The Beer on the Beach Experiment (Re-visited)

By Greg Eyres, Consulting Director at PricingProphets.com

In the 1980’s or 1990’s (I can’t remember which), the Chicago University –based Behavioural Economist Richard Thaler conducted what has become known as the “Beer on the Beach” price experiment.

He asked participants in the research how much they would be prepared to pay for an ice cold beer purchased from a run-down corner store at one end of a beach, and what they would be prepared to pay for an ice cold beer from the upmarket hotel at the other end of a beach.

As you would expect, participants were prepared to pay more when the beer was purchased from the latter, vis-a-viz the former. But as I discovered last week, this is not quite what happens in Fiji.

I was staying at a 3.5 star resort on one of Fiji’s many islands.  Very much marketed as a family resort, it offers just about everything a family could want.  It sits on a bay with spectacular views from the bar and restaurant. Most importantly, it offers a Kids Club where the ankle-biters can enjoy time away from their parents. 

At the other end of the bay is another resort that is much more marketed to couples and honey-mooners.  It is a 4 star resort that again offers spectacular views of a tropical paradise.

A glass of the house wine at the 3.5 star resort costs $11 (Fiji dollars).  What do you think a glass of the house wine costs at the 4 star resort?  Well, to my way of thinking, it would be reasonable to expect that it would something more than $11 - maybe $15.  Probably a better quality wine and a more exclusive and tranquil setting.

In fact, the 4 star resort charged us $5 for glass of the house wine.  Why?  Have they made a reasoned decision or are they pricing incorrectly?

At the 3.5 star family resort, what is the value of the glass of wine?  Mum and Dad have saved up all year for the annual holiday, the 2 kids are in at Kids Club, the sun is shining and they are finally starting to relax.  Are they going to pay the $11 or walk for 10 minutes to the other resort, where they can’t charge their drinks to their room?  Easy answer – they ain’t walking!  What they are really paying for is relaxation and a chance to unwind.  Walking around to the other resort will cut into that time and as any parent knows, that time is golden.

So, what of the 4 star resort?  My wife reliably informs me that the wine there was not as good a quality, although reasonable enough.  It is a beautiful setting and the accomodation and common areas are certainly of a better standard.  Why are they serving lower quality wine at a low price?  It clearly looks like a case of offering the wrong product at the wrong price.  A low quality, low price wine is incongruous with the quality of a 4 star resort.  They should be offering a premium wine at a premium price. 

In contrast to the 3.5 star resort, this resort is selling quality and quality products.  Pricing should reflect quality.  They may even attract a few mums and dads from the other resort who are seeking a better wine.

Having said all that, I don’t drink wine so it makes no difference to me.  I had a great time relaxing and snorkeling … while the kids were at Kids Club.

PricingProphets on Sky News

I was on the Sky News Tech Report today (Mon 2nd April) talking about Pricing and PricingProphets.com. We hope to post a video of the interview shortly, but in the meantime, here's a happy snap of Brooke & myself

Selling goods as a service

Inventory isn’t something companies want to sit on. You want to sell it as quickly as possible and turn it into revenue – not pay for it to be sitting in a warehouse. Why not turn your unsold goods into a service?

This month, a friend invited me to opening night of an exhibition by a renowned Melbourne-based artist. As we viewed the 23 pieces on display, Bob started telling me about the artist’s business model.

I was a bit surprised to hear of an artist with a “business model” – especially one with its own three letter acronym, ICE, which stands for (seek) Inspiration, Create (the art) then Exhibit (and hopefully sell) it.

But what I found more surprising was that the artist was sitting on 300-400 unsold pieces of artwork, which they valued at $1 million. What sort of business would sit on $1 millon worth of unsold inventory?

Believe it or not, this got me thinking about aircraft engines. Rolls Royce and other engine manufacturers ceased selling them years ago, and now sell “power by the hour” service contracts.

The case for selling art as a service, to display in corporate offices and boardrooms, using a subscription pricing model, is a very compelling one.

The client can enjoy a change of scenery every three months or so, and they can expense the cost, rather than capitalise the purchase of the artwork.

In the case of the artist, they retain ownership of their artwork and the utilisation of their unsold inventory starts to generate a revenue stream, rather than a lump sum that would be earned on selling the art. Potentially, the artist could earn more revenue from “renting out” their artwork, rather than selling it.

Selling a good as a service is a great way to generate income from unsold inventory. What unsold inventory do you have lying around that you can sell as a service?

[This post also appears on LeadingCompany, 29th March 2012]

How do you price legal services...?

Hat Tip: We would like to thank our lawyer for sending us this. 

And for the record, he doesn't charge by the hour. Thats why we use him

The Sound of Silence

Silence isn’t a sound that most leaders want to hear in the aftermath of their pitch for new business. Still, if customers don’t immediately sign on the dotted line, silence is the second best reaction. Let me explain.

I recently sat down with the managing director of a company who wanted to discuss his pricing over lunch. We chatted about things like the value he delivered, recent sales performance and the cost and frequency associated with updating his service.

Then we got to the heart of the matter. Peter had recently achieved some big wins: some of the biggest companies in his target market had taken a three-year subscription to his top-of-the-range product.

But why weren’t the other companies in his target market following suit? They had seemed impressed with his pitch and the product on offer, but they had gone quiet. That left Peter worrying that his price was too high, and maybe he should drop it.

I suggested to Peter that the sound of silence was not a reason to drop his price. In fact, the opposite is usually the case: customers won’t remain silent if the price is too high.

I suggested a different response to Peter: he should reduce the number of products in his product ladder from six to five, making it easier for customer to choose which product to buy. It was an idea that appealed immediately, and we finished our Malaysian spread with Peter in a more jovial mood.

Like that lunch with Peter, this blog is all about practical pricing advice.

It is more than just the dollars and cents; pricing can mean the difference between success and failure. It is at the heart of every company’s business model, but is often forgotten and poorly managed.

There’s going to be a lot to talk about, so hats off to the team at LeadingCompany, the first Australian media outlet to devote a regular column to the topic of pricing.

[This post also appears on LeadingCompany, 15th March 2012]

Click Here if You “Like” Behavioural Pricing

Imagine, sometime in the not too distant future, scanning the contents of your supermarket trolley. The self-service register totals your purchases to £175.25, and then asks you to scan your Facebook Card (Tesco Clubcard was wound up a couple of years before this). The electronic voice from the cash register now asks you “How would you like to pay for your £214.89 of groceries: cash or credit?”.

If recent sensationalism[1] is to be believed, this is what retailers will start to do: charge you more because you’re a Facebook fan or Twitter follower of certain companies and brands.

Retailers everywhere could be excused for paying attention. Most of them are doing it tough at the moment for a whole host of reasons which (in Australia) includes a slow down in demand, the high Australian dollar, and the exodus of consumers to online shopping sites, just to name a few.

To all the retailers reading this, we apologies for being the bearer of bad news, but we just cannot see this happening. Let us explain why:

• What does “Liking” on Facebook really mean? It means someone has clicked a button, that's all, and probably moved on. It does not indicate a preference for one product over another, and it certainly does not involve any sort of sacrifice, financial or otherwise;

• It assumes that companies will have an information advantage over consumers. Yes, one or two retailers may have made some gains in this area (Amazon springs to mind), but so far, the internet has been better used by consumers to find out what’s going on in marketers minds, rather than the other way round;

• History is not on behavioural pricing’s side either. Speaking of Amazon, remember their failed DVD pricing experiment, where they tried charging customers different prices (-30%, -35% & -40%)? Consumers didn’t take too kindly to that and despite the cost being small (an average refund of $US3 paid to 6,896 customers), damage to goodwill was far greater;

• The claim that the behavioural pricing revolution will happen this year is just over-hyped sensationalism. Airlines have taken 40 years to master the art and science of passengers sitting next to each other (and talking about the differences in fares paid

Yes, the Digital Buzz Blog did publish figures that said that the average annual spend by a McDonald’s Facebook fan was $159.79 more than a non-Facebook fan ($310.18 vs. $150.39 respectively), but it did not report that this was due to higher pricing. It could be explained by larger and/or more frequent purchases.

Retailers should not misinterpret “Liking” or “Following” as a signal to charge customers more. Nothing could be further from the truth. Behavioural Economics (not to be confused with behavioral pricing, as it has more credibility) has taught us that the pain of a loss is approximately twice as potent as the pleasure of a gain (a discount). And according to a late 2011 report from The E-Tailing Group, 63% of consumers ‘Like’ a retailers Facebook page for the possibility of getting a deal or a discount. Consumers are not going to sign up to pay more!

So what’s going to happen? We think there are a number of scenarios and implications for retailers:

• There will be a clash of paradigms: in the one corner will be companies that continue their price-based strategy, using services like Groupon & Living Social, and making sure they have the most competitive prices in Amazon’s PriceCheck App and their ilk. In the other corner will be companies that adopt behavioural pricing technology. That's going to be a battle worth watching.

• If and when large organisations adopt behavioural pricing technology, should small retailers (SMEs) be worried? We don’t think so. Not adopting behavioural pricing will give you a competitive advantage, but the big guys may not allow that to go unchecked for too long.

If the activities consumers participate in online results in a lighter wallet or purse, it will not be long before consumers change their behavior. The basic fundaments of pricing will be the same as they are today.

---

[1] See: The Mail Online, The Next Web and StartupSmart

Are you selling what your customer buys?

Interesting question isn’t it? But what am I talk about? I don’t often talk about my own purchasing decision, but hear me out on this one.

On Friday 10^th February, I picked up four rear window stickers for our company’s fleet of cars. Actually, I exaggerate a bit there: our business doesn't have a fleet of cars: they’re our personal cars, but hopefully we can now claim a portion of their usage as a legitimate tax (advertising) deduction.

The stickers are 600mm x 150mm and read “Are you pricing right? Ask…www.PricingProphets.com”. I estimate the stickers will last maybe two years, and they cost $A44 each.

Over those two years, a lot of people should see those stickers. If I wanted to be more precise, I could ask my friend, Peter Buckingham at SpectrumAnalysis exactly what the likely audience would be. Lets say 1,000 people a month see the stickers: that's 24,000 ‘views’ over my estimated life of the stickers.

Where have you heard that term ‘views’ before? Online advertising of course, where a view is also commonly called a page impression. Online advertising is a hit-and-miss affair: when was the last time you clicked on (never mind noticed) a banner ad? The stickers on the back of our cars are a bit hit-and-miss as well, but if you’re stuck behind my car at the traffic lights, I think you’re going to be a bit more intrigued by the sticker than you would if you saw it as a banner ad on a website.

But what’s more intriguing is that if I ran a banner advertising campaign, I would probably be charged around $40 CPM, which stands for cost-per thousand views or page impressions (the M being the roman numeral for one thousand).

This brings me full circle back to my opening question: are you selling what your customer buys? The company that I purchased the stickers from sold me four stickers and priced them accordingly. But what I actually purchased was an advertising product. What he sold me was not what I was buying.

I think we got an absolute bargain and the sticker shop left a fair bit of money on the table. Are you selling what your customer buys?

Track 1: The Pricing Managers Playlist

Money

Pink Floyd

Track 2: The Pricing Managers Playlist

You Can't Always Get What You Want

The Rolling Stones

Track 3: The Pricing Managers Playlist

Money for Nothing

Dire Straits

Track 4: The Pricing Managers Playlist

Money's too Tight to Mention

Simply Red

Track 5a: The Pricing Managers Playlist

Money

The Beatles

Track 5b: The Pricing Managers Playlist

Can't Buy Me Love

The Beatles

Track6: The Pricing Managers Playlist

Price Tag

Jessie J

Track 7: The Pricing Managers Playlist

Hey, Big Spender

Dame Shirley Bassey

Track 8: The Pricing Managers Playlist

The Price I Pay

Billy Bragg

Track 9: The Pricing Managers Playlist

Shopping

The Pet Shop Boys

Track 10: The Pricing Managers Playlist

Lost in the Supermarket

The Clash

Track 11: The Pricing Managers Playlist

Money, Money, Money

Abba

Track 12: The Pricing Managers Playlist

The Boys from the County Hell

The Pogues

Track 13: The Pricing Managers Playlist

Shoppers Paradise

Carter USM

Track 14: The Pricing Managers Playlist

Shopping

The Jam

Track 15: The Pricing Managers Playlist

Shoplifters of the World Unite

The Smiths

Track 16: The Pricing Managers Playlist

Take the Money and Run

The Steve Miller Band

Track 17: The Pricing Managers Playlist

Ka-Ching

Shania Twain

Track 18: The Pricing Managers Playlist

The Bargain Store

Dolly Parton

Track 19: The Pricing Managers Playlist

A Gallon of Gas

The Kinks

Track 20: The Pricing Managers Playlist

How Much is that Doggie in the Window?

Patti Page

Why Accountants shouldn't do Pricing

This is the third in a series of "Ten Things" presentations, in which Jon Manning, the Founder & Managing Director of PricingProphets.com, looks at ten ways to better present your pricing.

Ten Things (Episode 2)

Here's the second episode of PricingProphets "Ten Things" videos, 

in which I look at 10 historical pricing milestones.

Enjoy

Jon

Ten Things (Episode 1)

At PricingProphets.com, we've just launched a series of videos called "Ten Things". In this first episode, I talk about the Ten Things Every Accountant (and their Clients) Should Know About Pricing.

Enjoy!

Jon

Book Review: Impact Pricing

How can anyone possibly write a Pricing book that has two glaring omissions: (1) it does not distinguish between Business-to-Business (B2B) and Business-to-Consumer (B2C) pricing, and (2) it does not talk about price elasticity?

The answer is “very easily”, when you are Mark Stiving and you’ve just published “Impact Pricing”. The book focuses on B2C examples because, the fact is, that's what readers are most familiar with. But readers interested in business markets are not disappointed, as Stiving cleverly illustrates where consumer pricing concepts and strategies apply to business markets throughout the book.

So why ignore price elasticity, with the exception of three paragraphs? Stiving’s response is simple and practical: because he has “never seen a company that really knows its demand curve” (p69)? And you don’t have to take his word for it. As Scott McNealy, former CEO Sun Microsystems, once said: “Pricing [is] confusing for us too. In the whole history of Sun, we have never known what demand is, what elasticities are, or what the right prices are for our equipment”

For me, the real highlight of this book is Chapter 4, which could easily have been titled “An Idiots Guide to Value-Based Pricing", so clear, concise and well-structured is the chapter (as is the rest of the book).

It doesn’t matter if you work for a company that’s small or large, selling goods or selling services, or operates in business or consumer markets, there is something in this book for you. This is also, in my opinion, the first book that caters to the needs of the start-up / entrepreneur community, which makes it THE pricing book for the 21^st Century.

With this in mind, it should come to the surprise of readers that Stiving blogs at the appropriately-named www.PragmaticPricing.com.

A Christmas present for one lucky Pricing Propheteer

We've got one limited edition, collectors item, PricingProphets.com basball cap to give away to the next person who starts and pays for a pricing research project.

There has only been four of these caps ever made and this is the last one. Grab it now.

Click here to get serious about your pricing and start your Pricing Research Project...

The Golden Rules of Pricing

In 2008, I recorded parts of a Strategic Pricing Workshop I did in Bangkok, Thailand. I thought I'd give it a new lease of life and upload it...

PricingProphets featured in Public Accountant Magazine

PricingProphets.com is featured in the cover story on the October / November 2011 edition of Public Accountant. The magazine is not available online, but there is a copy available from the Press Room of PricingProphets.com

Here's why people write ratings and reviews...

Here's a price (and a product) you don't see anymore...

Pricing and Self-fulfilling Prophecies

Today's B&T Newsletter runs with the lead story that new research has found that...

"Price is the key factor in Australians' decision to purchase groceries, with eight in ten grocery buyers identifying price as more or just as important as country of origin when purchasing food"


REALLY? And why is that? Clearly, it's a self-fulfilling prophecy which did not require research to prove. If one supermarket spends the last 12-18 months on TV singing "down down, prices are down", what else would matter, besides price.

Here's a spoof of that "down down" ad...



Spoof's of "thats my woolies" aslo worth checking out on YourTube

How about a caption competition...

Looking for short and sharp captions for this photo...

Due to public demand...

Want to know the impact on Netflix's price change...

PricingProphets.com in The Australian Financial Review

"Well-priced advice for SME's" by Mark Fenton-Jones, which is almost entirely about PricingProphets.com, is the lead story in the Enterprise section of todays (23rd August 2011) Australian Financial Review. The article is behind the paywall, but you can read it here...

InfoGraphic: The Australian Advertising Landscape

I love a good InfoGraphic. Here's one I've put together on the Australian Advertising landscape, or where companies can sell and promote their products.

Have I missed anything? Suggestions on a postcard to jon (at) pricingprophets.com

If you know a campaign like this is going to be wildly successful, put your prices up first

Great Pricing Video

Great Marketing Video

For everyone else, there's PricingProphets.com

Accenture recently published a paper called “Going for Growth: The Role of Price and Cost in Driving High Performance in a Volatile Global Economy”

If you haven’t got time to read it, here are the key pricing-related points…

• Price optimisation was one of the three most important strategic priorities in the past 18 months for seven out of 10 companies;

• An equal percentage of companies did not have what Accenture would consider to be “sophisticated pricing capabilities”;

• Challenges in optimising pricing include sales execution, inadequate pricing analytics, unclear pricing strategy, inadequate decision support/analytics and governance and accountability incentives;

• Service, innovation and pricing are the most common levers for driving competitive advantage;
• Companies need to excel at delivering meaningful innovation at acceptable cost, and at a price that customers will ultimately pay;

• Companies most frequently use actions by competitors and the balance between supply and demand as inputs in setting price, and;

• Three-quarters of companies do not have a pricing strategy for difference marketing situations, nor is their pricing strategy tightly aligned with their overall business strategy.

The research surveyed 1,000 executives in 12 countries and 8 industries, all of whom have annual revenues over $100mill (ie, 'the top end of town').

And for everyone else, there’s http://www.pricingprophets.com/

Interesting Video on Menu Pricing

The Netflix Relief Fund - Enjoy!

Funny or Die Featured Videos from Funny or Die

Aug & Sep Speaking Engagements

I'll be doing a few speaking engagements in the next couple of months. You will be able to hear me...

1. On the September Business Essentials CD-ROM which I'll be recording in early August

2. At the Sales & Marketing Institute in Melbourne on the 16th August (Click here for details), and

3. In Shanghai for one or two value-based pricing workshops from 19th Septmber. Email for more details on this

Jon Manning
PricingProphets.com | Sans-Prix.com

Profit from Pricing & Music

There's some interesting little sound-bytes on the power of music over on Business Insider at the moment. Here's a couple of bits and pieces they authors have missed...

• A 2001 study by the University of Leicester Psychology Dept found that customers would pay more than GBP2.00 for a pint of beer when music was part of the ambience. The average response was GBP3.27 for a pint.
• An 8 week restaurant study found that customers spent 11 mins more at a table when slow beat music was played (compared to fast beat music), resulting in their beverage spend increasing by 41%, and total gross margins increasing by 15%
• But…staff in a data input centre processed 12.5% more vouchers when listening to fast music (compared to no music) and 22.3% more vouchers when compared to slow music

Could you get away with a 74% increased in prices?

This guy can. Full story can be found here

ShoeStringLaunch on PricingProphets

Click on the logo to read what ShoeStringLaunch.com had to say about www.pricingprophets.com

AnthillOnline on PricingProphets

Click on the logo to see what Anthill Online had to say about www.pricingprophets.com, in a story it ran on the 30th June 2011

How to segment children in China?

...by height of course, not age!

One of the worst graphs I have ever seen

This had the potential to be a great story on customers NOT buying on price. Unfortunately, I lost all interest in the story when I saw what is perhaps the worst graph I have ever seen.

The text around the image is proof I haven't cropped the image. Full article can be found here.

I assume this has something to do with the publisher, rather than the researcher?

Can anyone tell me what "naked pricing" is?

Here's Euro area price harmonisation in action...

Want to know what we've been up to lately? Building the world's first "crowd-sourcing" pricing website", which is now up and running. Providing the most affordable expert pricing advice in the world, you can find the website here.

Here's an article I wrote many years ago...

Found at ebookbrowse.com

Zimbabwe...again

Here's a follow-up to my posting on 28th April 2009 on inflation in Zimbabwe, taken in the British Museum last month

Who will notice your price change?

Think no one is going to notice your sneaky start-of-the-year price increase? Think again! Look at how much trouble The Guardian (1st Jan 2011, p11) went to to show readers the extent of train fare increases effective from the 2nd Jan 2011.

A Nice Cartoon...

On Apps Pricing...

This article deserves the widest readership possible!

How did Tata come up with $2,500 for the Nano?

The Tata Nano, a two-cylinder minicar that weighs 1,300 pounds and emits 103 grams of carbon dioxide per kilometer, less than any other car, got its price tag when Tata Group leader Ratan Tata made an offhand comment to journalists that the company could make such a car for $2,500. Newspapers picked up the figure, and the company used it as a challenge to motivate employees, Tata executive Sunil Sinha said in a lecture at Harvard University.

Source: Harvard Business Review, The Daily Stat, 21st October 2010

The FairPay Zone: Business Model Generation with a new spin: FairPa...

The FairPay Zone: Business Model Generation with a new spin: FairPa...: "The radically new FairPay pricing process is particularly relevant to the continuing dialog suggested by 'Business Model Generation,' the re..."

My first Podcast

My first podcast has now been embedded on the right - - >

Recorded with Michelle Nichols, then the Business Week Savvy Selling columnist, and published on the 26th April 2007

More developements at Ryanair

Passengers will also have to take their baggage from the airport to the aircraft, eliminating baggage handlers and making tickets even cheaper. What happens on arrival?

More here

Ryanair Shock

Ryanair boss Michael O'Leary last night confirmed that the low-cost airline was planning to make passengers fly the plane themselves.

"By sacking all of our pilots and allowing our passengers to fly the planes themselves, we'll be able to make considerables savings that will result in even lower ticket prices"

- Private Eye No 1238, 12th - 25th June 2009, p22

A Distraction - What would happen if Ikea purchased General Motors?

Meanwhile, back in Zimbabwe

New pricing model for an old industry

There's an interesting debate happening over at Wired on whether a new pricing model will work in an old industry....

Life Imitates Art

It wasn't that long ago that the story below, of a car dealer offering a "BOGOF" (Buy-One-Get-One-Free) on Porsche's got widely circulated.

Now its become reality (see above), and proof of how dire the US economy and car industry is, with a Dodge dealer in Florida offering two Rams for the price of one.

Fuel Surcharges

Here's an interesting development....

Singapore Airlines this week announced a reduction in their fuel surcharges.

It will be interesting to see if other airlines follow.

New Uses for Old Planes

Over the past 10 months, many people have commented on this posting on New Uses for Old Planes.

Well now another use has popped up, this time in Stockholm.

What can I say?

Prices (and inflation) in Zimbabwe

Its been a while since my last post on prices and inflation in Zimbabwe. In February last year, inflation was hovering at around 1,394%.

Inflation is now at around 2.2mill per cent, according to this article from France 24 and this article from The Economist.

Aircraft Toilets

In April 2007, I was interviewed by Michelle Nichols for a Business Week Savvy Selling Podcast. You can download the podcast here if you're interested.

In that interview, I talked about how low cost airlines had unbundled all the components of a flight ticket, and instead of charging one all-inclusive price, they had taken to charging for everything they could (meals, inflight entertainment, baggage, etc...collectively known these days as 'ancilliary revenues').

I also hypothesised about how long it would be before the airlines started to charge customers to use the aircraft toilet.

It now seems that others are starting to ask the same question. Sarah Maxwell's book, "The Price is Wrong", contains a forward by Jon Luther, who is the Chairman and CEO of Bunkin' Brands Inc. In his forward, he asks the very same question.

Even though my original hypothesis suggested the airlines were unsure whether to charge by weight or time, I still believe it is not beyond the realms of possibility that this may happen at some point. I was recently told that it costs about $1,000 to flush an aircraft toilet. I'm not sure how true this is, but what is clear is that aircraft toilets are very high tech.

Managing Price Increases

One of the most popular articles on the Harvard Business School Working Knowledge website at the moment is, not surprisingly, "Seven Tips For Managing Price Increases" by John Quelch.

You can read the article here

Dow Chemical's Second Price Rise in a Month

Here's an article from the New York Times that illustrates how much pricing pressures some companies are under these days:

Dow Chemical Raises Prices For a Second Time in a Month

Pricing in an Economic Slowdown

According to the National Bureau of Economic Research (NBER) in the US, the definition of a recession is “a significant decline in economic activity spread across the economy, lasting more that a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales"1. The more commonly accepted definition is two consecutive quarters of falling output.

It may still be a little too early to tell whether economies like Australia, the US and the UK are officially in recession or not, but either way, it is time to start thinking about and preparing your pricing strategies for use in a possible economic downturn.

Several articles have recently been published on how marketing strategies should be adapted for an economic slowdown, but they hardly, if at all, touch on how pricing strategies should be modified. In this post, we seek to redress that situation.

John Quelch from Harvard Business School wrote about strategies for an economic downturn in a recent article in The Financial Times2. He makes a number of good marketing –related recommendations. Below, we reprise those recommendations and go one step further, drawing out implications from a pricing perspective:

Recommendation 1: Focus on Quality

The Rationale: Companies that cut back on the quality of their products and services may find it comes back to haunt them when the economy recovers.

The Implications for Pricing: If you want to, or have to, reduce the quality of products and services, adjust your prices in the same direction as well.

Recommendation 2: Close under-performing areas of the business

The Rationale: This can apply to retail locations, as well as to products and services. It may be better to proactively rationalise now, rather than having to take a reactive, broad-brush approach later. Locations, products and services that are candidates for such action include those that are unlikely to rebound when the business climate improves, based on a re-forecasting of demand.

The Implications for Pricing: If you scale back your retail or trading locations, or your products and services, provide alternatives or transitional arrangements for those customers who may be adversely affected.

Recommendation 3: Buy up financially week competitors

The Rationale: The cost of acquiring financially week competitors may be significantly cheaper than it would be in times of economic prosperity. Particularly attractive will be companies whose customers currently don’t buy from you.

Implications for Pricing: M&A activity provides enormous pricing opportunities in terms of the added value that the merger may create. This should be capitalised on.

Recommendation 4: Expand relationships with customers

The Rationale: In the interest of cost efficiencies, companies will be looking to consolidate suppliers during an economic downturn. It is not a time to cut back on market research, as in times like these, it is even more important than ever to understand customer price elasticity.

Implications for Pricing: Companies should also consider long term supply contracts, and potentially (cost-effective) loyalty and retention programs.

Recommendation 5: Support Distributors

The Rationale: The business model of distributors can come under a great deal of pressure in times like these. Any initiatives that reduce their working capital or excess inventory requirements should be favourably received. Companies may also consider dropping weak distributors.

Implications for Pricing: It might be worthwhile thinking about support measures for distributors, such as early buy allowances, extended finance or improved returns policies.

Recommendation 6: Understand competitors costs structures

The Rationale: As they say, “you’re only as smart as your dumbest competitor”, and some competitors may attempt a market share grab in difficult economic times.

Implications for Pricing: Understand the impact of price wars and price reductions

Quelch does have some specific recommendations around pricing. Recognising that customers will shop around more, he suggests temporary price cuts, reduction in quantity discount thresholds, extended credit facilities, and more aggressive pricing on small-sized products.

There are a number of pricing and advertising additions to these suggestions. Firstly, those temporary price cuts and reductions in quantity discount thresholds should be for a fixed and defined period of time, not for an open-ended duration. The last thing you want to do is condition you customers to cheaper prices infinitum. In some industries, such as mortgages and mobile telephony, customers might look for invoicing and budgeting certainty and switch to fixed interest rates or capped phone plans. Make sure these prices are optimised sooner rather than later. And finally, if there is still money left in the advertising budget, consider spending it on price comparison websites (such as moneysupermarket.com) which is where the price sensitive customers will be looking for the best deals.

Another recommendation comes from a recent Business Week article3, which recommends companies increase financial and operational reporting frequency. This will enable you to monitor trends in sales volumes, revenues and costs, but also keep an eye on the number of days customers take to pay their account. If customers take longer to pay their bill, it might be worthwhile giving them a call, and re-thinking how you “get” your prices and possibly renegotiate payment terms and conditions.

Although the short term outlook for some sectors of the economy is not that rosy, strategies such as those outlined above can go some way towards easing the pain.

References
1 Anon (2008) “The long hangover” in The Economist, 12th April, pp79-80
2 Quelch, J (2008) “Family comes first when marketing faces tougher times” in The Financial Times, 18th February, p14
3 Anon (2008) “Don’t Let the Downturn Get You Down” in Business Week, 20th February, downloaded from www.businessweek.com on 2nd March 2008

Business Essentials

In March, I made a rare public speaking appearance. As much as I enjoy these, it can be hard to squeeze them in when you’ve got projects on across three continents.

Brendan Lewis, who among numerous other things, writes The Digital Bottom Line blog for Smart Company, asked me to be part of a panel that spoke on “Sales Models that Sizzle” at the March meeting of The Churchill Club.

As a result of that speaking engagement, last month, I got invited into the studios of Business Essentials, Michael Schildbergers’ outfit that produces a monthly business audio program on CD. I was interviewed by Heather Dawson and the resulting 8 minute interview can be found on the May 2008 Business Essentials CD. I hope all the Business Essentials subscribers enjoy listening to the interview as much as I enjoyed participating in it.

New Pricing Model

Here's an interesting new pricing model...a sushi restaurant in New York where children's prices are determined by height.

File this one next to the March 2006 pricing model adopted by Ostfriesland Hotel in Norden, Germany, who adopted a weight-based pricing model of €0.50 per kg, per night.

A bundling story...from an avid reader of this blog

We went to breakfast at a restaurant where the "seniors' special" was two eggs, bacon, hash browns and toast for $1.99.

"Sounds good," my wife said. "But I don't want the eggs."

"Then I'll have to charge you two dollars and forty-nine cents because you're ordering a la carte," the waitress warned her.

"You mean I'd have to pay for not taking the eggs?" my wife asked incredulously.

"Yes!!"

"I'll take the special."

"How do you want your eggs?"

"Raw and in the shell," my wife replied.

She took the two eggs home.

There are known known's...

The annual Plain English Awards have just been handed out in the UK. Some of the winners appear on the BBC's website, where readers can also put forward their interpretation on what companies are trying to say.

The gong that is currently attracting the most re-interpretation relates to (I think) Virgin Train's pricing structure...

"Moving forwards, we at Virgin Trains are looking to take ownership of the flow in question to apply our pricing structure, thus resulting in this journey search appearing in the new category-matrix format. The pricing of this particular flow is an issue going back to 1996 and it is not something that we can change until 2008 at the earliest. I hope this makes the situation clear."

Click here (then scroll down) to see what people think this might mean.

[Thank you to one of the frequent readers of this blog for emailing me this story]

The Next Big Thing in Low Cost Airlines

Here's a fantastic story from India, via The Times Online, on the next big thing in low cost airlines.

Click here to read the story.

Another Low Cost Airline Pioneer Passes Away

Last year, I commented on the passing away of Sir Freddie Laker, one of the pioneers of the low cost aviation movement.

Sadly, we've just lost another pioneer - Tony Ryan, who formed what is now Ryanair. You can read the New York Times obituary here.

What do the FT, Radiohead and campaigners against ticket scalpers have in common?

A couple of interesting pricing stories broke overnight. The first comes from the website of London Financial Times, which preempting a similar move by Rupert Murdoch at the website of the Wall Street Journal, announced that it was making much more of its content available free of charge. You can read coverage from the Sydney Morning Herald here, and from The Independent here.

Another big story, reported by the ABC here, and the BBC here, was the decision by the band Radiohead to let fans determine how much they want to pay for their next album – even nothing if they so wish. There are a number of restaurants around the world that offer this sort of pricing model, including one here in Melbourne in the beach side suburb of St Kilda. I can’t remember who told me this, but I do recall hearing that the owner of this restaurant in St Kilda operates a number of eating houses, and guess which one is the most profitable? The one where diners pick the price they pay.

The final story is this one from The Age which talks about how music fans are fighting back against ticket scalpers.