$1.50 Costco Hot Dogs, 99¢ AriZona Iced Tea, and Product Pricing as a Promise
Why Costco and AriZona will never charge more for their flagship products — plus three business strategy lessons inspired by their pricing strategies
What do Costco’s $1.50 hot dog and soda combo and AriZona’s 99-cent iced tea tallboys have in common?
They never change their prices. Never.
But with inflation on the rise and the cost of everything from milk to bread to gas going through the roof, how do AriZona and Costco get away with keeping prices so low?
And what do their respective commitments to price consistency say about how they do business?
There are three key lessons that founders, marketers, and bean counters can take away from Costco and AriZona’s pricing philosophies.
But first, let’s explore the weird histories of these two iconic American products.
Costco and the $1.50 hot dog combo
“I will kill you. If you raise the effing hot dog, I will kill you.”
That was Costco founder Jim Sinegal’s actual response when CEO Craig Jelinek proposed raising the price of their $1.50 hot dog and soda combo.
Unchanged since the eighties, it should cost about four dollars today when adjusted for inflation.
Sinegal’s rowdy quote is the stuff of legend on business Twitter. (It was even immortalized with a verified “True” page on Snopes.)
But the question begs: Why was Sinegal ready to commit murder over a buck-fifty hot dog combo?
He had this to say: “I know it sounds crazy making a big deal about a hot dog, but we spend a lot of time on it. We’re known for that hot dog. That’s something you don’t mess with.”
The food court hot dog billboard is one of the last things Costco shoppers see before they leave the store. Anchored against what the might cost at the ballpark — ten dollars or more — the value is undeniable. Whether shoppers indulge or not, it leaves a big impression — searing into their minds the brand’s everyday promise: Costco delivers a big bang for your buck (-fifty).
And Sinegal knew raising prices would symbolically break that promise. The little things matter to him.
The thing is: Costco’s hot dog business isn’t all that little. They sell more than 100 million combos annually — more than every Major League stadium combined!
A funny thing happened back in May. The parody Twitter account @JohnWRichKid tweeted this:
The tweet went viral and Republicans — naturally — used it to dunk on the Biden administration and so-called “Bidenflation.” The official @HouseGOP account even retweeted it to its million-plus followers. Did the GOP’s social media manager stop to verify? I’ll give you one guess. Anything for engagement.
So, what happened next? Costco’s stock dropped 12% by day’s end. In fairness, the viral tweet probably didn’t cause the dip — competitors Walmart and Target were way down that day, too — but isn’t it more fun to believe it played a small part?
Either way, the fact that the supposed hot dog price hike was “newsworthy” at all validates Sinegal’s (literal) do-or-die stance on pricing and proves that consumers really do see the populist combo as a symbol for the brand.
Costco’s crazy commitment to the hot dog biz
So, how has Costco stuck to its buck-fifty promise amid rising inflation and food costs?
By streamlining wherever possible: Switching from 12-ounce soda cans to cheaper 20-ounce fountain drinks and reducing the variety of available condiments. (RIP sauerkraut 🙏)
But those small changes are nothing compared to what Costco did in 2009.
Before then, the company sourced its franks from two third-party suppliers, including industry “big dog” Hebrew National. To reduce costs, they cut ties with the middlemen and brought hot dog production in-house. How? By literally building their own hot dog factory! And they didn’t stop at one. As demand increased, they built another just two years later.
And if that doesn’t prove how seriously Costco takes its dogs, this will.
When a Seattle Times reporter asked Sinegal what it would mean if the combo price ever did go up, he answered:
“It will mean that I’m dead.”
AriZona and the 99¢ iced tea
How AriZona looks out for the little guy
AriZona’s signature 23-ounce iced tea tallboys have been priced at just 99 cents since their debut in gas station cold cases more than 30 years ago.
They’re so cheap that if you were to fill your tank with tea instead of gas today, you’d actually be saving money. (You just might not make it very far.)
Adjusted for inflation since its 1992 rollout, a can of AriZona should cost more than two dollars today. (And that’s before you factor in that the cost of aluminum has doubled over the last 18 months.)
AriZona Beverage Company founder Don Vultaggio had this to say when The Los Angeles Times asked how he thinks about pricing in an inflationary economy:
“I’m committed to that 99-cent price — when things go against you, you tighten your belt. I don’t want to do what the bread guys and the gas guys and everybody else are doing. Consumers don’t need another price increase from a guy like me. Your company has to deal with cost increases, but your customers have to deal with cost increases too. And if you break their back, nobody wins.”
A Brooklyn native with blue-collar roots, Vultaggio knows that his tea’s low price is a promise to pennywise shoppers. And if continuing to deliver on that promise means taking a haircut, that’s just the cost of doing business.
How AriZona cuts costs for their 99¢ cans
In the face of strong economic headwinds, AriZona hasn’t just absorbed the losses. They’ve gotten creative to offset them.
How? By investing in a fleet of nimble, lightweight trucks instead of slower, more cumbersome tractor trailers. By delivering orders at night to avoid slowdowns caused by traffic. By using 50% less aluminum in their cans than the other guys. And by running an ultra-lean team relative to the scale of their multibillion-dollar business.
And there’s one other important point.
When was the last time you saw a commercial for AriZona?
Unlike competitors Coke and Pepsi, AriZona doesn’t spend millions to advertise its flagship product. Instead, they let the product speak for itself. That’s why every can of tea is stamped with an unmissable “99¢” badge at the top.
As Vultaggio says, “Most brands in America today believe they have to go out and have a Super Bowl commercial or do traditional advertising. When we first started, I didn’t have the money for that — so each can had to be like a billboard.”
🔑 Key takeaways
1. Price is a promise
As Haipeng (Allan) Chen, a professor of marketing at the University of Kentucky’s Gatton College of Business and Economics, told The Los Angeles Times, Costco and AriZona’s pricing strategies say to consumers, “Trust me, I’ll take care of you, I’m not charging a horrendous price.” Nothing speaks louder than uncommon value if you want to build customer affinity.
2. Price is marketing
Besides their low price points, what else do Costco’s dogs and AriZona’s teas have in common? Next to nothing is spent to market either one. Whether it’s a bold “99¢” emblem on a cold case tallboy or a can’t-miss billboard as you load your cart with industrial-sized ketchup bottles, each product’s inherent value communicates more than any ad ever could.
3. Price is an operational forcing function
Costco and AriZona moved mountains to maintain their low prices, going to extremes to cut manufacturing, distribution, operations, and marketing costs. In the quest to maintain price consistency, both companies brute-forced unconventional solutions to run leaner and meaner. If not for their self-imposed price commitments, would they have ever unlocked the value of those creative efficiencies? As they say, necessity is the mother of invention — and hot dog factories!
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