Every now and then, a book comes along which remedies a neglected or misunderstood topic with its clear, concise and commonsense approach. The Shredder Test is one of these books. Although it can be read in a few hours, it is equally likely to sit on the bookshelf of anyone involved in writing proposals as a handy reference for years to come. I will certainly be adopting many of the books recommendations immediately.

One of the advantages of spending 24hrs on a flight from Australia to the UK (or the other way round) is that you can catch up on some long overdue reading. On one recent such flight, I had the pleasure of reading Robyn Haydon’s book The Shredder Test.

This book presents a methodological approach to putting together proposals to win you business, either in a tendering or a negotiation environment. Combine Robyn’s approach with some successful B2B pricing strategies, and you should have a winning formula.

You can find more information on Robyn and her book at http://www.winningwords.com.au/

Podcast: How to Set and "Sell" Your Prices

The interview I did with Michelle Nichols, Business Week's Savvy Selling columnist is now live on the Business Week website, for downloading to your iPod of PC.

You can get a copy of the podcast by clicking here.

I hope you enjoy listening to it as much as I had fun making it.

Podcast

I've just recorded and interview with New York City -based Business Week, the premier US business magazine. The topic of the interview is "How to set and sell your prices", and it will be available as a downloadable podcast very soon. Details will be posted on this blog, so please check back again shortly.

Pricing Masterclass 2007 - Update #2

The Pricing Masterclasses 2007 were mentioned in the 'MyCareer' supplement in The Age today, Saturday 31st March 2007.

You can see what they said, in page 4 'Networking' column, below.

Sales of the Melbourne event are very strong: early bookings are strongly recommended.

Low Cost Airlines

Are low cost airlines running out of names?

Click here to see the name of the latest low-cost airline, who plan to start flying to destinations in France, Germany, Italy, Spain & Eastern Europe, from Cardiff International Airport this coming (northern) Autumn.

More Pricing Humour

Any excuse for a sale. Need I say more?

Can advertising save phone booths?

Telstra recently announced that it will offer advertising space on telephone booths. This may save thousands of telephone booths around the country apparently, which are suffering from declining usage due to the proliferation of mobile phones.

Will it?

Will advertisers pay to advertise inside phone booths if no one is using them? Probably not. If no one is using them, are people looking for them and therefore at them? The answer once again is probably not.

Telstra says that phone booth advertising has an 80% recall rate. Maybe thats the novelty factor of people saying "Wow, look at that, a phone booth. I wonder who uses that these days?"

What else could Telstra do? Well, perhaps phone booths could become mobile phone recharging stations. After all, mobile phones are not totally wireless: they still need to be recharged. A five minute power recharge station could be one option for phone booths.

Another may be a pre-paid credit vending machine, allowing users on pre-pay plans to quickly grab an extra $20 credit from a vending maching inside the booth. Credit on other Telco's could also be offered in-booth.

These two services could even be combined in the one booth...and I'm sure people would then read in-booth advertising while charging their phones for 5 minutes.

Zara & its competition

Readers of this blog who have attended one of my pricing workshops will know that I use Zara (whose Kuala Lumper store is shown opposite) as an example of a best pricing practice company.

This article, from the BBC wesbite (once again, courtest of Alan Cooper at Managing Change, tells how H&M, is responding (and looking increasingly like) Zara.

The greatest price since sliced bread

Here's a couple of interesting stories from the BBC website on the pricing of bread and market segmentation...

In-store bread vs in-bag bread and A family that blows its own trumpet

...courtesy of my good friend at Managing Change

Inflation in Zimbabwe

I visited Zimbabwe (twice) in the late 1980's. At the time, it was a safe and peaceful country, and at the time was being held up as a model for the rest of Africa (particularly its large southern neighbour) for making a successful transition from minority to majority rule.

How things change. As The Daily Telegraph notes, inflation in Zimbabwe reached 1,394% on the 12th February 2007. Some shop keepers in Harare are predicting dynamic pricing (prices changing by the hour) in 3 months time!

So much for the model country!

What's good for the goose isn't good for the gander...in China

My very good friend Alan Cooper sent me this story from the BBC's website.

Seems its OK for the Chinese to lower the price of everything they produce everywhere...except at home.

2006: The Pricing Year in Review

2006 was a year where Pricing possibly became a bit more transparent. It was a great year to pick up and read a book on Pricing, or to visit a website that helps unlock some of the mystery surrounding the setting of airfares. But it was also a year that the world lost a couple of Pricing pioneers. In February, Sir Freddie Laker passed away at the age of 83. In its obituary, The Economist said “Mr Laker in 1977 introduced the first outrageous discounts, of £118 ($US206) to fly the Laker Skytrain from London to New York, and the first taste of no frills”.

Meanwhile in New York, Sol Cantor passed away in June, at the age of 95. Cantor was an early visionary when it came to discount department stores, and built up Interstate Department Stores and Children’s Supermarket, the latter a predecessor to Toys ‘R’ Us.

The airline industry has been at the cutting edge of Pricing since the deregulation of the US industry in the late 1970’s, and 2006 was no exception. Across the North Atlantic, a new breed of carrier was born: business-class carriers in the form of Silverjet (UK) and Maxjet and Eos (US). Meanwhile, Oasis Hong Kong Airlines (eventually, after some Russian airspace difficulties) started services from Hong Kong to London-Gatwick. Oasis has guaranteed that 10% of its seats will be available at £75 plus taxes.

Meanwhile, British Airways found itself in hot water over “inappropriate discussions” with a competitor on fuel surcharges. This came shortly after the European Union and the US Department of Justice commenced a wider investigation into collusion in the air freight market.

And of course the airlines accelerated the unbundling trend that commenced a couple of years ago (think iTunes, and how it has unbundled the 12-15 track album, or how digital cameras have unbundled the 12/24/36 exposure film). Two European low cost airlines (Flybe, followed shortly thereafter by Ryanair) started the year by announcing they would start charging a fee for passengers to check their baggage, discounted of course when the luggage is booked in advance. Aer Lingus made a similar announcement in August.

And one of the most interesting Web 2.0 sites launched during the year is built on prices: Farecast.com is a US airfare search engine that predicts whether airfares over US city-pairs will rise of fall in the days ahead.

Many companies keep a close eye on the Pricing models used in the aviation industry. 2006 was no exception, with Amtrak announcing its adoption of airline-style revenue management practices on its high-speed Acela train services.

Hotels started to wake up to the poor economics of the mini-bar, and realised that they (a) are labour intensive (it takes 20 employees 7 hours to service the 1,946 mini-bars in the New York Marriott Marquis), (b) create time-consuming disputes when guests check-out and (c) are impossible to customise with guest-preferred contents. Watch out for refrigerators with empty space for your medical and dietary needs.

The Pricing industry itself was also in the news during 2006. Metreo, a vendor of Pricing optimisation software defaulted on a loan in January and was put up for sale by its creditors. Meanwhile, the Pricing scribes were hard at work, and we saw Pricing books released by Baker (Pricing on Purpose), Cram (Smarter Pricing) and Simon, Bilstein & Luby (Manage for Profit, Not For Market Share). And of course, Chris Anderson’s long awaited book The Long Tail was released mid-year. The Long Tail has many implications for Pricing, but in trying to answer what the effect of The Long Tail is on prices, Chris gave the inconclusive answer that “it depends”. Nevertheless, the book was probably the best and most interesting read of the year.

Elsewhere in the world of Pricing:

* Inflation hit 1,000% in Zimbabwe during the year, forcing the central bank to issue a $Z 100,000 note;
* Prices were no longer required for products such as Bankcard, Nikon 35mm camera’s and Telegrams delivered by Western Union, all of which reached the end of their product life cycle in 2006;
* Similarly, the UK electrical retailer Dixons announced it would no longer stock Cathode Ray TVs, 35mm cameras nor CD and cassette players.

And finally, does a year ever pass without some headline-grabbing Pricing disaster? The recently opened Disneyland Hong Kong blocked out 4 days of the Chinese New Year during which discounted admission tickets could be used, failing to realise than Chinese Mainlanders had a 7 day New Year holiday. Needless to say, the thousands turned away at the gate were not too happy.

Wishing you a happy Christmas and a safe and prosperous 2007. 

A Pricing Joke

An American decided to write a book about famous churches around the world. So he bought a plane ticket and took a trip to China.

On his first day he was inside a church taking photographs when he noticed a golden telephone mounted on the wall with a sign that read "$10,000 per call". The American, being intrigued, asked a priest who was strolling by what the telephone was used for. The priest replied that it was a direct line to heaven and that for $10,000 you could talk to God.

The American thanked the priest and went along his way.Next stop was in Japan. There, at a very large Cathedral, he saw the same golden telephone with the same sign under it.He wondered if this was the same kind of telephone he saw in China and he asked a nearby nun what its purpose was. She told him that it was a direct line to heaven and that for $10,000 he could talk to God.

"O.K., thank you," said the American.He then travelled to Pakistan, Sri Lanka, Russia, Germany and France. In every church he saw the same golden telephone, with the same "$10,000 per call" sign under it.

The American decided to travel to India to see if Indians had the same phone. He arrived in India, and again, in the first church he entered, there was the same golden telephone, but this time the sign under it read "One Rupee per call."

The American was surprised so he asked the priest about the sign. "Father, I've travelled all over World and I've seen this same golden telephone in many churches. I'm told that it is a direct line to Heaven, but everywhere else I have been the price is $10,000 per call. Why is it so cheap here?"

The priest smiled and answered, "You're in India now, son - it's a local call".

Sticky Prices

Avid readers of this blog may recall my previous post on the subject of price changes. The “Economic Focus” column in last week edition of The Economist also looked at the subject of price changes and price stickiness.

The Economist understands the importance of pricing from both a macro and a micro –economic perspective: “Shifts in prices are like the traffic lights of an economy” it says.

The article looks at how economists on both sides of the Atlantic are looking at the volatility of prices and the velocity of their change. For example, two of these economists, Bils and Klenow, have obtained 1995 – 1997 data for 350 items in the US Bureau of Labour CPI basket to calculate that these prices changed at least every four or five months.

Some other interesting findings:

* Sales account for 87% of changes in the price of clothes, 67% of furniture price changes and 58% of processed food price changes;
* Price changes in Europe tend to be bigger than in US (average increase of 8%, average decrease of 10%), and;
* High inflation leads shops to raise prices more often (now there’s a self-fulfilling prophesy if ever I heard one).

What the article does not explore, and which pricing professionals would be particularly interested in, is (a) the reasons for the price changes (competition, costs) and (b) what the impact of those changes was (revenue growth, market share objectives).

Nevertheless, this new wave of research (see sources at the bottom of The Economist story) adds to the work of Alan Blinder, his team, and their seminal 1998 book “Asking About Prices” 

When is a Low Cost Airline not a Low Cost Airline?

When is a low-cost airline not a low cost airline? It seems to be a question being asked by many commentators and passengers these days. And why not? Here’s a list of just some of the ‘optional extra’s available from various airlines, both here in Australia and overseas…

• Business class lounges (pay-per-use)
• Seats with extra leg room
• Inflight entertainment (prices can vary by flight length)
• Light meal
• Single meal
• Full service meal
• Headphones for the inflight entertainment
• Portable video player (cheaper if booked in advance)
• Your baggage (also cheaper if booked in advance)
• Comfort kits (blankets, eyeshades, socks, inflatable neck support)
• Kids entertainment backpack (colouring book, pencils, stickers puzzle, soft toy & postcards)

Once you’ve selected your “optional extra’s” and possibly made your way to the out-of –town airport that the carrier uses, you may find you total costs are not that different from those offered by a full service airline out of a more convenient airport.

I’ve already speculated elsewhere on this blog that the day may one day come when a low cost airlines attempts to monetise the aircraft toilet. The other possibility is that the low costs airlines, sooner or later, go full circle and start bundling up all these optional extras, in the same way regulators around the world are increasingly demanding that airlines advertise airfares exclusive of taxes and surcharges.

How much to see U2

Is it coincidence that Irish rockers U2 and the G20 Finance Ministers are all in Melbourne tonight? Maybe the four members of U2 should rename the band G4?

Its a warm night and as I have the front door open, I can hear the music of U2 coming from the telephone company dome.

The finance ministers are less noisy.

I have no idea what it cost to attend tonights U2 concert. But I do know that 22 years ago, during their first tour to Australia in 1984, it only cost $19.90 to see them. 

On the Road Again

Next month, I start a two-city pricing roadshow, heading back to a couple of my favourite destinations.

First stop is Mumbai, India on Thursday 16th & Friday 17th of November. And from there, its over to Dubai in the United Arab Emirates (pictured) for a workshop on Sunday 19th and Monday 20th November.

I look forward to seeing readers of this blog at one of these two workshops.

If you're not in one of these cities, or cannot make it to one of these events, just drop me an email. There are more events coming up in 2007 - one might just be near you!

Fuel Surcharges

The New Zealand website Scoop reported today that Singapore Airlines had decided to lower its fuel surcharge. You can read the full story here. In New Zealand, airfares have to be all-inclusive (not Fare + Taxes + Surcharges), so it would seem that there is no price drop for tickets sold inside NZ.

Meanwhile, also today (spooky, huh?), Qantas announced it too was reducing it fuel surcharge, although News Corp could not help notice that last week Qantas had actually announced a fare rise. Was the fare increase and the surcharge decrease designed to offset each other, the paper asked?

Ticket Scalping

Massachusetts is an interesting state when it comes to pricing. Not only does it have an item pricing law (every item has to have a price tag), it also has an antiscalping law.

That law says that, if one obtains a license, one can resell ticktes for a $2 mark-up above face value, plus certain service charges.

That really doesn't leave much room for an "honest ticket scalper" to make much margin when Ticketmaster charge fees of around $11.25.

No wonder Debbie Lacey accused scalpers of "obscene gouging" when she received a $42 face value Boston Red Sox ticket that had been purhcased for her for a price of $424

Who'd want to be an antlerless deer in Indiana?

Many of you might know that I'm a dedicated follower of pricing glitches and disasters. Here's the latest to land in my Inbox.

It seems that there has been a pricing glitch at the Department of Natural Resources, who dish out bonus deer shooting permits.

- With apologies to all the animal liberationists and lovers of Bambi who may read this blog/posting -

Lemonade for my Pimms

As the temperature in Melbourne today headed for a very unseasonal (for mid-October) 29deg C, I decided to head for the supermarket to grab some lemonade to make that most British of summer drinks: Pimms and Lemonade.

Following on from my last post, I discovered that Schweppes mixer bottles of lemonade have now gone from 315ml to 300ml.

I'm not sure what, if any price change, accompanied the volume change. I wonder whether the new bottle will draw consumers attention to or away from the change in volume? 

Change in Price vs Change in Size

It is widely recognised that customers are more sensitive to a change in price that they are to a change in size. What exactly does that mean? Small changes in weight or volume can be likened to “stealth” price changes, the benefits from which should flow straight through to the organisations’ bottom line. Here are a couple of historical examples:

♣ Between 1970 and 1995, the Hershey Chocolate Company in the United States reduced the weight of its chocolate bars fifteen times, but raised prices only four times.

♣ In the US in the 1950s, the average candy bar cost $0.05c. By 1983, this had risen to $0.35c, with prices increasing in 5 cent increments. Typically, the size of the bar increased at the time price increase, but it was later reduced before the next price increase.

♣ Finally, there is the example of Mars, and what it did with Britain’s biggest selling chocolate bar in 2002: it whipped the bar’s nougat in a different way, which reduced its weight from 65g to 62.5g, while leaving its price unchanged at £0.29.

And here are a couple of current examples, courtesy of the story on A Current Affair last Friday (Channel 9, 15th September 2006, 18:30hrs). The story talked about the following examples of product shrinkage:

♣ Schweppes soft drinks going from 315ml to 300ml
♣ Dolmio vegetable soup losing 20g
♣ Kellogg’s Mini Wheats shedding 55g
♣ PK Chewing Gum pellets losing a mere 0.3grams

All of the above historical and current examples have involved and reduction in volume and no change in price. Coca-Cola however have done something different however: in launching the new 300ml cans shown above, they have both reduced volume (from 375ml to 300ml) and increased price (from $1.50 for the 375ml cans, to $2.00).

According to press reports, Coke’s change in pricing and packaging is based on market research and factors such as downsizing by health conscious Australians and helping parents control the portions given to children.

Fact or Fiction? Who knows? And what about the Red Bull factor – the size of the can bears an uncanny resemblance to the size of a Red Bull can. And in the US, the average price of a 288 ounce case of Red Bull yields a price of $69.45, compared to $18.08 for Cherry Coke and $9.41 for Coca-Cola.

Would you miss 2.5g of a Mars Bar? Will you buy 300ml slim-line cans of coke for $2? Post your thoughts below.

Perhaps this is something people involved in pricing in Zimbabwe could try - at least it wouldn't get them arrested for increasing prices. 

The Price of a Penny

Readers of this blog may recall my posting on 19th May this year regarding the rising price of copper which is used in 2p coins in the UK.

Well, two metals are used to make the one cent coin in the USA (zinc, as well as copper), and according to the Quincy Herald Whig, it now costs 1.23 cents to make a 1 cent coin. The article goes on to question whether 1c coins should remain in circulation in the US, and introduces readers to two wonderfully named organisations:

Citizens for Retiring the Penny, who want the 1c coin removed from circulation in the US, and prices rounded to the nearest nickel, and;

Americans For Common Cents, who believe that 70% of Americans want to hang onto 1c coins.

Its great to see that competition is alive and well in America!

Interesting little price tag...

Here's an interesting price tag. My wife recently puchased a blouse at (the house of) Target, on sale, for only $5.04.

When she told me the price, I thought she was kidding. Why would a retailer price at $5.04 rather than say $4.99?

One of the reasons put forward for the use of price points ending in 99c is that the shop assistant had to open the till to give the customer back a penny. This prevented them pcoketing the proceeds of the sale.

That is not a reason in this case: one cent coins were removed from circulatation many years ago now, so had my wife paid with a five dollar note and a five cent coin, both could have found their way into the assistants pocket without a "where's my change query?" from the shopper.

Of course, the other possible explaination is that the $5.04 price point has been recommended by some sort of pricing or markedown optimisation software used by Target. 

Remember the Good Old Days?

This photograph appeared in The Age on Thursday 24th Aug 2006.

It is a photo of a service station in Fitzroy, an inner suburb of Melbourne.

And no, there is not a "1" missing from the price board. Apparently, this photo was taken in 1989, when petrol was just 47.9 cents a litre.

Here's a couple of other historical price comparisons...

In December 1997, 250g of Milk chocolate typically cost around $2.87. Todays, the price is around $3.67

A kilo of potatoes has risen from $1.42 to $2.42 over the same period

Book Review: Smarter Pricing, by Tony Cram

I’ve just finished reading this book: “Smarter Pricing” by Tony Cram. Refreshingly for the author of a pricing book, Tony is a Brit, “…based at Ashridge Business School where he researches, teaches, consults and writes on customer value and the dynamics of long-term business relationships".

This book is an enjoyable read and there are many interesting little case studies and vignettes in its 206 pages. It is divided into 4 parts and contains 10 chapters.

I do get the sense however that, perhaps Tony has been let down by his proof-readers and editors. The content is certainly refreshing (something old, something new), but there is also a bit of room for improvement. In some places, such as on page 41, I felt like I was actually in a lecture being given by Tony:

Action: how to gain from price indifference brands

I was also particularly concerned with the following sentence on p176:

“Manufacturers that have been able to demonstrate to retailers that they have worked hard to cut costs out of their system will be reaping the rewards as retailers will be more open to considering price increases.”

Now, correct me if I’m wrong, but if that was me, I’d be asking for a price decrease if the manufacturer had lowered their costs ???

Don’t get me wrong however. This is an enjoyable read for anyone taking a first look at pricing. Definitely worth a look. 

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!