Coming out on top!

As we coming out of the recession, some companies are taking advantage of the increase in consumer confidence and correcting for the pricing mistakes they made as we entered the recession.

Restoration Hardware, the upscale furniture and accessory store, is one example.

Here are some excerpts from an interview with Ian Sears, Chief Marketing Officer of Restoration Hardware (courtesy of Advertising Age): “As the recession hit, we dropped our prices by 20%. When that happens, and you end up discounting as much as we did and as much as our competition did, you, over time, begin to create some level of devaluing your products,"

But Restoration Hardware has began taking corrective action. They changed their advertising strategy to focus on more upscale channels, created a new website with a more exclusive “feel”, increased the quality and design of its offering, and, they increased their prices between 20 and 30%. All of these actions were meant to work in concert with each other to provide concurrence between company positioning, product mix, marketing mix and price.

So what will you do now as the recession is slowly coming to an end? You probably also dropped your prices in response to the weak economic climate - but is now the time to increase them? Or do you want to be stuck with the low profits of the recession, and see your competition race past you both in profitability and competitiveness?

Do you know what your customer’s new willingness to pay is? Their new price elasticity? Their new decision and value drivers? If you don’t (and unless you’ve just finished a price optimization study, you don’t) how will you find out? What plans and programs do you need execute in order to leverage all the new money coming out there as the recession comes to an end?

With regards to a bright future,

Per Sjofors

per@atenga.com

818 887 4970

Apple and Dell - commodity and not

I’m fascinated by the comparison between Apple and Dell, as loyal readers of my blog may have noticed before. In light of the release of their most recent financial statements I felt compelled to write about them again.

Apple, of course, has proven to be the master of de-commoditization. Historically Apple has never subscribed to the commodity mindset that besieges much of the technology industry. They have continued to find ways to keep their computer offerings unique. They where never lured into being like everybody else, and, now with the iPhone, they have managed to de-commoditize the cell phone too. With non-commodity products, Apple has the ability to “create their own weather”; they are in control of their own marketplace. And Apple does not miss an opportunity to use the pricing lever for their non-commodity products. Their products are more expensive than commodity products, yet they provide unique value for a small, yet significant, portion of the market. And when it comes to consumer satisfaction, in study after study Apple comes out on top.

Dell, on the other hand finds itself squarely in the commodity space. Their product offering is not particularly unique and, as with all commodities, buyers end up making their decisions on price alone. Dell faces stiff competition from a slew of like-wise commodity computer vendors, all vying for the product with the lowest price.

Now let’s have a look at the business results of these vastly different strategies:

	Apple	Dell
Last quarter revenues	8,337.00	12,342.00
Growth from previous quarter	2.1%	-8.08%
Last quarter profits before tax (EBT)	1,732.00	412.00
Growth from previous quarter	1.1%	-10.9%
Percent profit	20.7%	3.3%
Market cap	$143.32B	$26.38B

So what does all of this mean? It means that the company who chose the non-commodity business strategy, and successfully executed on that strategy has ended up with larger profits and higher shareholder value.

There is, of course, nothing wrong with pursuing a commodity strategy. It is a safer choice and it requires a very different corporate focus and skill-set than choosing a non-commodity strategy.

But most companies are not like Apple or Dell. They are in-between the two. Most companies have some products that are commodities and some products that are unique. And most companies have simple pricing schemes; like cost-plus, where every product gets the same standard margin; 15%, 50%, 200% - whatever is deemed to be common in the company’s industry.

These companies lose out on profits they would rightfully earn if they priced their unique products differently than their commodity products. So, a quick fix for a company like that is to analyze and document what products are unique and thus have pricing power, and consequently increase prices on these products.

Another risk almost every company faces is to be forced into believing their products are a commodity when in fact they are not. The reason this happens is simple - buyers tend to ground down salespeople in their quest to get a lower price, and a better deal. All but a few salespeople can resist this force for a long time. Eventually they succumb to believing that whatever they are selling is a commodity, and they resort to selling on price alone. This only helps to enhance whatever downward pricing pressure already exists in the marketplace, zapping away at profits a company rightfully should earn. The fix here is training. The sales people must know the true value of their product delivery to the buyer and must be trained on how to defend that value. When the salespeople start spending more time explaining to their management that prices must drop than they are spending convincing customers no additional discounts are available - then it is time to send them off to training on how to sell value!

So, the moral of the story is: Differentiation and uniqueness provide pricing power - define it and use it to increase profits - for the whole company or just the unique products. Never fall into the commoditization trap!

With hot summer regards,

Per Sjofors

Founder/CEO

Atenga, Inc.

www.atenga.com

What goes up, unfortunately also may come down...in a hurry.

Most of the time I’m writing in this blog about how a lack of pricing processes and/or discipline leads to underperforming businesses, and how a focus on pricing can rectify this. This time, the subject gets more serious. 

In a commodity business the product or service you provide is not valued by your customers more then any of your competitors, and your only way to compete is on price.  Since the low price will win the business, the only way a commodity-based business can be profitable and provide good shareholder returns is by focusing on costs and operational efficiency.  We all know this. 

On February 12th, Continental flight 3407, operated by Cogan Air crashed on approach to Buffalo, NY, and killed all 49 passengers onboard and one person on the ground. In the aftermath is has transpired that it was pilot error which caused the crash. So what does this have to do with pricing? Nothing directly, but it has everything to do with commoditization. 

Over the last 20-25 years the airlines have accepted, and even accelerated, a death spiral of commoditization; they failed to differentiate their offering and continued to detract value from their services by selling on price alone. They very quickly taught their customers to use the yield management systems (which coincidentally were once touted as the industry savior) to pay even less for their tickets. With revenues going south, and no efforts to fight commoditization the whole industry had to cut costs. We’ve seen this through all the various bankruptcies and industry consolidation. Another strategy the airlines adopted was outsourcing, particularly on short haul commuter flights like flight 3407. The large incumbents cannot fly these routs profitably, but the likes of Cogan air can. Their operating cost is lower. 

So lets introduce another concept: “You get what you pay for”. We all know this. Sometimes what you “get” by paying more is tangible, and sometimes its intangible.  But in all cases, when you pay more, you pay more because you can defend the additional cost, at least for yourself.

When Cogan Air hired the pilots on the doomed flight 3407 they also got what they paid for:

• The captain, Marvin Renslow was 47 years old, had flunked 2 FAA flight certification tests, and earned a “whopping” $55,000 a year.
• The co-pilot, Rebecca Shaw was 24 years old, commuted back and forth from Seattle  to New Jersey, and had, in fact arrived on a red-eye that day, and earned an even more “whopping” $16,300 a year.  On top of that, she also had a second job to help support herself financially. Sleep deprived anyone?

The NTSB has concluded that neither of these two followed required practices, neither was well-trained or experienced on the aircraft type and both were most likely fatigued as neither had the required sleep or quality rest period prior to that day. Unfortunately, this lack of quality ended up leading to dire consequences for the people in the back seat, who had trusted their lives to these individuals. 

Keeping the belt tight on costs is all fine when your “commodity” is grain, sand, or oil.  But if the service you provide ultimately affects peoples lives, where staff mistakes can become fatal, should you allow your cost control focus to affect the quality of your staff? Piloting is a highly complex job, which requires years of training. Yet, Rebecca Shaw eared as much as a burger flipper. Marvin Renslow would have made more money as an Operations Supervisor at McDonalds. Where they the best in their profession?  Probably not - as history unfortunately shows they where not even qualified to do their job. 

So how does all of this tie back to price? It is the tremendous failure of the airlines to fight commoditization that ultimately is the cause of this tragic event. 

• Their failure to differentiate their offerings, 
• Their failure to hold prices steady
• Their failure to understand that they were training their customers to use the yield management systems to their advantage
• Their failure to operate profitable businesses where they can afford to pay their most valuable and critical employees a reasonable wage, where they will attract “the best”  staff, where employees can afford to live close to their base, and not commute sleeplessly across the country before going to a full day of work.  
• There failure to have an industry where not meeting certification standards still allows an individual to be employed

With all of these failures, it’s no surprise the airlines continue to find themselves in bankruptcy court, fighting to keep their companies afloat.  The saddest part about this story, is that if more attention had been paid to pricing, they never would have found themselves in this mess.

With sad regards,

Per Sjofors

Founder/CEO

www.atenga.com

per@atenga.com

818 887 4970

Beginners guide to price elasticity

I promised that I would report back to you, the reader, the results of the price increase at iTunes. And after the first week, the results are in:

Of the top 100 selling songs, 33 were increased to $1.29 while 67 remained at the old price of $0.99.

• Sales of the 33 songs at $1.29 where down 12.5%
• Sales of the 67 songs at $0.99 where up 9.9%
• Leading to an overall a drop of 0.5% sales volume
• Resulting in approximately 9.5% increase in revenues

It certainly appears, from this first week, that the labels and Apple did the right thing, Worries that the price increase would force people to migrate to file sharing sites appears to be unfounded as overall track sales (not only the top 100) where up 3%.

Remember that this price change was forced by the labels, which thought that the $0.99 price was too low and did not fully maximize their revenues. With these results, Apple and the labels made an additional $450,000 in just one week on this price change.

So… do you know the price elasticity of your product or service? If you don’t, there’s no way you can know if your prices are optimized to maximize revenues or profits. You may well be leaving significant money on the table, and you are definitely shooting in the dark.

With whistling late Friday regards,

Per Sjofors
Founder/CEO
Atenga Inc
per@atenga.com
818 887 4970

Stirring the music download pricing pot

The music industry has been stirred up once again this week. After years of pressure from the labels, Apple finally gave up on its one-price-fits-all strategy for iTunes and introduced a three tier pricing model -- with downloads now available for $.69, $.99 and $1,29.

So among the three largest sellers of downloadable music, it creates an interesting competitive environment:

• Apple, the clear market leader with a premium product, with the highest priced downloads, a claim to better sound quality, and complete integration with iTunes and iPods
• Amazon.com, with a single price of $.99, “standard” high bit-rate MP3 files and an application that can integrate with iTunes and therefore iPods
• WalMart.com, with a $.05 lower price per song than Apple’s pricing scheme ($.64, $.94 and $1.24) and “standard” high bit-rate MP3 files.

So it will be interesting to follow:

• Will Apple lose some of its market share to Amazon - thus proving that a lower one-price-fits-all approach is the preferred consumer way to buy downloads.
• Or, will Amazon follow Apple and WalMart with three-tiered pricing?
• Will WalMart’s strategy to copy Apple’s tiered approach (but at a lower price) pan out? Will they gain market share?

What will the three-tiered pricing strategy do for the business results of Apple and the big music labels they’ve partnered with? Will it drive more revenue and profits or will consumers migrate back to the illegal file sharing sites that created the digital music market in the first place?

I will keep an eye on these developments and be sure to report back to you soon.

>>Update at 2pm 4/9/09: It did not take long. Amazon just introduced some songs at $1.29

With singing regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

It’s the Autobahn...or the Highway

Anybody who’s missed the current woes of the US car makers is either living on a different planet or not living at all.

With emergency life support in the form of billions from taxpayers and bankruptcy likely in the near future for both GM and Chrysler the car industry looks like a sure bet for losing money.

But wait! What if I told you that you can still run a profitable car business despite the global recession and the precipitous drop in automobile sales? Impossible, right? Well, not at Porsche. Let’s compare the first 6 months of Porsche’s sales data for 2007/2008 and 2008/2009.

Financial Year: 07/08
Total Number of cars sold: 46,600
Revenues from operations (Euro): 3.5b
Average Selling price (Euro): 75,107
Profits from operations (Euro): 1.658b

Financial Year: 08/09
Total Number of cars sold: 34,266
Revenues from operations (Euro): 3,04b
Average Selling price (Euro): 88,718
Profits from operations (Euro): 0.5b

So what do these numbers tell us? It is obvious that Porsche is not insulated from the global decline in car sales, and sales are down considerably. But, as opposed to almost every other car manufacturer out there, they have been able to fight back and increase the average selling price of their cars. As they say in their financial press release from March 31st:

“The substantially better development in revenue compared to the development in sales is primarily due to a changed model mix.”

So what can we all learn from Porsche? I think the following:

1. Ongoing discounting that is used by most other car manufacturers (especially the “Big Three”) detracts from the perception of value of the product and creates downward pricing pressure. Prospective buyers also quickly learn to buy on regular promotions (Presidents Day Sale!) and delay their purchase for some time. To my knowledge, Porsche never discounts its products, never runs “employee pricing” schemes, or anything of that nature. Thus, they never suffer from self-inflicted value perception wounds.

What do you do? Do you train your customers to buy at the end of the quarter or end of the fiscal year? Do you always discount to close the deal?

2. Porsche has done a spectacular job of increasing the average selling price of its products, raising their average sale price to €88,718 from €75,107. An 18% increase - in this economy!

It is a demonstration of how changing the product mix can be a powerful way to increase your revenues.

Have you thought about what you can do to change your product (or service) mix to drive your customers to a more expensive or maybe just more profitable mix? What programs do you have to have in place? What knowledge of your customers purchase decision behavior will ensure these programs have the maximum success rate? Can you do as good a job as Porsche? In this economy? Why not?

With speedy best regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

Maintain your customer base by offering better service

In my suburban neighborhood of Los Angeles, I have a reasonably wide choice of restaurants that I visit with some frequency. Most of the time, these range from “casual”, to “semi-fine dining”. Some of these are the larger, more familiar chains and some are restaurants with a single location.

As the economy worsens, and competition for customers increases, restaurants are taking different approaches to survive and hopefully maintain their profit margin. Let me review what I have found, and how it’s changed my dining choices.

Large chains

The large chains appear to focus on cutting cost by increasing the choices of “cheap” food and in some cases reducing the portion sizes while keeping prices the same or even slightly increasing them. Staff turnover also appears to have increased, maybe another effect of cost cutting.

These are actions that make sense from a business point of view, but overall, as a guest, it creates a less appealing restaurant experience.

Single location restaurants

While the strategies of the large chains are all pretty similar (as can be expected from companies run by professional mangers) single location restaurants have employed extremely variant tactics.

One group goes to the extreme in cost cutting - much lower quality food and significant price increases - at the same time.

The other group focus on creating a better overall restaurant experience; the food quality is maintained, the number of staff and the service level are both increased. Prices are not decreased. Examples of service increases may be that the manager may greet you in person, or you may get a free appetizer or dessert, or maybe when you order take-out you get a free drink while you wait.

It is quite easy from the above to figure out how the different strategies these restaurants have adopted have driven my behavior. The single location restaurants who both increase price and decrease quality have lost me as a customer forever. And this, sadly, includes some of my all time favorites.

So, now let’s look at what’s ends up driving my dining decision-making. On one hand I have large chains who provide a “reasonable” restaurant experience for a “reasonable’ price; compared with a segment of single location restaurants that offer an “excellent” experience for a little more money. In this scenario, the dynamic of “value for money” has changed to favor the single location restaurants even though they are somewhat more expensive then the large chains.


OK, so why has this story made it into my pricing blog? Well, it is here to show you that there are always different options, even in this economy. There will alway be a portion of buyers who make their purchase decisions based on low price and brand - and in this example will continue to visit the large chains. But, likewise, there will always be a portion of buyers who will be wiling to pay somewhat more for something better, in this case better service, higher quality food, and overall, a much better dining experience.

The trick for your company, of course, is to know what services and what quality improvements you can employ cost-efficiently that will add value to your offering, that will maintain your customers while attracting new ones at the same time… in this economy.

With not so hungry regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

Some people never learn….

Remember when Microsoft launched their new operating system -- Windows Vista -- 2 -3 years ago. Not only did the public and media complain about how incompatible it was with existing hardware but they were also befuddled by Microsoft’s decision to have, if my memory serves me right, six different versions of the product with prices ranging from less than $100 all the way up past $350. A quick price check today indicates that the range has widened, as you can now buy versions of Vista from $97 up to $800. Today there is Vista Starter, Vista Home Basic, Vista Home Premium, Vista Business and Vista Ultimate. Then there are versions of these with or without a Service Pack at an array of different prices along with upgrades from older Windows operating systems at another realm of different prices. Basically, what we’re looking at here is a discombobulated pricing mess.

Now don’t get me wrong, segmenting the market and having different versions of products to meet different levels of customer requirements is paramount in Best Practice Pricing, and it’s something we put into practice with our clients every day. But if that’s the case, you may be wondering why I’m complaining about what Microsoft is doing. The answer is simple. When you segment your market with different versions of your product or service, at different prices, it is crucial that the segmentation make sense for your customers. If it does not, they will feel they are being nickeled-and-dimed into paying higher prices for something that they do not value. So for example, Vista Home Premium does not have the “protection of hardware failure” feature while the Vista Business edition does not have the user-friendly DVD-burning feature. So if you, the customer, want both of these features, you have to buy Vista Ultimate - which comes at a substantial price premium to either of the other two versions. In Microsoft's case, this segmentation did not make sense to a large number of customers -- which led to reams of bad press, customer frustration and dissatisfaction. In fact, Microsoft can only get by doing this because of their monopolistic stronghold on the market. Any other company that would have attempted to quell the same outrage Microsoft did at the Vista launch would have been forced to change their product and price practices immediately to avoid complete failure.

While Microsoft is still going strong, they did not come out of this adventure unscathed. What’s amazing though, is that while they are waiting for the bruises to heal from their Vista experience, they have gone ahead and developed a new version of their operating system known as Windows 7. The product will be launched later in 2009. Hopefully, it will be better technologically than Vista, but when it comes to pricing, has Microsoft learned anything from its past mistakes? No, not at all, in fact, they have indicated they will do the same unnecessarily complex pricing again! They will launch five or six versions of Windows 7, at a bevy of different prices, creating the same confusion and the same outrage again!

So, while you should segment your marketplace and your offering to meet the needs and willingness to pay for each segments, you have to do this carefully to avoid alienating your customers -- even if you are an industry behemoth like Microsoft.

With non-monopolistic regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com

When it comes to pricing, tech writers are in the dark

So I’m reading this story about how Amazon.com dropped the price of a one-year Microsoft Xbox Live Gold subscription from $50 to $30. This subscription gives the user 12 months of Xbox Live service which includes online multiplayer gaming access, video chat, game and video downloads as well as Netflix's online streaming video service (though a Netflix subscription is required for that).

The journalist makes the statement that this is not good enough and that it should be offered for free. Why does he think Microsoft should give away a service for free? Because a prime competitor, Sony, does not charge anything for their similar on-line game service, so Microsoft shouldn’t either. And then he goes on telling us that the XBox 360 outsold the PlayStation3 by 8 million units -- 28m to 20m.

So why on earth should Microsoft give away their on-line game service when they don’t need to? Just because a journalist says so? Both Microsoft and Sony are in business to make money and in this case, Microsoft found a way to unbundle a portion of their product in such a way as to increase their revenues. This unbundled service can capture a higher portion of their customers willingness to pay, and, especially when compared to a free service, bring in much higher revenues. I assume that Microsoft did not make the decision to charge for the on-line service by gut feel or winging it – as many companies do. Instead, they must have used research, sound analytics and behavioral market simulations to test several things:

• Is a charge for the on-line service acceptable?
• For what percentage of the market is it acceptable?
• What price for that on-line service will maximize revenue while not affecting market share?

With more than 10 million subscribers to the Xbox Live service, Microsoft pockets another half billon dollars a year, which, even for a gigantic company like Microsoft, has a significant impact on their bottom line. So for your company, what services can you unbundle from your product? Or if you are a service company - can you unbundle services from your current offering and charge extra for them? How will it affect your sales level? Your revenues? Your profits? Do you know how your customers will react? Have you tried it? If you have not tried it, it is probably because you are worried it may backfire. That’s where research and market simulations come in to play. With the help of an independent, third party firm, you can find out exactly what will happen in the marketplace without taking on any of the risk that a price change may cause.

So you can have your cake and eat it too.

With sunny Southern California regards,

Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
per@atenga.com