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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

Kid Rock Plays with Pricing

Kid RockThis article in the Wall Street Journal describes how Kid Rock is changing the business model for his upcoming tour.  He is lowering the price for almost all of the seats to $20 and in exchange will begin receiving a cut of the concessions.

As all new business models should be, this may be a win-win-win.  A win for Kid Rock.  A win for the fans.  And a win for Live Nation Entertainment who owns or operates the venues where he will be playing.

Win for the fans is easy to understand.  Lower ticket prices mean more people can afford to go.

How is this a win for Kid Rock and Live Nation?  This only happens when overall revenue goes up, and that is a strong possibility.  In 2009, Kid Rock sold 17,000 tickets in Chicago.  This year he has already pre-sold 28,000.  Los Angeles sold out in 9 days and St. Louis sold out and wants another show.  It looks like $20 tickets will bring in many more fans.

Kid Rock also wins because many people who were “dragged to the show by a friend” become fans.  This builds his fan base.

What pricing lessons can we learn from this?

1. Business models are about pricing.  You should regularly rethink your business model.  When you create a new model where everyone wins you have the potential to change an industry.

2.  Don’t forget about complementary products.  Think of “share of wallet”.  In years past, Kid Rock would fill a venue, bring people in, so other people can make money selling them parking, beer or t-shirts.  If you have the attraction, you have potential to make money on everything.  In fact, you can lower the price of your main item to attract buyers for your complementary products.

3. Think about the lifetime value of a customer.  If Kid Rock creates new fans he will potentially make money from them in the future.

It’s always fun to watch a high profile pricing experiment.  The question is, are you thinking about your pricing?  Are you rethinking your business model?  With the pace of change today, someone may soon change the business model in your industry.  Will you lead that change or hope to catch up?

 

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

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Photo by familymwr

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.

 

Why You Must Offer Good, Better, Best

Almost everyone should implement a good, better, best strategy.  Pragmatic Pricing has said this many times.  Here is another piece of evidence for you.

Joel Huber and Christopher Puto experimented with choice sets, and how different alternatives effected respondents choices.  This experiment, as reported in William Poundstone’s book “Priceless”, is powerful evidence for why you should use good, better, best.

Huber and Puto asked students to choose a beer.  Each beer had a price and a rating by a “beer connoisseur”.  These are all summarized in the table below.

In the first test, they only asked the students to choose between the bargain and premium beers.  About 67% of the students chose the premium.

In the second test they added the cheap alternative.  Notice nobody chose the cheap beer.  However, 14% more people chose the bargain beer.  This would result in 5% less overall revenue just by adding the third alternative (assuming the same number of customers).  This is not what you want to do as a company.

In the third test they didn’t have the cheap beer but instead included a super-premium beer.  The 33% that originally purchase the bargain brand all moved up in their choices.  Even though only 10% of respondents chose the super-premium, the act of including that choice would increase overall revenue by 15% (again assuming the same number of customers).

Here is your lesson:  Add a higher end product to your portfolio.  This one act increases your revenue.  It increases your  customers’ Willingness to Pay.

Although we haven’t discussed it here, this one act also increases your gross margin because your gross margin as a % should be higher for your more expensive products.

Look around you and you will see good, better, best everywhere.  Apple products come in 3’s.  Sears is well known for good, better, best.  International travel has first class, business class, coach.  How can you make your offering a good better best?  Take heed.  If you need to create a third offering, make it at the high end, not the low end.  You will see an increase in profit.

 

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

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

Photo courtesy of the National Cancer Institute

The Price of Popcorn at Movie Theaters or How To Gouge Your Customers

Why Is Popcorn Expensive at Movie Theaters?

You intuitively know the answer.  You recognize that popcorn is so expensive because once someone buys a ticket to enter the movie theater he or she is captive.  The same is true at theme parks, airports, and anyplace else where, after making one decision, subsequent choices become limited.

The price of popcorn at the movies is a wonderful example of a concept very important in pricing:  Will I? vs. Which one?

When you decide to go to the movies, you probably select the theater that has the movie you want to see at a convenient time.  If you have theaters that charge different prices for tickets you may take that into account.  This is the “Which One?” decision.  You are choosing a movie theater.

Once you enter the theater, you ask yourself, “Am I going to have popcorn today?”  This is the “Will I?” decision.

People tend to be price sensitive when answering “Which One?” and they are less price sensitive answering “Will I?”  This means people are more price sensitive when choosing the movie theater and less price sensitive about their snacks.  This explains the high prices.

The question to you is how can you get your customers to make a “which one?” decision in your favor, and then make even more (and more) money from them in later “will I?” decisions.

Here’s another example.  I recently needed a Thunderbolt cable to connect two apple computers.  I paid $50 for the cable.  What a ripoff.  But I paid it because I needed it and didn’t have a choice.  (Apple recently lowered the price to $40.  Wow.)
What accessories do you sell?  Are your customers locked in to your accessories or not?  I wouldn’t advise gouging them (like Apple) but you can surely make a handsome margin if you can lock in your customers.

Can you sell extended warranties?  Do you have a service plan?  A tax preparer I work with offers “audit insurance.”  Look around your industry and see what others are selling.

Popcorn and thunderbolt cables are expensive because the customers are captive due to a previous decision.  Think hard about this.  You can do something similar.  You just need to find it.

But please don’t gouge your customers.  Remember you want a long term relationship and some day your customers will be making another “Which One?” decision that you would like to win again.

 

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

For more insights on pricing, sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo Credit: Tyello via Compfight cc

New Business Models – The Most Exciting Role for Pricing

Pricing is fun!  We help companies create value, determine how much value they create, and then capture that value.  But there is one thing that stands above, creating new business models.

Many new business models are based on looking at what customers buy vs what companies charge for.  In other words, pricing.

Netflix is a great example.  They built their company on DVDs by mail.  At the time, people went to the video rental store, paying for each rental and most importantly the associated late fees.  People were charged for the rental time.  However, people were buying the entertainment, the ability to watch a movie at home.  Netflix found a different way to charge customers for what they were actually buying and built a business around it.

And Netflix is doing it again.  They are shifting to streaming access to movies.  It isn’t about the DVD or the rental, it’s about the entertainment experience.  Netflix understands this well.

Think about Starbucks.  Many people grab a latte to go on their way to work, and this is perfect.  They are buying coffee, Starbucks is selling coffee.  But what about the Starbucks locations that always seemed to be packed with people working on their computers?  What are those people buying?  Of course they do buy a coffee or something, but that’s not really why they are there.  Can Starbucks charge for that?

Last week NPR published “Rubles for Minutes, Not Mochas, At Russian Cafe Chain“. It’s a chain that gives away the coffee but charges for the time spent.  Interesting concept and a great example of charging for what people are buying.

My guess is a coffee shop in the right location will succeed using a hybrid form, charging for both the coffee and the seating.  They may give away the seat for 30 minutes with the purchase of a coffee and then charge from there.

But this blog isn’t about coffee shops or Netflix.  It’s about business models.  Do you know what your customers really buy from you? Dig down a level or two.  Once you understand what they really buy, can you charge for that?

Software companies have it easy (ahem), in that they don’t sell a physical product.  They are always asking, what do we charge for?  That’s where we see things like perpetual license, annual license, per user, per gigabyte data transfer, per gigabyte storage, and of course freemiums (and many many more).

It’s not always easy for software people to answer the question of what to charge for, but at least they aren’t predisposed to simply charge for the physical product.

Back to you.  What do your customers really buy?  Why do they buy from you?  What can you charge for?  If you come up with something truly unique, you may be able to build a new business model.  You may be able to transform an industry.

Now that’s fun!

 

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

To gain more insights on pricing, sign up for the Pricing Perspective, a free monthly summary of my blogs and other publications.

Photo Credit: veo_ via Compfight cc

Teslas, Warranties and Whiners – More Pricing Lessons

A friend asked for my opinion on this blog – Tesla Model S Service Contract: $600/Year, Or Warranty Voided by David Noland.

David is on the waiting list for a new Tesla and found out the service contract is $600 per year.  Worse yet, if you don’t buy the service contract, you don’t get a warranty.

Where to begin.

First, David spends much of the article estimating the true costs of servicing the vehicle, pointing out it is much less than $600.  Apparently he thinks Tesla should be pricing service contracts on a cost-plus basis.  We’ve mentioned this before, customers think we should use cost plus pricing.  If we don’t, they think we are gouging them.  David gives us an example of this.  Tesla probably wishes David hadn’t pointed out the cost vs. the price.  However, as long as this theme isn’t picked up by lots of media, not that many customers will think this way.  In the end, Tesla can charge whatever their customers are willing to pay.

Second, hooray for Tesla.  It wouldn’t surprise me if we see more high end car companies doing this.  Why?  They are selling complementary products.  Keep the price of the decision product (the Tesla) as low as possible and make profit on the add-ons and accessories.  It’s like paying shipping and handling on an Internet purchase, or buying an HDMI cable for your new DVD player, or baggage fees on airlines.  These high margin add-on purchases are rarely considered by customers when making the initial purchase decisions.

Finally, hooray for David.  He is proactively considering the cost of the add-on, the total cost of ownership.  The cost of the service contract may make him change his mind.  It may not.  Regardless, kudos to him for investigating all the costs so he can make an informed decision.  Also, it’s wonderful that he’s sharing his opinion of it with all of his readers.  This information may change some minds of readers who were struggling to afford a Tesla, but I would bet most Tesla buyers simply grimace and write the $600 check.

Tesla hasn’t responded to David (and why should they?).  It is very possible that they have done extensive analysis on battery failure rates and $600 is a “fair” price.

In the end, companies get to make their own rules on how to sell their products … and for how much.  Consumers get to decide whether or not to buy.  I’m a strong proponent of informed consumers, but not whiners.  On the other hand, if businesses make decisions that cause customers to whine, they are asking for trouble.  What happens if a large portion of the media pick up this story?  Tesla may find this pricing tactic hurts their brand.

Pricing – sometimes, it’s a balancing act.

 

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

photo by jurvetson

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Pricing is … Unintuitive

The other night a colleague from Ireland told me this story about his father. 

Jack managed a small grocery store in Ireland many years ago.  In Ireland, Strawberries and Cream were a popular dish, so Jack would buy strawberries for a Shilling and sell them for 2 Shillings.  (The numbers are made up, but go with the point.)  However, the store was closed on Sundays, so any strawberries that were not sold by Saturday night were thrown out.  And that is what they did.

Then Jack got a new boss.

When the new boss heard of the practice of throwing away unsold strawberries he told Jack to lower the price of strawberries on Saturday afternoon to a shilling.  Jack protested, “we can’t make any money selling them for a shilling, that’s what we bought them for.”  But he did what the new boss ordered.  They sold all of their strawberries by the time the store closed on Saturday, but many of them only at their cost.

As my friend tells the story about his own father, “It wasn’t until Sunday afternoon that he suddenly realized how brilliant this was.”

What makes this brilliant?  Two things:

First, purchasing the strawberries was a sunk cost.  Once the store owned the strawberries, they would either sell them or throw them away.  It is better to sell them at cost, or even below cost, than to trash them.  The choice is some revenue or none.  Pretty obvious when you look at it that way.  Sunk costs (dollars already spent) are never relevant to pricing decisions.

Second, customers who bought the strawberries (at cost) also bought cream.  The store made plenty of money on cream.  Notice that this is an example of pricing a product portfolio with complements.  Pricing aggressively on one product, strawberries, influences the sale of complementary products, cream, at better margins.

If you are a regular reader of this blog, then you probably immediately saw these two points in Jack’s story.  For you experienced pricers, here is your lesson from this story.  Those around you who don’t study pricing probably didn’t get these two points until after they were explained.  The world is full of Jacks.  Not stupid, just not aware of the nuances of pricing.  We are always teaching.

 

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

Sign up for the Pricing Perspective to get a monthly recap of these blogs plus more insights on pricing.

Photo by Darwin Bell

Price Early and Often

There is a saying in Chicago on election day, “Vote early and often.”  Of course voting more than once is illegal.  But the saying is ideal when applied to pricing.

Price Early and Often

Price Early:  develop the right products.  While you’re in the product definition stage you must understand your customers’ willingness to pay (WTP) for your future products.  You should understand the market segments and the pricing segments that you will be serving.

At this early stage you will decide whether or not to move forward at all, and you can also determine what your product portfolio will eventually look like. Knowing your customers’ WTP is critical to optimal decision making, especially during product definitions.  Even if you don’t know their WTP, you surely must state your explicit assumptions.

Price Often: respond to and/or drive the market.  Many companies release a new product at a set price and rarely revisit the price.  This is especially true for companies with thousands of SKUs.  Don’t be one of these companies.

Change happens.  Competitors change prices. Competitors add new products. You add new products. New competitors enter the market. Customer preferences change. New technologies become available. New distribution channels develop.  The world is rapidly changing around you.  Why should your prices remain static?  They shouldn’t.

If you agree, which I hope you do, what are you doing about it?  If you don’t have a person or organization dedicated to making correct price changes, they won’t happen.  Most companies and managers, especially in high tech fields, constantly drive toward the next new product and rarely re-visit the existing products.  You need to appoint/find/hire some people who are responsible for maintaining prices.

Companies create slogans to make sure everyone involved is marching in the same direction.  Feel free to borrow this slogan and make it your own.  I guarantee if you live it, your profits will increase.

Just do it!  Price Early and Often

 

Mark Stiving, Ph.D. – Pricing Expert

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Photo by Nate Hofer

The Bigger Game of Pricing

Most of the time we think about pricing a single product (or service).  When we do it well, we think of value based pricing – how much is the next best alternative and how much more or less value do we offer through differentiation.  Perfect!

Perfect, except that much of the time the pricing game should be much bigger than this.  Grocery stores often charge very low prices for milk, and advertise that low price, to attract shoppers to their store.  This loss leader helps the grocery sell products that have much higher margin.  Notice, when pricing milk the grocery doesn’t use simple value based pricing, because the game is much bigger than just milk.

Selling multiple items to a single customer is very similar to the grocery store.  The goal should be to maximize overall profitability with the customer, not profitability on each item.  You may need to offer deeper discounts than you would like on some items to make your customer happy.  Do it, as long as you are getting significant additional business at prices that make up for your deep discounts.

How about freemiums?  What a horrible pricing strategy on its own.  After all, how do you make money with free?  Well, you make money with free when you think about the bigger game of pricing.  Free attracts attention and trial to help convert to paid.  Of course you knew that, but you probably hadn’t thought of it in terms of pricing.

A second example of the bigger game of pricing is for customers who buy multiple times.  We have discussed in the past how you don’t want to use simple value based pricing on your most loyal customers because if you upset them, and you will, you will lose a lot more revenue than any amount you could have made optimizing the price for each transaction.

This blog usually touts the simplistic mantra – use Value Based Pricing.  Value Based Pricing is fundamental to understanding your customers’ decisions.  But many times to optimize profits you must think of the bigger game.  Ask yourself, what other customer decisions are linked to this one purchase decision?  Here you read about two general situations where other decisions are linked: additional products and future purchases.  You should definitely be thinking of these two.  Can you think of others?

 

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Mark Stiving, Ph.D. – Pricing expert, speaker, author

Photo by briancweed