Gain returning customers… or not

In this blog I’ve talked many times about the importance of using segmentation and up-selling to gain increased revenue - but there has to be some rhyme or reason to what you don’t get without paying extra. What I’m trying to say is -- don’t do what this man did to me yesterday.

On a short trip with out-of-towners in the hills above Malibu, we stopped at what looked like a small 19th century village: a very pretty and very quaint area of town. The 1850s “general store” turned out to be a wine store with tastings of local (mainly) Malibu wines. We were all in a good mood, finding this old village was a nice surprise and finding a place to taste local, and unusual, wine was too. But as we sat down in the very nicely decorated tasting room I asked the server (was it just a server or the owner?) to light the candles in the imposing candelabra just in front of the table. It would have further added to the ambiance and our good mood. Not an unusual request - just about every restaurant has candles or these little oil lamps because it adds to the ambiance, makes people happier with the experience and thus increases their likelihood to return. Pretty simple. And the guy said: “NO. We only light the candles for private parties as part of the “special lighting package”. What?!?! Here we are four people paying $15 each to get a few sips of wine and maybe buy a few bottles and the guy refused to light the candles because we did not pay for it! And as other parties sat down for tasting we heard the same question every time - and the same answer! Unbelievable!

This guy had it all wrong. He was trying to “add value” to the “special lighting package” by disallowing the lighting of candles unless you pay extra for it. But since the lit candles are “expected”, what he managed to do was to turn off customers. His “no” was such a snub that I will not go back and I could hear how other quite animated parties were subdued by the same “no” to them.

So as you are looking for ways to up-sell don’t remove from the minimum experience customers expect to receive from you when it comes to service or product functionality. It can backfire badly….

Salut!

Per Sjofors

AppleTV, iTV and content pricing

The Apple rumor mill is in full swing again. This time is it about a (supposedly) soon-to-be-announced upgrade to the AppleTV, which is slated to be called iTV. Thus far, AppleTV has repeatedly been described by Apple execs as a “hobby”. But if we believe the rumors, soon, it may be turned into a real business.

The AppleTV, for those who do not know, is a small dedicated computer that allows the user to browse, download and play standard definition and high definition video and audio content from the iTunes store, YouTube and local computers with iTunes. And the entire system is controlled with a thumb sized remote control.

Here is one journalist’s take on the matter:

“Currently, TV downloads from iTunes cost an average of $1.99 per show—just high enough to annoy many customers who are used to getting TV for free, but low enough that people pay it. A 99¢ TV rental would obviously be a little closer to free and, if the shows remain commercial-free like the rest of iTunes, would be an upgrade from watching them on the boob tube or Hulu.”*

While the pricing strategy is a mystery to this particular journalist, for us in the pricing industry it is not. Apple, being the Pricing Champion they are, priced content on iTunes to maximize profit instead of demand. They know that early adopters are a smaller group, but they are not price sensitive. They buy because they want to be first. They want to know they are on the leading edge. Likewise, the AppleTV is not cheap at $229. You could almost afford a “real” computer at that price. But again, early adopters are not price sensitive.

So if the rumors are true, and Apple will introduce the $99 iTV and the cost of downloads does reduce to 99¢ it really just means that Apple now believes their little device is ready for prime time and expects it to be widely adopted. Some people call this strategy a skimming pricing strategy but I think it is just common sense. Think about this for a second. You develop a new product, created a whole new business segment, and you want to recoup your product and infrastructure development cost as soon as you can - so you price relatively high because you know the early adopters and not price sensitive. But as the product reaches the mainstream, volume goes up and price sensitivity goes up - so you lower the price. But this time the sunken research and development costs are already paid by the early adopters, so you can lower the cost and maintain profit margins. More often than not, just like in Apple’s case (if the rumors are true) a new version of the product is developed that is cheaper to manufacture and, because it is now a “different” product, it does not alienate those early adopters that are sooooo important for future product development.

The lesson to learn hear (no matter if Apple introduces this new product or not) is that what is a pricing mystery to some is common pricing sense for the rest of us. And that anybody who prices new groundbreaking products and/or services should not price low but should be aware that their marketplace’s early adopters are not price sensitive. In this context I could expand this article into a rant about the stupidity some people call penetration pricing, but I’ll save that for another time….

With warm August regards,

Per Sjofors

*The full article can be found at http://arstechnica.com/apple/news/2010/08/-more-evidence-for-99-itunes-tv-rentals-apple-tv-makeover.ars

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

Taking control of your own pricing

One of the aspects of best practice pricing is to take control over what customers are willing to pay. Just today I found another example of this. General Mills, the food giant reported strong earnings growth. Here are some interesting numbers:

Revenue for its US retail business increased 9.1% while sales volume “only” increased with 3%. Thus, the company was able to increase prices, and/or direct consumers to more expensive products.

General Mill’s CEO Ken Powell said in the press release that they made a significant marketing reinvestment and will continue to do so. Thus - General Mills took control and influenced the marketplace, with marketing, to pay higher prices. A great example of what just about every company can elect to do - even when selling commodities like General Mills.

With best cereal regards,

Per Sjofors
Atenga Inc

iPad pricing comments

- Apple followers are not price sensitive and typically want "the best", thus, a relatively high price of the 3G 64GB model is a way for Apple to quickly re-coupe the development cost. Recall how successful the iPhone was with a very high price for a phone.
- The "odd" pricing of the 3G modes ($629, $729, $829) is a way of framing to WiFi models too appear more affordable at their $499, $599 and $699 prices, thus they will easier penetrate a more price sensitive market segment.
- It is a stroke of brilliance to price (most of) the products considerable lower then the $1,000 that the rumor mill expected. And lower then Lenovo's and (I think) Dell's tablet computers.
- The iPad will not make a dent in the netbook market for some time; it is too different, too expensive and too much Apple. At current prices it appeals to Apple users who don't want the windows experience (like me) and therefore have not yet bought a netbook. As prices of the iPad will drop significantly over the next year to two - this will change.

Per Sjofors
Founder/CEO
Atenga Inc

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