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Should You Unbundle?

Luggage to checkA friend recently asked about a Pragmatic Pricing blog from 2 and a half years ago.  It was about the furor that was going on when the airlines were unbundling – they were beginning to charge for checked luggage.  It’s very interesting to re-read that blog now that we have emotional distance from the events.

As you read it, notice there is no longer all this anger toward the airlines.  Obviously, the negative reactions were caused by how they did it, not what they did.

My friend’s question: When does unbundling work?

Unbundling works when you are currently providing a complete solution for a single price and a large number of customers don’t benefit from all of the features.  In other words, your solution is too big.

In the airline situation, they were selling the full solution of air travel which included checked luggage.  However, many travelers didn’t check any luggage.  The complete solution was too big.  They were forcing people to buy features they didn’t use.  They could have (and did) offer a “complete solution” that had fewer features.  They removed checked luggage from their solution.  This new offering is a complete solution to some set of customers.

Should you unbundle?  If you currently offer a complete solution, but a large segment of your customers don’t use the entire set of features, then you are ripe for unbundling.  You can reduce the features of your complete solution and offer the other features as options.  This allows you to be even more price competitive with the base product while making up profit selling the add ons.

If you don’t want the complexity of a base product (that is a complete solution for some) and a myriad of a la carte choices to add on, then consider creating good, better, best bundles.  Thinking about unbundling can help you create a new “good” product that is more competitive and attractive to more customers.  Your current product can be considered better or best.

The secret to unbundling is thinking about the complete solution.  If you sell a complete solution, look for the minimum set of features that a segment will still buy.  If your smallest offering has more than that, then consider unbundling.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photo by sun dazed

Should Your Pricing be Fixed or Flexible?

Tug of war 2The answer: flexible … unless there is a good reason to not.  A good reasons could be very low transaction values, the capability of your sales channel, and your capacity for new business.

Flexible pricing enables price segmentation.  If you can learn a customer’s willingness to pay (WTP), flexible pricing allows you to charge closer to that amount.  Some customers pay more and some pay less.

Flexible pricing really means your willingness to negotiate.  Car dealerships carefully study their customers.  What are they wearing?  What is their current car?  What is their career?  They use this information and more to estimate their customers WTP and then negotiate the highest price possible.

Look at what happens if you only charge a single fixed price.  You could price high enough to capture the full value from customers with high WTP, but you would not sell to those with lower WTP.  You could price low enough to capture the most customers, but you leave money on the table because some people were willing to pay much more.

Given a choice you want to use flexible pricing.  What conditions drive you to fixed pricing then?

Low value transactions:  When you buy a bag of chips at the grocery, you don’t negotiate.  That’s because it isn’t worth the effort to the grocer (or you).  The cost of negotiating is likely higher than any incremental WTP you capture.

Capability of sales channel:  If your sales channel is not structured or trained to negotiate deals, then fixed pricing may be a better choice.  For example, it is difficult to negotiate individual deals when selling through a distributor.  However, the power of some buyers, like WalMart, could force you into negotiations even if you don’t really want to negotiate.

Capacity for new business:  If your factory is at full capacity or your organization can’t expand more without extensive hiring and training, then negotiating lower prices makes little sense.  However, if you really are at capacity, can you raise your prices for new customers?  Then as capacity becomes available you can offer your current (lower) prices to keep at full capacity.

Should you use fixed or flexible pricing?  Look at your situation.  If flexible pricing makes sense, use it.  If not, use fixed pricing. We presented 3 reasons why you would want to use fixed pricing, but surely there are more.  Can you think of any?  Please share them.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Graphic courtesy of city cigar life.

Air Travel Pricing by the Pound – Some Lessons

Weight on planeSamoa Air recently announced that they will begin charging for airline tickets by the pound.  When you first heard about this, you probably had an emotional reaction, either pro or con.  Undoubtedly the average weight of the people who support this is much lower than the average weight of the people who oppose the idea.

One young lady this past week said to me, “This is fair because right now I can’t afford to fly anywhere with my children.”   Hence, the first lesson from this incident.

1. Change is fair when it’s to our advantage.  What would that young lady think if we put a surcharge on screaming babies in airplanes?  She would think it unfair, but the business travelers of the world would rejoice.

The second lesson to learn is based on the justification.  After all, airplanes run on weight.  The heavier the load the more fuel is required.  Airlines charge for overweight bags.  Doesn’t it just make sense to charge by the pound?

2. Consumers think using a cost-plus mentality.  If it costs more to serve a heavy person then it’s reasonable to charge them more.  Of course as pricing people we do not price using cost plus.  We price based on willingness to pay.  However, we can often influence willingness to pay using cost plus arguments.

Lesson three is huge kudos to Samoa Air for creativity and thinking outside the box.  Airlines have always priced by the seat.  To some extent they also price by the mile.  Samoa Air is doing something different.

3.  What do you charge for?  Just because your industry has always charged one way doesn’t mean that’s what you have to do.  If you want to be different, you have to be different.  (Profound.)  It may make sense to be different in your pricing.

The first 3 lessons all tend to support pricing by the pound.  The fourth, not so much.  The implementation is to have people declare their weight when they purchase the ticket and verify it by weighing each passenger when they are at the airport.

4.  Complexity reduces likelihood to purchase.  Making products easy to purchase helps them sell.  When we add complexity in our pricing schemas, customers will tend to buy from providers where it’s easier.  Of course if you’re skinny and you think you will get a much better price, then you’re more willing to put up with the added complexity.  Many of us may not.

It’s impossible to know if this will stand or get reversed.  But the fun part is we can learn from the situation.  Let’s watch to see what happens

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Photos courtesy of LessWorkMoreLurk.com and foilman.

 

The Hooker Story

This week, please enjoy this fun story about my experience with a Las Vegas Hooker.  (Pricing experience.)

I tell this story at the end of my pricing keynote where I make three pricing points:

1. Know your value

2. Segment your market

3. Build a product portfolio.

Please share your comments either here or on Youtube.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

 

Make them Ask

Last week, I received an email from McCormick and Schmick’s Seafood restaurant offering a good price on a 3 course tasting meal, no coupon needed.  My wife and I like M&S, so we decided to take advantage of this deal.  We made reservations, showed up at the appropriate time, and were seated at a table.  We scoured the menu for the 3 course meal special but couldn’t find it anywhere.  Had I misread the email?  When we asked the server, she left and returned with a separate menu.

They made us ASK for the special deal. As a pricing guy, I loved it!

Here are two lessons in this story.

First, every discount should have an objective.  In this case M&S sent the email with low pricing to attract customers to their restaurant.  Of course they would prefer people come and buy off the regular priced menu, but they wanted to attract additional customers with a price deal.  They were willing to accept lower margins for these incremental customers.

Second, don’t give your best prices to customers who don’t “deserve” them.  M&S diners who came in without knowing about the deal expected to pay regular prices, so there was no reason to give them the special deal.  Asking for the discount is how you proved you deserved it.

How about your business?  When you offer a discount on something, do you know exactly what you hope to accomplish?  Besides attracting new customers, you may be trying to influence their choice of products, or you may be trying to increase consumption.  Just know why you’re offering the discount.

Once you know why you’re discounting you can determine who should get the lower prices.   You want the best prices to go to the right people, but not to everybody.  Find ways to target your discounts.

As a final thought, when I had to ask for the special menu I was surprised.  The uniqueness of the experience is what grabbed my attention.  However, if you think about it, this is really very similar to requiring a coupon, only without the coupon.  Pretty interesting.  You may want to add this tactic to your grab bag of pricing ideas for attracting new customers.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

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Hey Women – Quit Whining about Pricing

A very good female friend wrote to me, “Well Dr. Stiving…. Read this article. I am angry! Blog about this one!”
www.marieclaire.com/world-reports/why-do-women-pay-more

Well OK.  Stop whining about pricing.

The Marie Claire article provides many examples where women pay more for items than men:  dry-cleaning, bank loans, cars, health insurance, deodorant and even government tariffs.  With the exception of government tariffs, each one of these has rational economic explanations.  They are not about gender discrimination, they are about economics and free markets.

Although I’m a huge proponent of price segmentation, it is bad for companies to segment based on race, religion, or GENDER alone.  Yes, I’ve seen some horrendous examples, but the ones in this article are not examples of discrimination based on gender alone.  Let’s take them one at a time.

Dry Cleaning

It costs dry cleaners much less to launder and press a man’s dress shirt than a woman’s.  Think about it this way.  Most office-working males wear the same style dress shirt (boring).  Dry-cleaners see thousands of these a week.  They have equipment and processes to service them efficiently.  Women, on the other hand, wear many different clothing styles to work.  It is not as easy for a dry-cleaner to invest in the processes or gain the expertise for every type of blouse.

Women, here are two things you can do.  1. Start wearing men’s shirts.  If they charge you more to launder that shirt, I will line up with you and scream discrimination.  2. Search for a laundromat that charges the same for men’s shirts and women’s blouses.  Tell your local cleaner you will only go there if they don’t price discriminate.  Please let me know if you find one.

Bank loans and Cars

This has nothing to do with gender, and everything to do with your willingness to negotiate.  Some women are very tough negotiators and I’m sure they get better deals than most men.  However, on average it appears that men are more willing to haggle for a better price on these items, so they end up with better prices.

I recently bought a new car.  The negotiating tactic I used could have been used by anyone, of any gender.  After some Internet research I decided what price I wanted that the dealer might accept.  I called the local dealer and made them the offer.  They said no and made a counter-offer of $500 higher.  My reply, “I will accept your price if no other dealers in the area will accept my offer.”  He quickly called me back and accepted my offer.  It was very simple and had absolutely nothing to do with gender.  (Regardless how good the deal was, some women have probably gotten even better deals from this dealer.)

Women, are you willing to negotiate or not?  Are you willing to learn to negotiate?  This isn’t gender discrimination, it’s segmentation based on who is willing and able to negotiate.  Learn to negotiate and you will get a better price, regardless of what other women do.

Health insurance

Insurance companies have more statisticians than WalMart has smiley faces.  These guys know the probability of you getting a hangnail on Tuesday if you’re wearing red.  If one of them thought they could profitably charge less to women and win more customers, they would do it.  This is not collusion between insurance companies to cheat women, it’s statistically driven pricing based on the expected cost to care for you.

On this one I understand how you feel.  When I was in my twenties I thought it was UNFAIR that my car insurance rates were higher than for women of the same age.  That’s gender discrimination! But of course it’s not.  Male teens on average are more reckless drivers than female teens.  We cause more insurance claims so insurance companies charge us more.

Insurance companies like to make money and win customers.  They price to cover their expected costs with a reasonable profit.  If they tried to charged some group, like women, a higher price to make a larger profit, another insurance company would be willing to step up and take the business away at the smaller profit.  Competition is what keeps our prices down.

Deodorant

In the article, the woman’s version of deodorant that’s essentially the same as the man’s version sells for 30 cents more.  This is a good example of what I teach companies to do. Find segments (in this case women) who are willing to pay more for an item, and then create a special item just for them and charge them more.

I picture a woman standing in front of the deodorant aisle, carefully selecting the best one for her.  Then I picture a man, walking up, grabbing one and saying, “this one’s fine”.  Which one is more likely to use low price as a major factor in their decision?  The man.

Women, you have recourse.  Buy the man’s deodorant, after all it’s essentially the same.  Complain to the manufacturer, they may lower their prices.  Shop around.  Maybe on average your deodorant is 30 cents more, but if you continually buy the lower priced ones, manufacturers and retailers will provide you lower priced products.  If you are buying one of the most expensive deodorants on the shelf, you’re telling the deodorant companies that you like what they’re doing.

Groceries – a counter example

Although this was not covered in the Marie Claire article, I’ll bet women pay less for groceries than men.  As a man, should I complain?  In fact, I’ll bet married women pay less than single women.   Why?  It’s simple, stay at home moms are more likely to clip and use coupons.  It’s not discrimination, it’s free market economics.

Nobody wants to gouge women.  Nobody can.  Companies simply look at how much people are willing to pay for their goods and try to price accordingly.  If you want to get your products and services for lower prices, all you have to do is act price sensitive.  When you see good, better, best offerings, buy “good”.  Learn to negotiate and negotiate for everything.  Don’t be picky about gender based versions of items.  And like you, if I want better prices at the grocery store, I need to spend some time clipping coupons (not gonna happen).

Feel free to share your thoughts or rants.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by joeywan

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The ID Ten T Error – Another Reason To Not Compete on Price

Have you ever noticed that the cheapest customers require the most support?  I read a blog titled “Why Cheap Customers Cost More” which gave me an Aha! so I had to share it.

Imagine there are two types of customers.  Type A are very involved, they study the product category before buying.  They look at the features and benefits of different alternatives.  They understand the value tradeoffs when they make their decision. They are informed before they make their purchase decision.

Type B customers are not involved.  They just want to make a decision.  But if they don’t know the differences between the products, then what attribute can they use to make their decision?  That’s right … Price.  They probably go for the lowest price.

Which customer type is more likely to call your service department with questions?  Which customer is more likely to return the product because it didn’t work for them?  Which customer will have more user errors?  Type B.

Hence the title of the blog.  Technical support people use the phrase “it was an ID Ten T error” when referring to user error, to customers who didn’t know what they are doing. When you sell the lowest priced product you are bound to get more type B customers meaning more ID Ten T errors.

The lesson is to not compete on price.  Compete on value and win the type A customers.

In case you haven’t figured it out:  ID Ten T = ID10T.

 

Mark Stiving, Ph.D. – Small business pricing expert

Photo by StuartPilbrow

Is Groupon Worth It? – Do the math.

A colleague recently asked what I thought of Groupon for the independent restaurant business.

My gut says it’s probably not a good idea, but it depends almost completely on how much additional business at regular prices you think each Groupon will generate for you.  Let’s do the math to see when it is the right decision.

Assume you sell a $20 Groupon.  That means the customer paid $10 and you received $5.  Let’s also assume that your variable costs are 75% of your normal price (50% food cost, 25% labor).  This means for each $20 Groupon, you put $5 in your pocket but paid out $15 in costs for a net loss of $10 per Groupon.

You need to sell an additional $40 in product at normal prices to make $10 in profit to offset this $10 loss.  So, if you believe each Groupon will generate additional regular price business at 2 times the Groupon value, then you will break even, not make money, break even.

In this example, if you only have 25% gross margin (75% variable costs) you need to have incremental sales at least 2 times the Groupon value to justify it.  However, if you have 50% gross margin, the math works out that you only have to sell half the Groupon value incrementally.  The lower your variable costs, the more likely Groupon will be valuable to you.

Page 5 of “The Uniform System of Accounts for Restaurants, 8th edition” says that “A prime cost (cost of sales plus labor) of 65% or less in a full-service operation generally offers a restaurant the potential to earn an adequate bottom-line profit …” If you have variable costs of 65%, your breakeven point for Groupon is selling an additional $1.15 at regular price for every $1 of Groupon.

No matter your costs, you have to generate a lot more full price business just to break even.  This may seem unreasonable, but there are three ways Groupon can help generate additional business.

1. That customer buys a lot more than the value of the Groupon during the visit.  You can help this along by offering a Groupon value that is much lower than your normal ticket value.

2. That customer returns and buys more.  Ideally, you create a loyal customer by offering great value and service.  However remember, when you attract customers with low prices, the type of customers you attract are the one who are the most price sensitive.  They are more likely to follow the coupon than be loyal.

3. The crowds at your restaurant attract more people that wouldn’t have tried.  Find ways to show off your crowd and definitely gather testimonials.

My advice to you before using Groupon is do the math.  Know how much additional full price business you need to generate just to break even.  Do you think you can achieve that and more?  If so, it may be worth it.  If not, well … try something else.

 

Mark Stiving, Ph.D. – Small Business Pricing Expert

Brilliant Price Segmentation – An Example

Think about your customers.  What is different about the ones who are willing to pay more vs the ones who need a low price to buy?  How can you charge one group more than another?  Keep thinking.  There are more ideas you haven’t thought of yet.

Here is a brilliant example.  Customers who are price sensitive probably comparison shop.  Customers who are not price sensitive probably just decide what they want and buy it.  In the world of Internet retail, you can tell these customers apart (at least statistically).

This became clear after reading this blog from Upstream Commerce. In it, Gilon Miller points out that you can tell how your website visitors arrived at your store.  If they came from a price comparison site, then they are probably very price sensitive so we want to price more aggressively.  If they came from a product review site, then they probably already know they want our product and are much less price sensitive.  Let’s charge them full price.

This is a wonderful example of price segmentation based on transaction characteristics.

You probably didn’t think up this one on your own (I know I didn’t).  There must be thousands more opportunities for price segmentation out there.  Keep thinking.

 

Mark Stiving, Ph.D. – Small Business Pricing Expert

Photo by Brian Watkins

 

 

Excessive Segmentation? – Bausch & Lomb

The other day I was talking with someone about price segmentation and he asked me about the Bausch & Lomb situation.  I didn’t know anything about it, so I looked it up.  Here is a detailed description. 

From a pricing perspective, it was brilliant.  B&L took the exact same contact lens, packaged it differently with three different brand names, and had different instructions for how often to replace them: daily, every couple weeks or extended.  The wholesale prices were $5, $8, and $46 (for the exact same lens).

Why was this smart?  They had a market for long life lenses and realized they could make more money by dramatically lowering the price and getting customers to buy more often.  By creating a new version, they didn’t have to lower their prices on the existing business.

If you already know this story though, you know that B&L was sued for this in 1994 and eventually settled.  They weren’t sued for breaking any pricing laws.  Rather, they were sued for fraudulent marketing.  They were misleading their customers into thinking the lenses were different, that they needed to throw away the disposables every day.  (I used to wear disposables and was too cheap to throw them away daily so I’d usually keep them for several weeks.  Now I know I could have kept them even longer.)

B&L had FDA approval every step of the way, but in the end misleading customers is what caught them.  Here is what B&L could have done.  They could have tested their long life lenses with an additional QA check and then guarantee a level of performance to those customers.  This would have added very little additional cost, the products perform the same in the short term but only one is guaranteed for the long term.

What can you learn from this?  Don’t use fraudulent marketing to support your price segmentation.  Price segmentation is used all the time and is not the culprit here.  Continue to pursue means to segment your customers based on Willingness To Pay.  However, don’t intentionally mislead them.

 

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by maikel_nai