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

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

As we enter a recession that probably will be long and deep, smart companies fight back with - pricing!

Many companies feel the need to improve their “competitiveness” in a downturn, and they think the best way to do so is to drop their prices. Wrong! Sure, in a recession your sales will drop, but if you also drop your prices, your contribution margin will drop even further, making your company less profitable and possibly resulting in a loss of profitability altogether. If you do, it means you have given up, and taken the easy road. You need to fight back. You need to utilize the recession as a way to improve your long term business results. Pricing champions do!

Pricing champions find ways to increase their prices, or increase their price realization. They fight back. They become even more successful and they increase their competitiveness by adding cash to their war chest, and improve and invest in product and market development.

Let’s take a look at two price champions:

Dow Chemicals, one of the largest chemical companies in the world, reported Q3 revenues that where up 13%, while volume went down 9%. In anticipation of the recession, the company increased prices by an average of 22% across the board.

Here is what Andrew Liveris, chairman and chief executive said:

“The company's ability to take protective measures has helped the company ward off the effects of the current economic downturn. The company has initiated two broad-based price increases and implemented aggressive cost controls.”

Dow is not giving up. They planned for the recession and they used pricing as a strategic weapon for that purpose.

The second pricing champion is a relatively unknown company called Parker-Hannifin, a diverse manufacturer and number 279 on the Fortune 500 list – probably the largest company people haven’t heard of. On October 16th they reported last quarters’ results - a 10% increase in sales over the previous quarter, and a 9% increase in profitability compared to a year ago.

So let’s see why. Here is what Timothy K. Pistell, EVP, CFO said in the prior earnings call, July 31, 2008

“Part of our “Win Strategy” is strategic pricing. We think we have done a very good job through this last fiscal year. The fact is that the gross profit margin improved in ’08 over ’07. Right now, we forecast our price increases will stay on pace with our cost increases.”

What they both have in common is that they do not drop their prices in a recession. They plan for price increases and cost control. They don’t give up. Certainly, they see a recession as a difficult time, but, they also realize that these difficult times are what weed out the long-term winners from the losers.

So you have a choice. You can follow the lead of the pricing champions, and use this economic downturn to your advantage or you can give up. What will you do? What long-term effect will strategic pricing have on your business? What will you do with all that extra profitability?

Again, the choice is yours.

With positive and "do-the-right-thing" regards,

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

The $300,000 Watch That Doesn’t Tell Time

I'm intrigued, and cannot stop thinking about, this limited edition Swiss watch launched back at the end of April 2008 for a whopping $300,000 - it sold out in 48 hours. So while this is a very extreme and unusual consumer goods/luxury goods example, what is there to learn here for companies selling product or services in the business to business space? Well, what it means is that if you or your company are able to identify a segment of your marketplace with needs and desires something you can exclusively meet, you have pricing power; you set the price; you don't discount; you don't negotiate - you increase your profits.

One of the objectives of best practice pricing is just to identify such a segment, to understand that segments' willingness to pay, and leverage that knowledge into higher profits.

Now, in this case, was $300,000 the optimum price? Probably not. If the vendor sold out in 48 hours it really means they were too cheap - how ever odd that sounds for those of us who would be reluctant to spend that kind of money on a watch. It also means that the vendor guessed "the best price" as opposed to useing one of the several methods available for companies to accurately define willingness to pay. The vendor could have optimized the price and thus captured the maximum of that willingness to pay, but did not. As a result they lost several millions of dollars in real profit.

Your company have the same choice - use guesswork, often expressed as "I know what the market is willing to pay for this new product" or do the work to discover the actual value of your product or service, and capture the profits you are entitled to!

With warm summer regards to the reader,

Per Sjofors

Founder, Managing Partner

Atenga Inc

www.atenga.com