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Archive for the ‘Pricing Strategy’ Category« Previous Entries Next Entries »The Ultimate In Customer-Driven PricingTuesday, October 2nd, 2007
Rock band Radiohead have just announced that their new album will be released as a digital download with the fans being able to decide how much they pay for it. The band currently have no record label and as such, have no overheads in releasing the album – therefore every penny paid by the buyer goes straight to the band. So far the NME website reports that people having been paying an average of £5 per album, meaning that the consumer is paying much less than they would normally pay in a traditional release. In addition to this, the fans know that all the money is going straight to the recording artist as opposed to the majority of it going to the record label big-wigs. Have Radiohead kick-started a new trend? Can this kind of pricing be applied to other industries other than the music industry? Leave a comment below and let us know what you think. An article on the Church of the Customer blog looks at this story in more detail – see below. For more information on pricing take a loook at our white paper – “The Problem With Price”.
Jumping on the bandwagon… or shunting it off the road?Thursday, June 14th, 2007
With the launch of Apple’s much mooted iPhone on the horizon, many leading phone manufacturers are rallying together to try and proactively take a lead… or is it just a reactive damage limitation exercise? Can the might of the iPhone brand and all the hype surrounding it take on an entire industry? Only time will tell. The article below, from the Financial Times has all the details.
Pricing And The Three HumpsTuesday, June 12th, 2007
There was a very interesting post from Seth Godin on his blog at the end of last week. In the post, Godin suggests that there are three main ‘humps’ that result from different pricing strategy. The post is below, so let us know what you think of it (or you can click here to view the post on Godin’s blog). If you want more information on pricing why not have a read of our white paper “The problem with price”.
Go Figure – Pricing & Segmentation – Part 4 of 4Wednesday, May 30th, 2007
Here is the fourth and final part of Tim Harford’s fantastic article on pricing and segmentation. Perhaps you are a company director rubbing your hands with glee as you read this, planning to deploy a range of clever price-targeting strategies in your own business. Before you get too excited, you’ll need to deal with the leaks in your price-targeting system. There are two potentially catastrophic leaks or great holes in an otherwise brilliant marketing scheme. If you don’t deal with them, your plans will be in ruins. The first problem is that supposedly price-insensitive customers may not play the self-targeting game. It’s not hard to persuade price-sensitive customers to steer clear of an expensive product, but sometimes it is more difficult to prevent the price-insensitive customers from buying the cheaper one. This is not a problem in the case of small price differences; we have already seen that you can get some customers to pay a modest mark-up in absolute terms, but the mark-up can be huge in relative terms. Some of the most extreme examples come from the transport industry: travelling first class by rail or air is much more expensive than buying a standard ticket, but since the fundamental effect is to get people from A to B, it may be hard to wring much money out of the wealthier passengers. In order to price-target effectively, companies may have to exaggerate the differences between the best service and the worst. There is no reason why standard-class railway carriages shouldn’t have tables, for instance, except that potential first-class customers might decide to buy a cheaper ticket when they see how comfortable standard class has become. So the standard-class passengers have to do without. The 19th-century French economist Emile Dupuit pointed to the early railways as an example: “It is not because of the few thousand francs which would have to be spent to put a roof over the third- class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches… What the company is trying to do is prevent the passengers who can pay the second-class fare from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich… And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second- class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.”
The shoddy quality of most airport departure lounges across the world is surely part of the same phenomenon. If the free departure lounges became comfortable, then airlines would no longer be able to sell business-class tickets on the strength of their “executive” lounges. And it would also explain why flight attendants sometimes physically restrain passengers from the cheap seats from stepping off the plane before the passengers from first and business class. This is a “service” aimed not at economy-class passengers but at those looking on in pity and disgust from the front of the plane. The message is clear: keep paying for your expensive seats, or next time you might be on the wrong side of the flight attendant. In the supermarkets, we see the same trick: products that seem to be packaged for the express purpose of conveying awful quality. Supermarkets will often produce an own-brand “value” range, displaying crude designs that don’t vary whether the product is lemonade or bread or baked beans. It wouldn’t cost much to hire a good designer and print more attractive logos. But that would defeat the object: the packaging is carefully designed to put off customers who are willing to pay more. Even customers who would be willing to pay five times as much for a bottle of lemonade will buy the bargain product unless the supermarket makes some effort to discourage them. So, like the lack of tables in standard-class railway carriages and the uncomfortable seats in airport lounges, the ugly packaging of “value” products is designed to make sure that snooty customers self-target price increases on themselves. Consider a hypothetical organisation, TrainCorp, a passenger train company. TrainCorp owns a train that always travels full. Some of the seats go at a discount of £50 to leisure travellers who booked in advance, to senior citizens, to students or to families. The other tickets cost the full price of £100 and are bought by commuters and other business travellers. This is a fairly standard group-targeting strategy: by giving away a few low-price tickets, TrainCorp restricts supply and acquires the ability to demand high prices by offering tickets to only the buyers with the highest willingness to pay. (It might be profitable for TrainCorp just to fence off some of the seats and restrict supply that way, but it’s even better for them to fill the spare seats if they can.) We know at once – if we are economists – that this is inefficient. In other words, we can think of something that would make at least one person better off without making anyone else worse off. That something is to find a commuter who was willing to pay a little less than £100, say £95, and who decided to travel by car instead, and offer him a seat for £90. Where does the seat come from, since the train is full? Well, you take a student who is in no great hurry and was willing to pay a little more than £50, say £55, for the seat and politely throw him off the train. But you refund the price of his ticket, plus an extra £10 for his trouble.
Where do we stand now? The comuter was willing to pay £95 but only paid £90. He’s better off by £5. The student was willing to pay £55 for a £50 ticket, so if he’d been allowed to ride, he’d have been only £5 better off. But he has just been given £10, so the student is also happy. And what about TrainCorp? Well, TrainCorp just transformed a £50 ticket into a £90 ticket and made a more profitable sale. Even after paying £10 compensation to the student, the company is £30 ahead. Now everyone’s a winner; or they would be if TrainCorp adopted this system instead of its group price- targeting strategy. But of course, that’s not what happens, because if TrainCorp tried it, commuters who were willing to pay £100 would hang around for the £90 tickets, and students who weren’t willing to pay £50 would buy tickets anyway and wait to be paid to get off. The whole affair would turn out badly for TrainCorp, who is the one who gets to set the prices. In case your head is spinning a little, here’s the quick-and-dirty summary: the group price-targeting strategy is inefficient because it takes seats away from customers who are willing to pay more, and gives them to customers who are willing to pay less. Yet airlines and railways still use it, because the alternative of individual price-targeting isn’t feasible. OK, so sometimes price-targeting is less efficient than a uniform price; sometimes it’s more efficient than a uniform price. But we can say more than that. Whenever price-targeting fails to expand the number of sales and merely moves products from people who value them more, like commuters, to people who value them less, like students, as in the case of TrainCorp, it will definitely be less efficient than a uniform price. Whenever price-targeting opens up a new market without affecting the old market, it will definitely be more efficient than a uniform price. And there’s a middle position. A lot of group price-targeting does a bit of both: it opens up some new markets but also wastefully moves products away from high-value users to low-value users. For example, my book, The Undercover Economist, is published in hardcover at a high price, and the paperback edition emerges later, at a lower price. The aim is to target a higher price at people impatient to hear what I have to say and at libraries. One good result is that the publisher will be able to sell paperbacks more cheaply, because some costs will be offset by the hardcover sales, and so the book will reach more people. One bad result is that the early version is much more expensive than it would be if there was only a single paperback edition, and some buyers will be put off. That’s what life is like in a world of scarcity: when companies with scarcity power try to exploit it, the situation will almost always be inefficient, and – equivalently – we economists will almost always be able to think of something better.
This is an edited extract from “The Undercover Economist” to be published in the US on November 1 (Oxford University Press $26) and in the UK on March 2 2006 (Little, Brown £17.99). cTim Harford 2005. Go Figure – Pricing & Segmentation – Part 3 of 4Friday, May 25th, 2007 Part 3 of Tim Harford’s article on pricing and segmentation. The 4th and final part will be published next week.
Supermarkets have turned price targeting into an art, developing a vast array of strategies to that end. Above the main concourse of Liverpool Street station, there’s a Marks and Spencer “Simply Food” store, catering for busy commuters on the way in and out of London. Knowing what we do about scarcity value, we shouldn’t be surprised to find that this shop isn’t cheap – even compared with another branch of M&S merely 500 metres or so away, at Moorgate. I picked up five products at random in the Liverpool Street store and managed to locate four of them in the Moorgate store. Every single one was about 15 per cent cheaper there. Big salads were down from £3.50 to £3.00, sandwiches from £2.20 to £1.90. But even when such discrepancies come to light, few City workers would be willing to stray that distance to save 30p. A bold and effective piece of price-targeting.
Other supermarkets are more circumspect about their pricing policy. Going undercover once again, I made a comparison between the smallish Sainsbury’s supermarket in Tottenham Court Road, and the large store in Dalston, one of east London’s less prosperous neighbourhoods. It was harder to find examples of identical products selling for different prices, although by no means impossible. Does this mean that Sainsbury’s doesn’t price-target as much as M&S? Not at all. They simply go about the whole process with more finesse. When researching Sainsbury’s, my approach was the same as with M&S: walk into the shop and see what caught my eye. As you probably know, what catches our eye as we walk into the supermarket is no coincidence; it’s the result of careful planning designed to throw attractive but profitable products in the path of customers. What constitutes an attractive product depends on who those customers are. In Tottenham Court Road the obvious goods were all quite expensive: Tropicana orange juice at £1.95 a litre, Tropicana “Smoothies” at £1.99 for 100ml, Vittel mineral water at 80p for 750ml, and so on. It wasn’t that these products were more expensive in Tottenham Court Road than in Dalston (only the Vittel was), it was just that in Dalston cheaper substitutes sprang into view far more readily. For instance, I couldn’t find inexpensive orange juice in the Tottenham Court Road store, but in Dalston, Sainsbury’s own brand of fresh chilled juice was sitting next to the Tropicana at about half the price, and the concentrated juice was almost six times cheaper than the Tropicana. Brand-name pasta was the same price in both shops, but only in Dalston was it sitting next to Sainsbury’s pasta, which again was almost six times cheaper. The effect was to target the whole Tottenham Court Road store at shoppers who are indifferent to prices, but to aim the Dalston stores at shoppers with a keener eye for a bargain – while of course giving any price- blind Dalston shoppers plenty of opportunity to show their true colours. Another very common pricing strategy is sale pricing. We’re all so used to seeing a store-wide sale with hundreds of items reduced in price that we don’t pause and ask ourselves why on earth shops do this. When you think hard about it, it becomes quite a puzzling way of setting prices. The effect of a sale is to lower the average price a shop charges. But why knock 30 per cent off many of your prices twice a year, when you could knock 5 per cent off year- round? Varying prices is a lot of hassle for shops because they need to change their labels and their advertising, so why does it make sense for them to go to the trouble of mixing things up?
One explanation is that sales are an effective form of self- targeting. If some customers shop around for a good deal and some customers do not, it’s best for stores to have either high prices to prise cash from the loyal (or lazy) customers, or low prices to win business from the bargain-hunters. Middle-of-the-road prices are no good: not high enough to exploit loyal customers, not low enough to attract the bargain-hunters. But that’s not the end of the story, because if prices were stable then surely even the most price-insensitive customers would learn where to get particular goods cheaply. So rather than stick to either high or low prices, shops jump between the two extremes. One common situation is for two supermarkets to be competing for the same customers. As we’ve discussed, it’s hard for one to be systematically more expensive than the other without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices. That way, both can distinguish the bargain hunters from those in need of specific products, such as people shopping to pick up ingredients for a recipe they are making for a dinner party. Bargain-hunters will pick up whatever is on sale and make something of it. The dinner-party shoppers came to the supermarket to buy specific products and will be less sensitive to prices. The price-targeting strategy only works because the supermarkets always vary the patterns of their special offers, and because it is too much trouble to go to both stores. If shoppers could reliably predict what was to be discounted, they could choose recipes ahead of time, and even choose the appropriate supermarket to pick up the ingredients wherever they’re least expensive. In fact, it is just as accurate, and more illuminating, to turn the “sale” on its head and view prices as premiums on the sale price rather than discounts on the regular price. The random pattern of sales is also a random pattern of price increases – companies find it more profitable to increase prices (above the sale price) by a larger amount on an unpredictable basis than by a small amount in a predictable way. Customers find it troublesome to avoid unpredictable price increases – and may not even notice them for lower-value goods – but easy to avoid predictable ones.
Try to spot other odd mix-ups next time you’re in the supermarket. Have you noticed that supermarkets often charge 10 times as much for fresh chilli peppers in a packet as for loose fresh chillies? That’s because the typical customer buys such small quantities that he doesn’t think to check whether they cost 4p or 40p. Randomly tripling the price of a vegetable is a favourite trick: customers who notice the mark-up just buy a different vegetable that week; customers who don’t have self-targeted a whopping price rise. I once spotted a particularly inspired trick while on a search for crisps. My favourite brand was available on the top shelf in salt and pepper flavour and on the bottom shelf, just a few feet away, in other flavours, all the same size. The top shelf crisps cost 25 per cent more, and customers who reached for the top shelf demonstrated that they hadn’t made a price-comparison between two near-identical products in near-identical locations. They were more interested in snacking. « Previous Entries Next Entries » |
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