Thursday, February 12, 2015

Why Security Analysts Often Whiff on the Pricing Issue

Guest Post by Per Sjofors, CEO Stratinis USA (

It was a key moment in the third quarter earnings call for Netflix when Management was blaming a previous monthly price increase from $7.99 to $8.99 for disappointing new subscriber growth. The lackluster results almost overnight knocked 24% off the market cap of the high flying video streaming company. Fast forward three months and Netflix stock was soaring in the wake of strong new subscriber growth and Management made the unusual confession that they may have been wrong to have blamed the price increase in the first place.

Few stocks over the past year have garnered as much public or analyst attention as the mercurial Netflix and few have shed so much light on the black hole of Management called “pricing”. Netflix Management made a number of critical pricing decisions in the Spring of 2014 including maintaining the existing $7.99 monthly rate for existing subscribers for two years, while increasing the new subscriber rate to $8.99.

These moves had tremendous bottom line implications for the company. On what basis for instance did Management decide to hold the line on existing subscriber pricing when a dollar increase could have potentially meant a doubling of net profit. And why did Management decide on the $8.99 price for new subscribers versus a threshhold price point such as $9.99. And what were the reasons for Management believing pricing was to the blame for the disappointing third quarter results.

One would think that given all the analysts covering this stock at least one would have questioned Netflix Management on these critical decisions or at least on whether or not they were now being guided by new data driven pricing optimization software that takes much of the guess work out of pricing decisions.

Not only were there no questions but a review of hundreds of earning call transcripts of public firms show that it’s very rare for Management to be questioned about pricing decisions at all. What is the reason for this collective negligence on behalf of US security analysts especially given that pricing is one of three key ways to boost profitability along with reducing expenses and selling additional units.

Much of the blame must be put at the door of our leading business schools. How many really do a good job of teaching pricing strategy other than it is one of the four Ps of marketing. Ask any number of MBA grads from leading schools over the past thirty years on how much emphasis was placed on the topic of pricing and you are very likely as to come up with the same answer as we did: “Not Much”.

How can this be? The truth is most American businesses, even highly respected firms like Procter & Gamble, tend to gloss over the topic pricing with at most, a staid “good, better, best” approach. And those select so called “Academy Corporations” like P&G are training grounds for so many US corporate leaders and thus have a huge influence on US business practices and grad school curriculum.

The truth is the road to bottom line success for most companies in the US where there is a large, homogeneous, and growing home market has historically been either via unit growth or cost cutting. Determining optimal price points for various customer segments is either considered too hard to truly determine causal impact or too culturally challenging in the face of alpha dog sales departments or constricting overly conservative corporate lawyers.

May we suggest then that the path to fame and success for newly minted security analysts begin with understanding the capabilities of new pricing software tools and challenging Management on the rationale for their pricing edicts. The days of flying blind on pricing need to be in the rear view mirror giving the stakes in these times of modest growth and lean corporations. In the end, the upside can be a grand slam home run for American business as a whole.

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