Revenue Friendly Advertising

The advertising strap line "Don't Drink and Drive" is a common one, used in many parts of the world. Taken literally, its main message is don't drink AND don't drive.

While in Bangkok last week, I took this photo of one of the tallest buildings in the city. As a landmark building in the city, it is highly visible to the 6mill registered inhabitants of the city, as well as the (estimated) 3mill unregistered inhabitants of the city (which makes a pricing professional wonder what sort of cost-per-thousand, or CPM, pricing would be used on this form of advertising?

But also, note the subtle change in the strapline, which is revenue friendly. Johnnie Walker have ditched the "don't drink and drive" theme, replacing it with "drink, don't drive". In other words, keep buying our product and drinking it...just stop driving. 

Pricing Unlocked in Kuala Lumpur and Bangkok

Thank you to all the delegates who came along to the "Pricing Unlocked" events that were held in Kuala Lumpur and Bangkok last week.

Pricing in this part of the world is never easy, but I hope it will now be a bit less painful for those who came along and learned from these highly interactive and informative events.

Please feel free to contact me if you are interested in a customised in-house pricing workshop for your organisation. 

World Pricing Day?

If there was ever a day worth declaring "World Pricing Day", could today (14th July) be it?

Two suitable days spring to mind. The 23rd of February, when in 1917 the Russion Revolution begain following Government imposed controls over the price of bread.

Today of course, in 1789, was the storming of the Bastille and the start of the French Revolution, which also began after citizens complained about the price of bread.

Such is the power of pricing.

Also on this day, The Economist has published a letter I wrote in response to an article on Online Advertising Pricing models, although my letter, like the comments above, relates more to the history of pricing than online pricing models. My letter is third from bottom, and it contains a link to the original story (highly recommended).

I'm sure you will see the "French Connection" in both the contents of the letter and of course the name of my company. 

Another Oil Price Cartoon

Here's another cartoon on the pricing of oil, gas, petrol...whatever you call it...courtesy of Wayne Stayskal at Slate (11th July 2006) 

Here we go again (?)

According to The Wall Street Journal of 30th June 2006...

"Chrysler plans to unveil an employee discount plan for consumers and the
release of a new model in a bid to spur sales."

If you missed this topic last time around, you can read what happened to GM's efforts to launch "Employee Pricing for All" in Australia here, and my original post on the topic is here.

Fractional Ownership: The Resaissance of Timeshare

In the December 2005 edition of the Wiglaf journal, I wrote about some of the developments and milestones that were witnessed in The World of Pricing in 2005. An earlier version of that article appeared on this blog here. As we pass the half way point of this year, is it too early to speculate on what might be one of the most important developments for 2006?

More and more companies around the world, from Seattle, to Shanghai and Sydney, are trying to sell more services. After all, as Allmendinger and Lombreglia point out in the October 2005 edition of the Harvard Business Review[1]:

“…smart service providers are..deriving more than 50% of their revenues and 60% of their margin contributions from service, as opposed to product sales.”

An increasing number of companies around the world are finding a solution to this challenge in a business model that was developed 43 years ago by the French company Société des Grands Travaux de Marseille. The model is applicable in B2B markets, where company’s like NetJets has been using it for years. Likewise B2C companies, like GolfClubDemo.com, Bag, Borrow and Steal and Bags to Riches are using it. Even former Formula 1 driver Damon Hill has adopted the model at his company P1 International. What is this model? You may know it as time-share, or the by the increasingly common moniker of ‘fractional ownership’.

Who’s doing it?
At P1 International, members pay a £2,500 joining fee and either a £11,750 or a £13,750 membership fee, in exchange for anywhere between 50 and 70 days a year in a high performance vehicle like a Bentley Arnage T or a Lamborghini Murcielago. Manhattan’s Classic Car Club and Club Sportiva in San Francisco offer similar services to P1 International.

Log on to GolfClubDemo.com and select a new driver or putter to test. It will be FedEx-ed to you in two days, after which you have a week to work on your handicap. Return the club in the supplied FedEx boxes and select another club, or apply the $25 charge for the club to a purchase from a partner retailer.

And while he is on the golf course, she can part with between $19.95 and $174.95 a month and be seen with the latest Chloe, Fendi or Gucci handbag, and hang onto it for anywhere between one day and six months.

A Subscription Model by Another Name?
All these companies, and others, are offering what is most commonly known as fractional ownership schema. Other commentators use terms such as Leasing Luxury or Temporary Ownership[2]. Regardless, most customers of these company’s, in one way or another, are joining forces to purchase collectively, or qualify to rent or lease, a product or service that would otherwise typically be out of reach for the consumer.

Writing in the Harvard Business Review recently, Pedraza and Bonabeau[3] attempted to distinguish fractional ownership from a concept they term ‘variety-in-luxury’. Taken literally, variety-in-luxury also describes one of the main benefits of such schema, allowing customers to do something that otherwise would be very expensive to do: experience variety in luxury goods. Where variety in a product is more important than access to it, the authors believe variety-in-luxury is the paradigm. Fractional ownership on the other hand, applies to the situation where “access to an item is more important than variety”.

To illustrate the difference, they give the example of Tanner and Haley Resorts that, in return for upfront fees of $300,000 to $500,000 (for a 30 year membership), annual fees of between $5,000 and $20,000 and overnight rates of between $200 and $400, members can live in a variety of luxury properties for up to 60 nights a year. While variety may be more important than access in this particular example, the concept of value is determined by the customer, and not by the product or asset category. Luxury cars for example could equally fall into the categories of both fractional ownership and variety-in-luxury.

The Fractional Ownership Society
There is a long list of reasons why fractional ownership is booming, some of which relate to the product and the business model itself, while others reflect broader trends and developments in society in general.

Fractional ownership is ideally suited to “Generation Debt”, those consumers who want the best in life, but don’t want to save up for it. It is also ideal for those who don’t want to hang on to assets for too long: like shoppers at Ikea, they don’t purchase furniture to pass on to the next generation. This is particularly the case with classes of assets that depreciate, rather than appreciate. And of course, the customers get the benefits of using the products without actually owning them, as well as the ability to change the product according to their whim or fashion.

What’s In It For the Company?
The rewards for companies who can sell a product as a service are potentially enormous. These models offer a revenue stream, like an annuity, rather than the one-off, lump sum payment reaped from a single transaction: selling the product. Furthermore, if all five pre-requisite of revenue/yield management can be put in place[4], such services can be sold in a way that minimises the consumer surplus, in the same way that airlines, hotels and car rental companies attempt to do so.

However, like an airlines’ fleet of aircraft, fractionally-owned products only make money when they are working. A handbag or golf club doesn’t make money while it is sitting on a shelf. It should however, be possible to depreciate the inventory of fractionally-owned products.

Companies offering fractional ownership schemes can also enter new market segments. They can capture the middle market, which may consist of customers who can’t afford outright ownership of a luxury product, but don’t tolerate knock-off products.

Fractional ownership schema also allows customers to enjoy the benefits of a product without the inconvenience of ownership. Members of Damon Hill’s P1 International can drive a Ferrari without having to worry about insurance, maintenance or registration. While they are out driving, no one knows that they are not the outright owner of the vehicle. And of course, when they pull into the country club, with a new set of (GolfClubDemo.com) golf clubs, they can be tested on a real golf course, and not in the back of a pro shop. All of which helps the customer make a more informed purchase decision, having found (cost-effectively) the product they really want.

More Pro’s than Cons
Sounds too good to be true? Well there are a few risks and potential downsides associated with fractional ownership schema, but fortunately most of them can be mitigated. Any fractional ownership provider runs the risk that ‘runners’ will shoot through with the product. This situation can of course be mitigated by vendors taking out appropriate insurance.

Another possibility is that the product gets returned damaged: a Mont Blanc fountain pen leaks in a Gucci handbag for example. No problems in the case of Bag, Borrow and Steal, where customers can take out insurance for anywhere between $5 and $40.

Finally some fractional ownership models allow customers to keep the product for as long as they like, a practice that may not assist in optimal scheduling of the next hire, as well as diluting the potential benefits of a revenue/yield –managed service.

Premium Products, Premium Services
There is a lot of value in many of the fractional ownership schema examined above. Product and service providers that understand the value their products are delivering should be able to capture that value in premium pricing. Commercial aircraft in the US can land at 500 airports, while Biz Jets, such as those operated by NetJets, can land at 5,000 airfields. It is value propositions like this that should help command premium pricing for what Allmendinger and Lombreglia call smart service providers.

References

Anon (2006) “Ferarries to go” in The Economist, 14th January, p65

D’Innocenzio, Anne (2006) “New Ways to Satisfy Lust for Leasing Life of Luxury” in The Seattle Times, 21st March, accessed online at www.seattletimes.com on 21st March 2006

Foust, D (2006) “Now You Can Try ‘Em Before You Buy ‘Em” in Business Week, 30th January, p107

Gross, D (2006) “How Much For Those Used Jimmy Choo’s?” in Slate, accessed online at www.slate.com on 22nd March 2006

Jackson, K (2006) “Renting Luxury” in Open Skies, January, p31

Pedraza, M & Bonabeau, E (2006) “What is Luxury Without Value?”, in Harvard Business Review, April, accessed online at www.hbr.org on 29th March 2006

All prices mentioned are in US dollars

Footnotes

[1] “Four Strategies for the Age of Smart Services”

[2] D’Innocenzio, Anne (2006) “New Ways to Satisfy lust for leasing life of luxury” in The Seattle Times, 21st March, accessed online at www.seattletimes.com on 21st March 2006

[3] Pedraza, M and Bonabeau, E (2006) “What is Luxury Without Value?”, in Harvard Business Review, April, accessed online at www.hbr.org on 29th March 2006
[4] The five prerequisites for revenue/yield management are: (a) the product is perishable, (b) there is limited capacity of the product, (c) demand for the product is variable, (d) incremental costs are low or non-existent and (e) market segmentation is possible. 

How not to price...

Here's an example of how not to price, discovered on the wesbite www.maplin.co.uk, and sent to me by my very good friend, Alan Cooper at Managing Change.

It speaks for itself. 

The Fuel Monty

Here's an interesting pricing -related story...the Cult of Personality at Ryanair, CEO Michael O'Leary, has agreed to bear all in the busiest street of Warsaw if Polish airline and competitor LOT abolish their fuel surcharge by the end of the month.

You can read the Ryanair NewsFlash here.

Reminds me a bit of the challenge laid down by Sir Richard Branson to Geoff Dixon (Qantas CEO) a while back, for the loser to dress up in a (female?) flight attendants uniform and crew and UK-Australia flight. From memory, Geoff Dixon just turned a blind eye to the "bet".

Pricing Round-Up

I've just returned from Liquid Learning's Strategic Pricing 2006 Conference & Workshop in Sydney, where it was great to see so many new faces and industries taking an active interest in pricing.

There was a very interesting story in the press that caught my eye while I was away. On Wednesday 10th May 2006, copper hit an all-time high of $US8,000 a tonne. The Guardian newspaper in the UK pointed out that if you have 146 pre-1992 two-pence coins, which contain 6.9g of copper, you've got yourself a kilo of copper.

Even better if you have 145,000 of these coins lying around, as you'd be sitting on a cool $US8,000 worth of copper...with a face value of GBP 2,900 .

Time to empty those money boxes?

Petrol/Gas Pricing Ver 1.0

Here's the first of two light-hearted looks at petrol/gas pricing. The cartoon opposite appeared in a week when not only did prices at the pump reach a new high, but the Reserve Bank of Australia also raised interest rates...

Petrol/Gas Pricing Ver 2.0

...and here's the second.

A Hotel Pricing Joke

A subscriber to my newsletter (thank you Jj) recently emailed me the following hotel pricing -related joke.

Enjoy!

A husband and wife are traveling by car from Melbourne to Sydney. After almost twenty-four hours on the road, they're too tired to continue, and they decide to stop for a rest. They stop at a nice hotel and take a room, but they only plan to sleep for four hours and then get back on the road.

When they check out four hours later, the desk clerk hands them a bill for $350. The man explodes and demands to know why the charge is so high. He tells the clerk that although it's a nice hotel, the rooms certainly aren't worth $350. When the clerk tells him $350 is the standard rate, the man insists on speaking to the manager.

The manager listens to the man and then explains the hotel has an Olympic-size pool and a huge health club that were available for the husband and wife to use. He also explains they could have used the tennis courts, jogging track, mini-golf, and bowling alley.

No matter what facility the manager mentions, the man replies, "But we didn't use it!" The manager is unmoved and eventually the man gives up and agrees to pay. He writes a cheque and gives it to the manager. The manager is surprised when he looks at the check.

"But sir," he says, "this check is only made out for $100."

"That's right," says the man, "I charged you $250 for sleeping with my wife."

"But I didn't!" exclaims the manager.

"Well," the man replies, "she was here, and you could have."

You Read it First Here

Readers of this blog may recall that back on the 25th October last year I commented on the launch of (General Motors) Holden “Employee Pricing for All".

In that posting, I said that

"According to my sources, GMH employees get discounts of between 10% and 20% depending on their length of service. By my calculations, some of the vehicles on offer are at the lower end of that range"

Well, yesterday, this was confirmed. The Australian Competition and Consumer Commission (ACCC) found that:

“…retail customers had in fact paid about $4,700 more for some models with air conditioning than employees of GH Holden”

…And that…

“…employees were offered a further discount of between 25% and 29%, which was not available to the public”

So what’s the stick? GMH have undertaken to write to people (estimated to be between 250 - 300) who purchased…

“VZ Commodores and WL Statesman & Caprices between 21st October and 9th November, offering them a full refund if they want to return the vehicle”


Sources: Porter, I (2006) “Holden forced to refund on ‘employee pricing that wasn’t” in The Age, 20th April 2006, p5

And special thanks also to “my source” - you know who you are 

Did you get away over Easter

Here's The Bulletin's estimate (18th April 2006, p15) of how much it would have cost to fill up certain types of vehicles over the Easter long weekend. 

Innovation in Hidden Charges - The Sequel

Not surprisingly, it appears that every major metro newspaper in Australia, bar two, picked up on yesterday's story about banks charging fees for incorrectly entered PIN numbers at ATMs.

The Auststralian Bankers Association are now saying that no banks charge such fees, although The Age newspaper reports today (Business section, p2) that "some credit unions charge the fees, but at variable rates".

It seems that the information on these fees was supplied to the Australian Consumers Association by a research house, and all four of the major banks say "...there were errors in the information they had given..."

Wasn't the 1st of April last week?

Innovation in Hidden Charges

The following article appeared in The Australian Financial Review today (7th April 2006, p80):

"Banks are charging up to $2 for cancelled EFTPOS and ATM transactions and are even billing conusmers if they put in the wrong PIN, the Australian Consumers Association said yesterday.

Senior finance policy office Nick Coates said the charge represented a new low. "It illustrates the upward creep of retail banking fees and a creative development in the innoviation of hidden charges" he says in an upcoming issue of Consuming Interest.

No comment.

Regional Pricing

At a networking function earlier this week, I was telling someone about my love of maps.

Combine that with my love of pricing, and you end up saving useless press clippings like the one opposite (I hope its readable).

The graph was published in a magazine that used to the come the Weekend Financial Times, and shows how the price of a pint of Guinness varies around the world.

If you can't read it, just beware: South Africa is a much cheaper place than South Korea to enjoy a few pints of Guinness.

Hic! 

Product Longevity

Frequent readers of this blog may recall my posting on the 8th March about the (potential) demise of certain products. If not, you can read the posting here.

How refreshing it was to contrast the extinction of the products mentioned therein, with a story on the longevity of the Morgan 4/4 which appeared in the ‘Life & Leisure’ supplement in the Australian Financial Review of 31st March 2006.

Here are a couple of quotes from that article:

“The Morgan Motor Company has been building its 4/4 sports car for 70 years…the longest running continuous production of a car in motoring history…apart from mandatory safety and emission inclusions (airbags, indicators and front, rather than rear, hinged doors” the design is basically unchanged from the 1936 model".

Believe it or not, the vehicle’s frame is still made of wood, and the roof is constructed manually.

What’s this got to do with pricing? Well, in 1936 the Morgan 4/4 was touted as the cheapest sports car in the world, able to “round corners at speed without sliding”. Back then it cost 748 pounds and 7 shillings. Today, the price of the 2006 limited edition vehicle is $109,000.

How refreshing! 

Beware of Price Perceptions

Most mornings (depending on where I'm working), I grab a coffee from Gloria Jeans. GJ's is an Australian-owned, franchised chain of coffee shops, and a recent winner of Australian Franchise of the Year.

Anyway, on Wednesday my regular brew rose in price by 20c, from $3.50 to $3.70. Being a franchise, every Gloria Jean's probably put up its prices by the same amount across all its stores (after all, when was the last time you saw two or more McDonalds engaged on a price war?).

This price increase probably hasn't caused too much grief amoung GJ's customers around the country. But in Melbourne's cafe society, it may have been perceived differently. Wednesday was the day the XVIII Commonwealth Games started in the city, a time when the city is bursting at the seams with tourists, who have little or no knowledge of GJ's prices.

But for locals, it wouldn't surprising if the price rise has been accompanied by what appears to be a shot of price gauging and opportunism. GJ's could probably have picked a better day to change prices.

Happy St Patricks Day!

Value Propositions

Another posting I just couldn't resist. Like most jokes, cartoons and the like, they often have a serious side to them as well.

How do you sum up the value proposition of the product or service you are trying to sell? 

A Special Event

I just couldn't resist posting this Ron Tandberg cartoon up on my blog (from The Age, 16th March 2006).

The Commonwealth Games began here in Melbourne last night (15th March), with around 80,000 people inside the Melbourne Cricket Ground for the opening ceremony...including these three guys. 

Examples of the Economics of Pricing

Here’s a couple of articles that have recently caught my attention, all of which illustrate some of the economic issues surrounding pricing.

Readers of this blog may recall my entry on cinema pricing last month. If not, you can read it here. The prolific piracy of DVD’s in China is discussed in the early sections of this article, which looks at the costs of producing a pirated DVD vis-a-viz the cost of going to see a movie at the cinema in China. Towards the end of the article, you will find a discussion on the economics of a Wal-Mart proposal to supply DVD’s-to-order, in-store (another example of the transferability of pricing, perhaps?).

On a less cheerful note, but one everyone has to confront sooner or later, the cost of chapel crypts at Woodlawn Cemetery in Detroit have increased between 42% - 100% in the last couple of months. Why? Because Civil Rights campaigner, Rosa Parks was interned there last October. Perhaps an illustration of cross-price elasticity (?), you can read the story here. You can also ”buy it now” two side-by-side plots at the cemetery on eBay for $100,000

Finally, in what may come as a surprise to hotel managers and no one else, it seems the economics of the minibar just don’t stack up. The costs of servicing hotel room minibars far exceeds the revenue they are generating. See which hotels minibars are starting to disappear from here. 

In the Footsteps of the Tasmanian Tiger

• Seventy years ago this year, the last Tasmanian Tiger (or thylacine) died at the Hobart Zoo. This year is also shaping up as a year of extinctions. By the end of the year, there will be a few less products and services to be priced:
  
  Nikon has announced that the only type of camera it is making now will be digital ones. In China, there is likely to be a generation that go from ‘no camera’ to ‘digital camera’, not taking the detour to ‘film cameras’ that many of the current generation are familiar with
  
  Bankcard, the iconic credit card introduced in Australia in 1974 will be no more by the end of the year, despite the fact that there are still 1million card holders
  
  As there were only 20,000 of them sent last year, Western Union has announced the closure of its telegram business (there hasn’t been a telegram delivered in Australia since 1993)
  
  Dixon’s, the UK Electrical retailer has announced that by the end of the year, it is unlikely to be selling cathode ray TV’s, and is likely to be selling flat-screen TV’s only. It has already stopped selling manual 35mm camera’s and it expects to also stop selling portable CD players and cassette players (remember them?) in the not-too-distant-future.
  
  And all these announcements have come in the first 6 weeks of 2006. What products or services will join them before the end of the year? Share you predictions….

 

A light-hearted look at Cinema Pricing

A couple of weeks ago, an article in the New York Times discussed the possibility of changes in cinema admission pricing, where the cinemas move to a variable, airline -type pricing model (which is, by the way, the model increasingly being adopted by railway companies such as GNER & Virgin Trains in the UK, and most recently Amtrak on its high speed, Acela services between Boston, New York and Washington).

Anyway you can find the New York Times article on variable pricing in cinemas here (may require subscription).

Cinema admission pricing is a deeply flawed model. Prices are negotiated between the distributor and the box office, and rarely, if ever, reflect differences in the movie itself, the season, the day of the week or the stage of the movie's screen life. That's why, several years ago, the average occupancy in a UK cinema was a mere 20%.

Putting these (often) predictable drivers of pricing to one side, Jeremy Dauber at, of all places, the Christian Science Monitor, has come up with 10 rules for the variable pricing of movie tickets.....and it is worth a read. 

Value-Based Pricing & Google

Value-based pricing is all about aligning what customers get with what they pay. In the case of Google’s cost-per-click advertising, you only pay if your ad gets clicked on. That’s also when Google earns revenue. So there is an alignment of objectives: the advertiser wants clicks and Google wants revenue.

By the way, value-based pricing is not a new pricing paradigm or methodology. Oscar Wilde famously said that:

“A cynic is a person who knows the price of everything and the value of nothing”

Adam Smith also talked about value as early as page 24 of his 1776 book “The Wealth of Nations”:

“The word value…has two different meanings….sometimes [it] expresses the utility
of some particular object, and sometimes the power of purchasing other goods
which the possession of that object conveys. The one may be called “value in
use” the other “value in exchange”

Anyway, about 11 months ago, I started experimenting with Google’s Cost-per-Click advertising model. I paid my $A10 set-up fee, and over the last 11 months, I’ve been running campaigns using various pricing-related keywords.

I have now received my first charge for the clicks I have received over the last 11 months, and I am pleased to say I have only provided Google with $A3.10 in revenue.

This obviously prompted me to consider whether my campaigns on Google is really worth the trouble and effort. And I recalled some interesting eye-tracking findings I read recently. You can read the stories here and here.

And as you can see from this image, the best place to be in the Google search results is not right-of-screen where their ad-sense listings appear, but in the organic search results.

Now….should I continue with my cost-per-click advertising? Hmmmmm. 

Spare Parts Pricing

• I recently received an email from a friend of mine in the UK (who has a very good website by the way). He'd recently read that a replacement headlight bulb for his recently acquired Audi A2 can cost as much as GBP 66, yet the cost of the bulb is only about GBP 4.
  
  Spare parts pricing is extremely different from the pricing of the products they go with. Here are some of the reasons why:
  
  Spare parts typically have a more complex mix of channels & intermediaries (such as distributors, dealers, wholesalers and consumers)
  
  Spare parts and accessories have different price elasticities (compare the cost of the part vs the cost of downtime )
  
  Spare parts and accessories have different inventory requirements (there are typically 20 times more SKU’s for spare parts compared to the products manufactured)
  
  Spare parts can have a significantly longer or different life cycles. There may be little or no price sensitivity during the warranty period, the lower priced, generic substitutes become popular in the post-warranty period, as repairs & parts cost more than the original good. Then, towards the end of the Product Life Cycle, some parts become coveted, hard to find & can therefore command a premium
  
  If you are in the spare parts business, they can become a ‘gold mine’, but you need to carefully consider the carrying cost of such inventory.
  

Need training in Pricing?

Need training in pricing, or a refresher course on the latest developments in the field?

I will be running a one day pricing workshop in Sydney in May, following a two day pricing workshop being run by Liquid Learning.

You can find further details of the conference and the workshop here, or alternatively, email me for further information.

Who else is unbundling?

I recently commented about the trend toward unbundling, which is particularly widespread in the aviation industry at the moment.

The New York Times recently ran this story (may require subscription) on how car rental companies are now joining the trend. It talks about, amongst other practices, "holding [car rental] customers responsible for "any and all" loss or damage to a rental car resulting from natural disasters", as well as abreviating the grace period for returns from 1 hour to 30 mins.

There is little doubt that this will cause a few headaches for travel-related websites. In 2004, a survey by Travelocity found that customers at a major US airport car rental location were paying, on average, 24.4% more (in taxes and surcharges) than the price they had been quoted when booking a rental car.

As a result, the major travel website were moving towards a concept they called "total pricing". Travelocity would guarantee their quotes would be within 1% of the final price, Orbitz were promising a perfect match and Expedia were heading in the same direction.

The unbundling trend is hardly likely to be good news for such websites.

The Father of Low Cost Airlines

Sir Freddie Laker, perhaps the pioneer of low cost air travel so popular today, passed away in Miami yesterday, 9th February.

For the younger generation who think people like Michael O'Leary (Ryanair) and Stelios Haji-Iannou (easyJet, and my former boss) are the pioneers of low cost travel, you can read obituaries on Sir Freddie from the BBC, The Daily Telegraph and CNN here. 

Ni Hau Ma

You may recall that Disneyland Hong Kong opened its gates in the second half of last year. Not only was the theme park going to appeal to the people of Hong Kong, but also to the hundreds of thousands of increasingly affluent Chinese mainlanders on the other side of the New Territories.

As the New York Times recently reported (may require subscription), the Chinese Year of the Dog started with a bit of a growl at Disneyland Hong Kong. The park had been selling discounted one-day tickets, but their use on certain "special days" was blocked out. The Hong Kong Chinese celebrate the Chinese Lunar New Year over four days, but mainlanders enjoy a week of festivities.

Consequently, the park was inundated for three days with visitors from the mainland, forcing guards to close the gates, as well as halt sales on the Internet.

What should they have done? Several years ago I was in a similar situation: responsible for pricing a new and innovative service, the demand for which was totally unpredictable on an occasion such as this. Should we increase prices? Should we decrease them? In the end, we left prices unchanged for the occasion, conducted a post-mortem analysis of how our demand had been affected on the day, and made sure we adjusted our pricing appropriately when next such a special event or occasion occurred. 

Airlines Continue to Unbundle

Remember the days when an airline ticket was an airline ticket? It included travel for you and your luggage from your origin to your destination, a drink and a meal during the flight, perhaps even a movie or an episode of Mr Bean on a short hop?

How times have changed. Low cost airlines have unbundled the airline ticket described in the forgoing paragraph. Sure your fare still gets you from your origin to your destination, but what about that meal and drink? You’ll have to pay for that – no longer included in the ticket price. And the movie or that episode of Mr Bean? Well you’ve heard of pay-per-view, haven’t you?

Now the low cost airlines are unbundling your luggage from the ticket price. Flybe, a regional UK low cost airline started the trend a couple of weeks ago, and last week, Ryanair announced that it will start charging passengers to check in their baggage from 16th March 2006 (aka price signalling, to see if other low cost airlines will follow suit).

Flybe, is reported as saying it will charge £4.00 per check item, discounted to £2.00 if pre-booked, while reducing its fares by £1.00. It is also increasing cabin baggage allowances from 5kg to 10kg, and check baggage to 25kgs (probably from 20kg?).

Ryanair is reported to be “planning” to lower fares by £2.50 on the same day it starts charging £2.50 to check in a bag. According to Ryanair, 50% of its passengers travel with one piece of baggage and will therefore be unaffected. Overall, the change will be revenue-neutral for the airline.

But low cost airlines appeal to price sensitive passengers. So expect to see more cabin baggage being crushed into overhead lockers and under seats by passengers seeking to pinch every penny they can (especially on Flybe!).

Michael O’Leary (Ryanair’s CEO) has already given away £1 and free tickets (passengers still had to pay taxes and fees), and is on record as saying he believes it is possible for airlines to pay passengers to fly (how many other forms of public transport can you name that pay passengers to travel?). Of course, the way that model is evolving, passengers will still be paying for in-flight entertainment, food and drink, luggage, and anything else that can be monetised. My bet is that it won’t be too long before they monetise the use of the toilets.

Retail Round-Up

The latest edition of The Bulletin (31st Jan 2006, pp20-21) carries a story “Never Ending Store Spree”, which includes a very interesting calendar (shown here).

The article talks about how, as soon as Christmas was out of the way, retailers began stocking Easter Eggs and the like. It also goes on to talk about the rest of the year, and as you will notice from the calendar, there are year-round promotional initiatives planned for all but about three months of 2006.

Such a calendar is bound to get pinned onto kitchen fridges around the country and help condition price sensitive shoppers about the best time to make their planned purchases.

Conditioning shoppers in this way does not maximise revenue. Sure the products on sale/promotion drive foot-fall and act as loss leaders. But the initiatives also ensure that shoppers only buy when prices are at their lowest, and they will hold off making their purchases until such sales or promotions start. Other dangers associated with sales and discounting strategies include:

• Customers’ references prices are lowered;
• Subsequent promotions are not viewed as a "fair deal", making it difficult for retailers to raise prices in the future;
• A return to 'normal' prices starts to look like a price increase to the consumer;
• Reducing prices in anticipation of covering the lost revenue with additional volumes is a flawed strategy, and;

In a typical S&P1,500 company, volumes would have to rise by 18.7% to offset the impact of a 5% price cut.

It is rumoured that one particular retailer has high-profile sales every six weeks or so, because if they don’t there are no customers in their stores.

Another retailing-related story (“Wal-Mart, The Record Label” in the Financial Times, 31st January 2006, p9) also caught my eye recently. I will quote one paragraph in its entirety:

“John Fleming, Wal-Mart’s head of marketing, told analysts last year that they
should expect to see the retailer deepening its relationship with the music
industry, as it pursues an effort to broaden its customer base and to increase
sales of higher-margin goods, including clothes and electronics”

Could this be the start of a shift in strategy for Wal-Mart: a departure from their mantra of Always Low Prices. Always? Given that Wal-Mart is a company with the power to change not only its buyers share price but also the rate of inflation in the USA, this might just be something to watch.

Pricing In the Middle East

I've just returned from Dubai in the United Arab Emirates, where I conducted a three day pricing workshop, my first in the Middle East.

Here are a couple of interesting facts I learned about Dubai along the way:

(a) Dubai, according to the UN, is the fastest growing city in the world;
(b) Water cost 2 dirham a litre in Dubai, Petrol costs 1 dirham, and;
(c) the cheapest room at the Baj al Arab hotel (shown opposite) is $US2,000 a night.

Thank you to all those delegates who attended the workshop. 

Bizarre Pricing Schemes

Last week I was in Manila in the Philippines running a two day pricing workshop. Over lunch, one of the delegates asked me what the most bizarre pricing scheme (or schema) was that I'd seen over the years was. Two pricing 'models' quickly came to mind:

• The first I saw near the ruins of the Church of St Paul in Macau, where a silver plague advises male visitors to the public toilets there that use of the toilets are free, but toilet paper is 1MOP (Macau Peteca)
  
• The second pricing scheme I'd noticed only the night before, outside a restaurant near the Glorietta Mall in Manila (Alaya Ave). The sign at the front of the restaurant read "Eat Now, Pay Later". Now surely, this is just stating the obvious: with the exception of QSRs (Quick-Serve Restaurants, such as McDonalds et al), aren't most restaurants "eat now and pay later"?
  
  

Feel free to drop me an e-mail or post a comment if you've come across any bizarre pricing schema

Winning Pricing Strategies

Its not even the end of 2005 and already 2006 is filling up quickly.

I will be running a three day "Winning Pricing Strategies" workshop in Dubai, UAE on the 28th - 30th January 2006.

Please feel free to email me if you would like further information

Employee Pricing for All Crosses the Pacific

For those of you who saw any prime time television last Sunday night (23rd October 2005), you may have noticed that Holden (General Motors, or GMH here in Australia) launched an “Employee Pricing for All” initiative. Sounds familiar? Of course it does…..if you’ve been keeping an eye on the US motor vehicle industry over the northern summer, you’ll know this campaign has just blown in from the other side of the Pacific Ocean.

According to my sources, GMH employees get discounts of between 10% and 20% depending on their length of service. By my calculations, some of the vehicles on offer are at the lower end of that range, so not everyone who works there will be totally disenfranchised that any Tom, Dick or Bruce can get the same discount as them.

The discounts apply on vehicles with compliance plates pre-dating the 1st July 2005, so obviously there is an objective of running out inventory before the new season’s model arrives. But there is a very good chance that the program will just bring forward purchases that were planned for the new year and new model(s).

Who is the winner here? At this stage, we don’t have a price war on our hands yet: three days on and there is no sign of a response yet from any other Australian vehicle manufacturer (Ford, Toyota & Mitsubishi). Nevertheless, as with any other price war, the real and only winners will be the consumers, (i.e. Holden buyers). After all, AMR Research estimated that US employee pricing schemes in the US by Ford, GM & Chrysler cost $5bill in revenue leakage from the industry. And two of those companies announced their third quarter results last week, losses of $US1.6bill and $284m for GM & Ford respectively.

Forthcoming "Appearances"

Here's a brief run down on a couple of "appearances" I will be making as we approach the end of the year....

• My article "Transferability in Pricing" is scheduled to be published in the October 2005 edition of the Professional Pricing Society's newsletter The Pricing Advisor;
  
• In December (5th & 6th) , I will be running a two day workshop, "Effective Pricing Strategies for Competitive Advantage" for The Knowledge Group, at the InterContinental Hotel in Manila, The Philippines, and;
  
• Also in December, you will be able to read "2005: The Pricing Year in Review" which is scheduled to be published in the Wiglaf Journal.
  

Pricing Trivia #2

Here's a bit of an update on an earlier post regarding the cost of ink in printer cartridges, this time from the New York Times (subscription/registration may be required):

• Ounce for ounce, the ink in a printer cartridge is four times the cost of Krug Clos du Mesnil Champagne (@ $US425 a bottle)...
  
• ...or about the same price as Joy perfume, which sells for $US158 a 2.5 ounce bottle