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?