Pricing Trivia #1

Here are some useful bits of pricing trivia and pricing anomalies that I have found over the years. They may no longer be valid, but they are thought provoking nevertheless:

• In the summer of 2003, the Air Tariff Publishing Company held 48,019,078 airfares is their database. That might explain why…
  
• In April 2004, the lowest economy class round trip airfare from Dallas-Fort Worth to Honolulu on American Airlines was $US1,060. However, if you purchased a Dallas-Fort Worth – Jas Jose round trip ticket (for $346) and a San Jose – Honolulu round trip ticket (for $350), you would have saved yourself $364.
  
• It is cheaper to fly 1,120km between Beijing and Shanghai than it is to drive. If one takes the Beijing to Shanghai expressway, you would have to stop ten times to pay tolls to the value of 500 yuan (approx. $US60). And that doesn’t include petrol. The tolls alone are cheaper than a discounted airfare.
  
• Unkechaug Indians can legally buy and sell tax free cigarettes. Drop buy the Poopatuck Smoke Shope (near Mastic, Long Island) and you can pick up a pack of cigarettes for between $US2.00 and $US3.50. In nearby New York City, you would pay $US7.00.
  
• Head across the US border, from Phoenix of Tucson, Arizona, into Negales, and you’ll be able to pick up prescription medicines for about ¼ of the price there are in the USA.
  

Post M&A Pricing

Last week, Symantec announced that its pricing strategy, post its merger with Veritas, could take a year to sort out.

In a report published on Silicone.com it was noted that Symantec sold it products using a diverse range of pricing models including single user licences and site user licences. Veritas on the other hand sold its products primarily on a CPU basis.

As Mike Marn et al have noted in the book The Price Advantage, post M&A pricing is an increasingly important area when it comes to pricing.

Pricing opportunities can contribute as much as 30% of post-merger synergies and companies can be richly rewarded with post-merger pricing opportunities. After all, the customers, competitors & employees all expect expect change after a merger or an acquisition. Given that post-M&A opportunties may only last for 6-12 months, one wonders where this merger of computer security heavyweights will be able to capitalise on such an opportunity?

Forthcoming Speaking Engagements

Interested in learning a bit more about pricing? Why not come along to one of the following events at which I will be running various pricing workshops...

Marcus Evans' Pricing Optimisation Conference
22nd & 23rd September 2005, Duxton Hotel, Melbourne

Marcus Evans' Holistic Pricing Masterclass
26th - 27th Septmber 2005, Grand Copthorne Waterfront Hotel, Singapore

Pricing Workshop
8th October 2005, CAE Business Connect, Melbourne

Some History on Price Tags

For many years now, I have had an interest in the history of pricing. Sometimes one can be amazed by how long a pricing strategy or tactic has been in use.

To give you one example, as far as I can ascertain, the advance purchase of tickets has been around at least since 1729, when the British Museum in London started selling tickets in advance.

Between 1869 and 1872 the Bon Marche Department store in Paris implemented two radical changes in retailing: it pulled inventory out from behind counters and put it on display for shoppers to inspect, and it put price tags on its products. Prior to this, and as far back as the first evidence of auctions in 500BC, how well one haggled generally determined the price a customer paid for a product or service.

So in the overall scheme of things, price tags have really only been with us from around 140 years. And a story in last Sunday's Washington Post by Mimi Harrison Price-Tag Fasteners, Hanging on since '64 traces the origin of those ubiquious plastic fasterners that are commonly used to attach price tags to various products and services.

Retail Pricing

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

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

So what are the "better companies" doing?

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

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

Variable Pricing

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

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

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

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

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

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

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

Unlocking Business profitability

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

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


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

The Change of Price

How quickly can you see the impact of a change in your prices?

If you’re a publisher of travel guide books, say a publisher like Fodor or Frommer, it may not be until the book hits the discount bins in a bookshop prior to the launch of a new edition. It can be up to six years between launches of new editions of travel guides.

Industries like the Yellow Pages directories around the world are all on annual sales cycles, and few if any companies in this industry, change prices during a sales canvass. Yellow Pages Pricing Analysts may be waiting a year to assess the impact of their price changes.

There’s a slightly different situation in the US airport-based car rental business. There, some companies can see the impact of price changes, especially when a competitor is involved, within 24 hours.

But perhaps the fastest impact of a price change is seen by Dell Computers. When they change prices on their website, they can see a change in customer behaviour literally within minutes.

The world, and the world of pricing, moves faster all the time.

Price Benchmarking

Every now and then, one reads about price benchmarking. Not necessarily of apples and apple products, but rather obscure and irrelevant apple and oranges pricing.

Perhaps the most commonly cited example is the price of a litre of milk, compared to say the price of a litre of bottled water. Or the price of a litre of milk or bottle water, versus the price of a litre of petrol.

Some of these comparisons are fairly simple calculations. It was quickly pointed out when it commenced operations, that the Heathrow Express train, that carried passengers from Paddington Station to London’s Heathrow Airport was, on a pence per kilometre basis, more expensive than a flight to New York on the Concorde on a pence per kilometre basis. A fairly simple calculation.

However, this one would not have been so simple: by volume, the ink for a HP colour printer is more expensive than Vintage 1985 Dom Perignon. A very intriguing calculation, even though the two are hardly substitutes for each other.

Welcome Message

Welcome to "Unlocking the Power of Pricing". This is the blog of Sans Prix Pty Ltd, a Strategic Pricing Consultancy based in Melbourne, Australia.

It offers a range of off-the-shelf pricing solutions, as well as tailor-made consultancy services to companies large and small.

Although based in Melbourne, Sans Prix will work anywhere in Australia, or the world. We have even delivered pricing solutions to clients electronically on the other side of the world, without jumping on a plane. We have experience in a wide range of industries, gained in places as diverse as Australia, the UK, Europe, USA, India, and various countries across South-East Asia.

Sans Prix is of the view that the “80/20” rule applies in pricing: 80% of an organisation’s pricing is ‘universal’, and 20% is unique to that firm. Sans Prix’s client list symbolises both the globalisation and the universality of the art and science of pricing.

You can read more about Sans Prix by clicking here