique about the waters themselves.
Pepsi ï¬rst launched Aquaï¬na back in 1994, and it was so successful that Coca-Cola followed with Dasani just ï¬ve years later. Both products are sold as puriï¬ed water. In Dasani’s case, Coca-Cola bottling plants around the country collect the water from the most convenient local water source near each plant. Usually, that means connecting to the nearest town’s water or, if there isn’t running water, using well water. Coca-Cola then ï¬lters the water and adds in small quantities of mineral salts for uniform taste. Coca-Cola essentially buys Dasani water from the local source at a very low price, bottles it, and then sells it for a substantial proï¬t.
It’s interesting to note that although Americans have no problem buying tap water from Coca-Cola, the same can’t be said for Europeans, at least not so far. Dasani’s launch in the United Kingdom in 2004 was a disaster. Simply put, the British wouldn’t buy Coca-Cola’s water. Dasani torpedoed the launch when Fleet Street tabloids ran headlines like “The Real Sting” and “Coke sells tap water for 95p.” But mineral contamination that ended up in some of the bottled water is what sealed Dasani’s fate in the United Kingdom. Coca-Cola pulled Dasani in the United Kingdom and shelved plans to expand into Europe.
In the United States, some consumers buy Dasani and Aquaï¬na in part due to inchoate fears that tap water and communal taps or fountains are unsafe. Overwhelming evidence points to the contrary, but local water departments don’t spend big money marketing their product. Convenience is perhaps an even more important feature of bottled water, though. Coca-Cola isn’t selling Americans water; it’s really selling Americans a little bit of packaging and ease. In essence, Coca-Cola sells the value of your time—the time it would take to get a bottle, ï¬nd a tap, and ï¬ll it yourself.
Excerpted from All You Can Pay: How Companies Use Our Data to Empty Our Wallets . Reprinted with permission from Nation Books.