Thursday, June 30, 2005

Retail Pricing

Today is the last day of the 2004-05 Australian financial year and the height of the retail sales season. How timely then that Business Review Weekly is running a story on discounting in the retail sector.
The second paragraph of Craig Roberts article ("Lights on the Till") contains a great quote about the power of pricing:

"Many of the retailers that are struggling the most have slashed prices in an attempt to recover, but in doing so they risk falling further into the mire. Companies that have refused to drop prices, but continue to provided differentiated service or quality to consumers, appear to be doing better".

So what are the "better companies" doing?

- They are exceeding their customers expectations when it comes to quality of service (many companies don't realise they are providing a product and a service);
- They are providing a higher quality product or products;
- They have a better store layout or format (next time you walk into a store with a carpeted or parquetry floor, think of the effect it has on your reference price, compared to a store with a polished concrete floor);
- And finally, they have the right products and control over their inventory.

Several of these topics (and much, much more) are discussed in Paco Underhills' book "Why We Buy: The Science of Shopping", a recommended read for anyone in the retail business.

Monday, June 27, 2005

Variable Pricing

On the 28th October 1999, the New York Times carried an interview with the then Chairman of Coca-Cola (“Variable Price Coke Machine Being Tested”, by Constance L Hayes) in which he mentioned that the company was testing temperature sensitive vending machine that would automatically raise the price of vended cans of Coke in hot weather.

An outcry subsequently followed in internet chat rooms and on the Op-Ed pages of newspapers around the world. To this day, one still wonders what would have happened if Douglas Ivester had said the company he chaired was testing vending machines that would lower the price of Coke on cold days.

But you can’t really blame Coca-Cola for trying. In the mid-1980’s, Richard Thaler conducted what has become known as the “beer on the beach” study. In it, he found that a thirsty sub-bather would pay $2.65 (in 1986 dollars) for a beer delivered from a nearby resort hotel, but only $1.50 when the same beer came from a nearby grocery store.

You can read more about this in Thaler’s paper “Mental Accounting Matters” (published in the Journal of Behavioural Decision Making, Vol 12, Issue No 3), 1999). It is also briefly mentioned in Steven D Levitt and Stephen J Dubners’ fascinating new book: “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything”.

There is are some interesting pricing challenges and considerations here: it seems it’s OK for consumers to self-select when and where they buy and what they pay for it, but perhaps its not acceptable for companies selling products and service to make this decision for its customers…especially when the product is coming from the one source: a vending machine. There are also interesting insights into psychological pricing, and how customer reference prices change with the purchasing environment. Do you take these factors into account with you own pricing?

But back to the New York Times: Six year later, journalist David Leonhardt has re-visited the topic of variable pricing in his story “Why Variable Pricing Fails at the Vending Machine” (27th June 2005). He points out that variable pricing is much more widespread than it was in 1999: airline tickets and electricity have utilised variable pricing for years, but today that practice is found with “restaurant meals to clothing and books sold on the internet, to the toll on the George Washington Bridge”.

What new industries will variable pricing touch in the next six years?

Wednesday, June 08, 2005

Unlocking Business profitability

Last night I spoke to an audience of approx. 50 entrepreneurs at the Celtic Club in Melbourne. A very attentive and interested audience hopefully picked up some useful pricing tips that they will be able to put into practice when they return to work this morning.

My Top 10 pricing tips, which I know people were scrambling to write down last night (done without a Powerpoint presentation - how refreshing) were as follows:

1. Always move price and value together
2. Pricing is harder up than it is down
3. Never under-price a revolutionary product
4. Add products at the top and not the bottom of the product line
5. Understand the difference between setting prices and getting prices
6. Costs are an internal matter and prices are an external matter, based on the value to the customer
7. Pricing is transferable
8. There is no such thing as a pricing laboratory
9. Only respond to a competitive price moves if your product and theirs are apples and apples
10. Remember the "Concept of Dual Entitlement" - a customer is entitled to a fair price and the company is entitled to a fair profit.