Tuesday, June 25, 2013

Where's the value in a pizza?

This week, while watching an online video, I was reminded of some of the subtle differences between value-based in consumer markets, compared to business markets.

In a previous post, I’ve described how products and services in business markets can be priced on the basis of the revenue they generate for clients, the costs they save them, and the risk they minimise. Quantify one or more of these sources of value, and use it as the basis of your pricing.

To a certain extend, the same principles can be applied in consumer markets. Consumers can save money by shopping at Aldi. Education can improve a person income-earning potential, and risk can be minimised by driving a Volvo.

But consumer products can provide value in other ways.

At the end of a three day value-based pricing workshop in Manchester a couple of years ago, one of the delegates approached me saying “I’d like to show you how we at Domino’s Pizza put value at the centre of everything we do”.

The Operations Director opened her laptop and logged on to a site where numbers were constantly changing. Every Domino’s store in the UK (today there is over 800 of them) wer listed down the left hand side. She went on to explain what all the numbers indicated.

One column showed the time a pizza order was received. The next, the time the toppings were put on the base, then the time the pizza went into the oven, and so on, until the pizza went out the door on its way to the hungry customer.

“Do you know why we do this?” asked the Ops Director. “The value we provide to our clients is giving them their pizza in thirty minutes or less. And getting their pizza on time is the number one reason [by a British country mile] why customers order from us next time they want a pizza”.

That’s why Domino’s put time at the centre of everything they do: it is the source of value they provide to their customers.

And what video prompted the topic for this week column? Well you can watch it above. It may be parody; it may be pie-in-the-sky, or it maybe how first class pizzas are delivered in the not-too-distant future.

Tuesday, June 11, 2013

A Dumb Way to Price!

When movies first came out on VHS cassettes (remember them?), the movies studios thought they could sell copies for $70 - $80 each. It turned out to be a dumb way to price.

The studios worked out what the typical family would pay to see a movie at a cinema, and multiplied that number by two, an estimate of the number of times the movie would be watched at home.

But consumers were not paying for an experience in a multiplex cinema complex on a big screen, and the pricing strategy failed to gain traction. The rest, as they say, is history.

When used the right way, there is merit in setting the price of a product relative to the price of another.

Many years ago, when I worked at a chain of Internet cafes that were rapidly expanding from London, to elsewhere in Europe and New York (in the pre-Wi-Fi and pre-Euro days), the launch price for one hour of Internet access would be determined by reference to the price of a morning newspaper and a cappuccino in the country we were expanding into.

So, for example, we would price one hour of Internet access in Spain at 250 pesetas, in Italy at 200 lira, and in Germany at 2.50 Deutschmark.

This is a common way of setting prices. I was recently talking to one of Australia’s foremost image consultants, and that's exactly how she prices her services: relative to the price of a hairdressing appointment.

This approach to pricing will generally serve you well…initially: just be prepared to fine-tune your pricing based on customer and competitive feedback, as the movie studios had to.

But you do need to be mindful that the relative price has been correctly set. And while there is no such thing as a perfect price, relative pricing anomalies should be easy to spot.

Earlier this year, I was sitting in the bar at Manila Airport, when a traveller next to me started a conversation. He went on to tell me that a packet of cigarettes in the Philippines costs less than one Australia dollar.

Viewed another way, the price of a packet of cigarettes in Australia is equivalent to some Filipino’s daily wage (that might explain why my taxi driver stopped to buy just 2 loose cigarettes from a roadside seller on the way to the airport).

The message should be very straightforward. If you are pricing something relative to something else, make sure it’s an appropriate comparator: a newspaper or cappuccino in Europe would work better than a price of cigarettes in The Philippines.

It may also be beneficial not to mention the relative or comparator product. When Apple launched the iPod, they didn’t mention that it was a storage device for mp3 files. It was an expensive personal music player, so expensive in fact that modern pricing folklore has it that iPod is an acronym for “Idiots Price Our Devices”.