Tuesday, March 17, 2009

Starbucks Challenge - Maintain Brand Standards while Reversing "High Price Point" Image

This is a great pricing case study: Starbucks is working to counteract dwindling sales by adding new product offerings, including a new line of breakfast items that are priced below $4. They are also restructuring their menus to promote their iced coffees and other specialty drinks that are below $3. These tactics are meant to change the widespread opinion that Starbucks is priced higher than competitors and only offers high price point items. However, while Starbucks wants to reach out to a new customer base, they don't want to alienate the brand or the value conscious customers that made their brand a success.

Starbucks marketing execs argue that people appreciate good quality and ingredients and will pay for that value, but are also trying to keep the customers who are starting to cut everyday luxuries. So here is the pricing challenge - diversify pricing options and consumer conception without losing the strength of the products or the brands. The New York Times reports:
"When Starbucks begins serving a new line of breakfasts early Tuesday morning, the coffee shop chain is hoping its egg sandwiches achieve more than just the perfect balance of smoky bacon and salty parmesan cheese."

"Starbucks is also trying to pull off another balancing act: the meals must be inexpensive enough to draw in frugal customers, yet fancy enough to appeal to those who care more about quality than price."

"The $3.95 breakfasts — coffee and an egg sandwich, cup of oatmeal or coffee cake — represent Starbucks’ latest effort to recast itself as an affordable brand."

The article goes on to highlight the company's dilemma between price competitiveness and brand identity:
"Executives struggling to reverse the company’s recent revenue decline also play down the difficulty of the balancing act between value and prestige. “If we are a premium brand, it doesn’t mean we can’t provide value," said Howard Schultz, the chief executive. "We believe when we come out of this, we will be stronger because we maintained our core customers and, through providing value, will bring on new customers."

I think that Starbucks will maintain a strong following with its customers who appreciate the product for its uniqueness and value. However, the company is smart to try and modify its image to keep in touch with consumers with less and less expendable income. I am going to follow this story as it progresses. Warmly, EM

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Apps Pricing Follow Up: Set a Sustainable Price

The verdict is in on the IPhone App pricing experiment. In an earlier post here we talked about iPhone application firm App Cubby's experiments with a "pay-what-you-want" pricing model to encourage shrinking sales.

Reacting to user complaints about App Store's lack of a try-before-you-buy feature, App Cubby reduced its prices across the board to $0.99 and created a donation page where satisfied users were urged to donate the difference between the $0.99 and the actual value of the software. The company set up a donation page where users could download apps for their phones and set their own price points. Developers were encouraged to submit apps and gain a strong following with the customers. After only a few months, the experiment has been ruled a failure:
"During the week App Cubby ran the experiment, the company received a grand total of $75 in donations. Yes, the sales volume of the company's re-priced offerings did increase, but not enough to offset the lack of donations and increased support responsibilities.

"In a blog post titled "The Experiment," CEO David Barnard lays out the cold, harsh facts about App Store development. It's a lot easier to charge too little on the App Store than you might think.

"In the rush to win the App Store lottery, developers have been pushing their prices to the bottom in order to get noticed and earn a place on the top 100 rankings lists. The problem is that revenues from an underpriced application simply will not let the developer sustain a business over the long term. Even if you can pull in more users to try the app, you aren't generating enough revenue to cover the real costs of doing business."

Read the full article, "App Store Lessons: Set a sustainable price." This is a great example of the kinds of considerations that need to go into a pricing strategy: are you going to fight for market share by cutting prices or are you going to focus on the value of your brand? In this instance, we can see that consumers are fickle with software and apps, especially with all of the open source options available online, and cutting prices to nil will mostly get you nil.

The company has returned to a $10 price point across the board and is offering lite versions so that consumers will still have the opportunity to try before they by, thus developing a middle ground solution that addresses customer concerns and also drives a profit. Cheers to App Cubby for trying creative approaches and for not letting the experiment run for to long. Warmly, EM

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Monday, March 16, 2009

Pricing to Fight Alcoholism?

This is an interesting pricing application that we haven't focused on too much but that has interesting implications. How does the government set, control or use pricing to instigate social behaviors? Should they be allowed to do it?

There is an interesting debate around this subject going on in the UK. Legislators in Scotland are trying to pass minimum prices on alcohol to curb the country's drinking problem:
"Radical measures aimed at breaking Scotland's “unacceptable” relationship with alcohol were set out yesterday by the Scottish government.

Announcing the “bold strategy” to introduce a minimum price at which alcohol can be sold, Nicola Sturgeon, the Health Secretary, said the measures were an attempt to prevent strong drink being sold for “pocketmoney prices”.

Scotland would be the first country in Europe to introduce minimum pricing and there would also be a ban on “irresponsible” offers, including buy-one-get-one-free and the sale of drink as a loss leader.

Ms Sturgeon described Scotland's position as the eighth worst in the world for alcohol consumption as “simply unacceptable”, adding that the government was determined to show bold leadership over the issue.

Critics attacked the proposals as unworkable, saying that they raised the prospect of people crossing the border into England to buy cheaper alcohol, or purchasing it over the internet."

Read the full article: "Minimum price plan to curb Scotland's drink problem." At the same time, legislators in England have rejected a similar minimum price proposal, saying that they would not want to "punish the masses" especially during an economic recession. These proposed price increases are the results of studies in England, Wales and Scotland outlining the negative effects that drinking is having on the country. Opponents of the bill say that punishing people who are already having trouble making enough money in the current slump is not going to stop them from getting drunk:
"But there was also strong opposition to the idea from those who argue that responsible drinkers would be punished for the misbehaviour of a few.

"David Poley, the chief executive of the Portman Group, set up by drinks manufacturers to promote sensible drinking, said: "This would hit the pockets of hard-working families who are already struggling to make ends meet, and it would not deter those people who drink to get drunk."

"Jeremy Beadles, chief executive of the Wine and Spirit Trade Association, which represents wine and spirits producers and wholesalers, said: "It is worrying that in the midst of a recession when sales and consumption of alcohol are falling that the government should be talking about raising prices for all consumers at a time when many are already struggling to make ends meet."

Read the full article: "Government to reject proposals to set minimum prices for alcohol." On the other hand, football fans in England will get a break next year as five of the major English Premier League clubs announced reduced ticket prices in the coming season ("Fans to benefit from price cuts").
"Thousands of supporters will pay less to watch Premier League football next season after five clubs decided to cut their season-ticket prices.

Everton, Sunderland, Manchester City, Newcastle and Portsmouth are leading the way with a variety of reductions to help fans through the recession.

Five others, Aston Villa, Tottenham, Chelsea, Hull City and Arsenal have announced a price freeze.The remaining 10 top-flight clubs are yet to reveal their pricing structures."

"I think everybody's acutely aware of the economic circumstances that the country is in and the difficulties that individuals find themselves in, and money is tighter," Dan Johnson of the Premier League told BBC News.

"I think the clubs are sensitive to that and one very real way they can helps fans is reducing ticket prices."

Steve Powell of the Football Supporters' Federation said: "It's much welcome relief."

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Thursday, March 12, 2009

Online Pricing Training Now Available

We know the economy is tough and you can't come to us, so we are bringing pricing training to you because we know how critical pricing training and CPP certifications are to today's pricers.

We are glad to announce ANOTHER NEW PPS Online Training Workshop presented by Tim Smith, Ph.D., Managing Principal, Wiglaf Pricing. We are also offering:
Avoid the Commodity Trap: Pricing Services in a Recession, Reed Holden, Founder of Holden Advisors

The Psychology of Buying at Higher Prices in a Down Market
, Scott Sorrell, CEO, Sales Adrenaline

Bundling's Impact on Profits, Tim Smith, Ph.D., Managing Principal, Wiglaf Pricing

Now getting pricing training is easier and more affordable than ever! In the comfort of your home or office settings, you can attend virtually to a LIVE session or learn at your own pace with the RECORDED Sessions.

LIVE Sessions and RECORDED Sessions Prices are:

For Non Members: $695 and you gain 1 CPP Credit for each Workshop
For PPS Members $495 and you gain 1 CPP Credit for each Workshop


1.You can get your Pricing Workshop at anytime, from anywhere in the world

2.Speakers will be available to answer your questions via e-mail

3.Post Workshop quiz will be sent via e-mail after the user completes the workshop

4.All participants of Live and Recorded Workshops will receive one (1) CPP Credit towards the Certified Pricing Professional Designation after successfully completing the quiz.

For a full schedule or to register, click here!

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Tuesday, March 10, 2009

Pricing Advice in Two Sentences

We have a great discussion going on in the Professional Pricing Society LinkedIn group. I wanted to re-print some of the discussion here, because I thought it would be beneficial to many of our readers. One of our members posted the following question:
"If you had only two sentences to share your most valuable pricing advice, what would those two sentences be ?"

We have had a great deal of response from pricers:

- "Always know who your profitable customers are, what they value and are willing to pay for better than your competition. Voting in favor of less government will always give America the best opportunity for the full benefits of freedom."
- "Be aware of how your customers want to buy, as well as how they need to buy. And remember that pricing serves strategy, not the other way around."
- "My succinct advice: Understand what your customer needs and values (not what your product can do) and Know your competition."
- "Regarding pricing: 1) When possible, price based on your unique value relative to the competition, not on cost. 2) to quote McKinsey & Co's line from the PPS Conference back in 2007, "a 1% increase in price results in 12% increase in bottom line."
- "Customers don't appreciate the value of anything given away for free."
- "Based on my own researches about pricing, managing prices is about managing value, costs and competition information to take the best decision and optimize sales and profitability."
- "Start high & Don't forget time value of money. Sell the Value to your customer."
- "1) Price should be a projection of a broad (not narrow) point of view.
2) Brand Value (Recognition) and Marketing Power (Muscle) significantly influence buyer’s decision (perception) and the final selling price."
- "Make sure that you know where and who you are, where and who you want to go and be, and what do you need to. All along the way, ask you on your own frequently the same question, and if the answer change, consider seriously to change yourself."
- "1) Keep away from pricing by exception 2) Get the right training and performance incentives for your sales people."
- "1) Don't oversell and don't sell anything which will not bring value to your customer. 2) Built trust relation with the customers, if you succeed then you will "deliver" instead of "selling"."
- "1) Knowing the right price is worthless if you cant execute. 2) Your customers know what you are doing with a value survey. 20 years of focus on cost reduction and buyer training has ensured that. Actions are hard to hide."
- "1.) Price with confidence 2.) Discount with a purpose."

And that's just the start! Any other pricers want to weigh in? Comment here or, to see the entire discussion, join our group on LinkedIn!

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Monday, March 9, 2009

Guest Insight: Price discrimination is economically efficient

Pricers, here is a great article that was submitted to us by author Leigh Caldwell whose blog covers economics, modeling behaviors and trends, and several other fascinating subjects. This article, "Price Discrimination is Economically Efficient", argues that price discrimination - if it can be maintained in a competitive environment - enables companies to sell products to more people and thus generate more consumer surplus:
"In case you made the mistake of thinking cutthroat price competition is always efficient, I have a small demonstration for you.

"Imagine a market where there are three consumers of sausages, A, B and C. A derives £5 of benefit from a sausage; B gets £10 and C £15. Suppose now there is a single butcher in town, and he has to charge a fixed price. The variable cost of producing a sausage is £4 and the fixed cost for the period is £5.If the butcher prices his sausages at £15 he'll sell one unit at a cost of £9 and make a profit of £6. If he prices at £10 he'll sell two units at a cost of £13 and make a profit of £7. If he prices at £5 he sells three units at a cost of £16 and makes a loss of £1. Naturally then, the butcher will set the price to £10, make £7 profit and generate consumer surplus of £5 (all of which goes to lucky C).

"However, imagine that he develops the ability to price-discriminate and charge a different amount to each consumer. If he can charge £5 to A, £10 to B and £15 to C he sells three units at a cost of £16 and makes £14 profit. He can even offer some extra incentives to the customers, by setting prices to £4.50, £8 and £12 - still making £8.50 profit but now with £5.50 of consumer surplus. Better for everyone (except C, but she still does better than either A or B so we shouldn't feel too sorry for her).

"Incidentally, competition between firms does not change this result much. The exact results depend on the nature of the fixed costs under competition, but price discrimination - if it can be maintained in a competitive environment - still enables the companies to sell product to more people and thus generate more consumer surplus.

"The point is that there is no single price point which allows all three consumers to buy the good and the producer to stay in business. Thus price discrimination is the only way to achieve an outcome that's stable and beneficial for all parties - as well as maximising total welfare.

"Good ways to achieve price discrimination include structured pricing, value pricing and various other mechanisms. We've also created a capability within our CVM software which manages price discrimination to maximise revenue (consumer surplus, though not a short-term concern of most suppliers, is worth maintaining in the long term - the theory of repeated games again)."

Thanks Leigh for bringing this article to our attention. Read the full article or more from Leigh's blog Knowing and Making here.

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Wednesday, March 4, 2009

Retailer Backlash over Prices

The tension is mounting between suppliers and retailers. People are spending less, yet retailers are forced to raise prices to compensate for the lost profit of the suppliers. One great recent example is the price of milk - suppliers lost an average of .05 a gallon last month to stop the rapidly increasing price per gallon that had been passed on to consumers. Now, however, suppliers are in jeopardy, and the situation has become enough a problem to gain attention by state legislators and regulatory agencies, which is garnering backlash from grocers' associations:
"What's next? Are we going to do apples? Are we going to bread? Where do you draw the line?" he said. "This is America. This is not some dictatorship from Montpelier that says we know how to run private business and we know what's best for you and your customers." (see article here)

Here is another example from the Wall Street Journal:
" A big grocery chain has removed from its Belgian stores about 300 Unilever products that it says are priced too high, a sign of mounting tension between retailers and suppliers as the recession grinds on.

"The move by Brussels-based Delhaize SA, which operates the Food Lion chain and other grocery stores in the U.S., comes just days after Unilever reported strong fourth-quarter profit that was driven in large part by its ability to command big price increases despite the ailing economy. (Big Grocer Pulls Unilever Items Over Pricing)"

The problem has become so bad that grocery stores are even being downgraded by investors, which no doubt does nothing but exacerbate the issue. On an interesting counterpoint: one retailer is going against the flow and refusing to change its prices.
"Sales down by 19 per cent but Abercrombie & Fitch eschews inelegant option of cutting prices to suit its cloth

Abercrombie & Fitch appeared to have it all – a glossy catalogue filled with beautiful young men and women, glamorously photographed by Bruce Weber; gorgeous assistants in carefully lit stores that seem more like nightclubs than retail outlets; and fashionable garments emblazoned with the A&F logo, appealing to the upwardly mobile youth of America.

But when the economic downturn caused shoppers to think twice about their spending, A&F refused to reduce its prices – as much as £60 for a polo shirt – in an attempt to protect the brand.

Its reluctance to wield the red sticker has seen bargain-hunting shoppers desert in significant numbers, allowing rivals such as American Eagle and Aéropostale to steal market share with their cheaper products. Yesterday, A&F reported a 19 per cent decline in sales across its chains for the three months to January 31 to $998 million (£688 million), with like-for-like sales at A&F-branded stores down 25 per cent. Net profit also fell sharply to $68.4 million, down from $216.8 million a year earlier.

Mike Jeffries, chairman and chief executive, said: "The fourth quarter proved to be a catastrophe for the retail industry – a nightmare that included unprecedented promotional activity by other retailers in the malls and consumers who continued to show reluctance to spend, especially for premium brands."

However, he claimed that the company was "satisfied" with its results for the quarter, adding: "We will . . . continue to protect and position our brands for more promising times."

Read the full article: "Abercrombie & Fitch refuses to reduce prices". How long can this possibly last? We will see if their customer base is as loyal as they think they are, or if they can continue to pay premium prices for their teens' new clothes. If they do succeed, it will be an interesting case study for retailers examining their pricing strategy. More soon! Warmly, EM

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Tuesday, March 3, 2009

Is Cutting Prices a Good Strategy?

We have been talking a lot about how pricing strategy plays an integral part in business sustainability and success, and have been focusing on the numerous pricing strategies being employed in various industries to survive the current economic downturn.

One of the primary issues for many businesses, as we have pointed out, is the decreasing amount of expendable income consumers have at their disposal. So what are businesses to do to maintain as large a piece of the dwindling pie as possible? Some businesses are using demand pricing models, while others are choosing to focus on the value proposition that their product and services holds that sets them apart from the competition.

Still others, primarily in retail up to this point, have been cutting prices. Now we are starting to see price cutting in the service industry as well. See this article which has been getting a lot of attention from pricers:
"The sour economy is forcing Valet Girls to skimp a bit.

"In better days, Valet Girls, an all-female parking company based in Malibu, charged Hollywood party planners a premium price so their guests could enjoy the novelty of handing the keys to their BMW or Bentley over to a young, tank-top-wearing woman.

"Valetgirls But lavish company-sponsored parties are suddenly out-of-favor (being seen as a sign of corporate excess during a time of belt-tightening) and Valet Girls is feeling the squeeze. The 26-year old company, which heretofore boasted an unbroken string of annual sales growth, has seen bookings plummet 60% so far this year compared to the same period of 2008.

"In response, the company laid off 50% of their staff and cut hourly pay for its valets from $10 an hour to $8. And this week, it slashed its hourly rate from $36 per valet to $26.Co-founder Nancy Saltzman said the decision to cut pricing was a matter of survival.

"We had to slash rates almost 25% to stay competitive this year," Saltzman said. "[Hollywood party planners] are now shopping out three and four quotes for valet parking where before they used to simply call and book us."

Read the full article: "Valet Girl loses steam, cuts prices". Is this a good survival strategy? Arguably the service provided by Valet Girl is far from one that is necessary for daily life, but the trend is continuing into more necessary industries as well, such as healthcare. EMRresource.com, a McKesson Healthcare blog outlining trends in the healthcare industry, recently posted: "Given the state of the economy, with a drop off in patient volume, many physicians feel their practices are at risk." Read the full post: "Is Funding Enough to Instigate Physician EMR Adoption?".

Using price cutting as a business strategy has also caused a lively discussion in the PPS LinkedIn Group:
"Would like to know if you would have recommended the action they took (to cut prices)? So now they are winning 80% of their quotes . . . but are they profitable and is the business sustainable?" (Chris Hopf)

"Only they know if they are profitable and therefore sustainable. However, to not win business is to ensure lack of profitability and sustainability. Another question is when do the owners think corporate business will rebound? The price cuts could be medium term or short term depending upon their outlook. In which case, short term pain enables them to be ready when business turns around. I wonder how much of their business is related. The parents of the groom, for instance, who sees Valet Girls work, decide to hire them for the corporate deal, etc." (Will Davis)

"Their business is quite different from many of us in that their "product" cannot be bought and stored, nor can it be transported to a different market, and they don't have significant fixed assets. They also cut their primary cost per hour by 20% (labor) while reducing their prices by 27%. So most of the price cut came from their employees who are not employed by them full-time and expecting this to be their only source of income. In many of our businesses we also have to worry about the long-term impact on price levels that a cut may have." (Stu Schlachter)

"Some thoughts: As we all know and they will likely find out . . . it will be a challenge to raise prices in the future, but maybe their approach will actually lead to them to being around in the future (to have that challenge). However, if they cannot create a profitable return on the business in the current climate, they likely won't be able to sustain the business with a low price/high volume approach. And with very little fixed dollars . . . they could simply scale way back, land the opportunities that value their differentiation (value prop) at current rates (not reduced) until the economy rebounds. Also how they are framing their message around any reduction in price will be key to their success in raising their rates in the future." (Chris Hopf)

What do other pricers think? Lack of funds both in the business and consumer markets is forcing a lot of businesses to rethink their business models. We will keep on top of these trends to make sure that pricers have the best information and tools available to them as pricing strategies become even more integral to long term success. Warmly, EM

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