Don’t overestimate your customers!

In retail sales, it’s a well-known fact that consumers don’t know what things “should” cost, and apart from the products they buy every day, they don’t have a reference point for pricing and they don’t shop around. Think about this for a second. Do you know what a head of cauliflower “should” cost?

For those of us involved in the pricing industry, it is therefore interesting to be on the receiving end of grocery stores’ price manipulations. I do most of the cooking and thus most of the grocery shopping in my family, so let me give you two personal examples.

I don’t eat red meat, so I use ground turkey for burgers and any other meals where you would normally use beef. My local Albertson’s sells two brands of ground turkey; one of the brands is a 1 pound package at $4.99 and the other is a 1.25 pound package at $5.49.

Last week they had stacked the 1 pound package up to the ceiling (literally!), allocating almost the whole turkey section of the counter for the promotion, and surrounded it with big “buy 2 for $9.99” signs. A whopping one cent discount! I returned to the store about 3 hours later to pick up something I forgot - and they where sold out of the “discounted” turkey.

It is obvious that many shoppers thought the promotion was a bargain. They shop for ground turkey seldom enough that they don’t have a reference point and they don’t know what a pound of ground turkey “should” cost. Thus, they can be easily manipulated.

When you set your prices do you take this into consideration? You probably know what you are selling should cost - because it is your business. But do your customers?

The second example is from the same Albertson’s. Here in southern California, grocery stores always have a section devoted to Hispanic shoppers. In some cases, you can actually find exactly the same products in the Hispanic section - just much cheaper! Obviously there’s an assumed difference in buying power between the average Hispanic shopper and the rest of the shopping population and thus a different willingness to pay.

So do you consider differences in your marketplace’s willingness to pay? Do you segment the market? Do you provide versions of your products for the various segments you sell to, or are you trying with a “one size fits all approach”? If you do, do you know how much business goes to somebody else who has the same products and prices to capture a larger portion of the marketplace? If you are looking for a quick fix to your bottom line, considering pricing for uneducated customers could really make a difference.

With warm summer regards,

Per Sjofors

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

The AppStore, a microcosmos for understanding price elasticity

On a number of technology blogs, a bit of grumbling has started over the price of software bought from Apple’s AppStore. So let me just explain what this is.

I’m sure you are aware of the iPhone, one of the hottest consumer electronics products in the last 12 months. About a month and a half ago, Apple introduced an updated version of the product, the iPhone 3G. As the phone is basically a small portable computer, Apple also introduced what they call the AppStore, a section of iTunes where iPhone users can download small software applications. The AppStore has been a huge success, with hundreds of these iPhone applications available, selling more then $30m worth of software in the first month despite the fact that a majority of the apps are available for free.

Each developer set his or her own application price, or decides to give the app away for free, though most chargeable apps sell for $2.99 – $9.99. And on various technology blogs, I'm starting to hear about one of the world’s most common pricing mistakes. Developers are complaining, to whomever wants to listen, saying things like “I used my gut feel to price my app at $9.99 and it did not sell very well, so I dropped the price to $2.99 and sure I’m selling more but I’m getting less revenue”. This is a classic example of the perils of price elasticity. Price elasticity is a fancy name for how the demand of a product or service changes with the price. If the demand changes little with the price, then the price elasticity is low (or inelastic); if it changes a lot, price elasticity is high (elastic).

Once the elasticity curve is known, it is easy to generate a revenue curve. The revenue curve points out the best or optimum price, where the combination of price and demand generates the maximum revenue. If your market is elastic, and most markets are, selling your product at the optimum price point is crucial for the business results of your company, and can easily mean the difference between market leadership and marginalization.

These AppStore developers have a very unique advantage in the way they can discover the price elasticity curve for their product by simple trial and error. An advantage virtually no other company has. They sell software, so revenue max is also profitability max, they promote their product to a “closed” marketplace as they only compete with other software companies in the AppStore, and they can change the price as often as they wish.

So an AppStore developer can start with a price of, say, $9.99, wait a month, note the demand, change the price to $6,99, wait a month, note the demand, change the price to $4.99, wait a month note the demand and so forth. After plotting 5 to 6 demand points, all with prices taken out of thin air, it will be easy to set the optimum price, the price that will give the developer maximum revenue and profits. Of course, during this process, the company is losing revenue; leaving money on the table to define the lower-than-optimum demand points and forsaking sales volume to define the higher-than-optimum demand points.

Any company can do the same. Whether you are selling farm equipment, data storage, shovels, or boxed software the process is identical, but, because you don’t have the advantages of easily changing your prices on a platform like the AppStore, the process will be longer – probably a few years. And chances are that by the time you are done, your marketplace will have changed so much it will be time to start the process all over again. Not to mention that in the process, you will give up millions in lost revenues and margin.

So when you priced your product, did you use some combination of “gut feel”, “I know exactly what the market will bear”, or the all-too-frequent “our cost plus x % markup”? If you did, what are the chances that by sheer luck you will hit the optimum price point? If you were one of the very few who found that price point by luck, you probably have revenues beyond your wildest dreams. But if not, chances are much higher you are struggling to meet the numbers. If your company is like 99% of companies out there, you can easily gain 10% – 20% in revenue, double your growth rate, and double profitability by knowing the price elasticity of your product, and optimizing your price accordingly. Think about it. What would price optimization mean for your company?

And if experimenting with different price levels and seeing how they affect demand is not a realistic possibility at your company, as the cost in lost business is too high, how will you be able to define the optimum price?

With warm summer regards,

Per Sjofors
Founder & Managing Partner
Atenga Inc
www.atenga.com