Archive for the ‘Pricing’ Category

Are you charging your customers enough?

Nearly every executive pays lip service to “shareholder value.” But many of them readily, if unwittingly, make business decisions that run counter to that objective.

Over the long run, no variable correlates more strongly with shareholder value than profit maximization — something that many companies do not prioritize in spirit, let alone in practice.

Instead, they often focus on flavor-of-the-month strategies such as market share growth or product innovation. Believe it or not, these are not always compatible with maximizing profit over the long run.

The problem with focusing on market share is that growth is often achieved at the expense of competitors. “Switchers” are the most difficult customers to attract, frequently requiring discounted pricing or free trials, and are also the most difficult to retain. The result is generally a temporary increase in market share that does not translate into higher revenue or lower operating costs.

While focusing on product innovation is always a good place to start, it too can come up short when it comes to maximizing profit. One major reason is a failure to properly price the products. An introductory price that is too low for too long — usually in hopes of stealing market share — may never produce the return a company is hoping for.

The result is that companies often spin their wheels, leaving profit on the table because they don’t understand the true value of their enhanced product — or feel that their brand does not command the heft required to demand premium pricing for premium quality.

Why does pricing go off the rails?

Our consulting firm recently worked with a company whose stock was under-performing relative to its peers. The company’s solution had been to increase market share through product upgrades. Despite considerable money and effort, however, the strategy failed to build top-line revenue and, as a result, investors were unmoved.

When we performed the postmortem we determined that management put a great deal of care into identifying what customers wanted and how to market the products but put little thought into what to charge. Not only were the prices too low to feasibly provide a return on the organization’s R&D investment, customers failed in lieu of premium pricing to grasp the products’ premium quality.

Setting the right price

It can be a challenge to devise and stick to a pricing strategy that reflects the true value of a product or service without compromising competitiveness. Here are a few tips that can make the task a little easier:

  • Ensure that every stakeholder both understands the primacy of long-term profitability and is aligned around that goal;
  • Recognize that there may be special instances when premium pricing should temporarily take the backseat to marketplace competition;
  • Understand your existing and potential customers’ needs and budget and seek to meet both;
  • Enumerate the ways in which your product or service addresses those needs, using tools such as a customer-value model;
  • Consider if or how you need to differentiate and build your brand to support premium pricing.

For more information on our services and work, please visit the Quanta Consulting Inc., web site.

Pricing lessons from the Rolling Stones

Over the years, the Rolling Stones have shown the world about what rock ‘n’ roll is all about.  Back in May, they looked to prove this again by embarking on a 50thanniversary concert tour.  This time, however, the band discovered that they can’t always get what they want.  For the first time in their history, the Rolling Stones had difficulty selling out venues especially the premium seats.  Their difficulties selling tickets offers valuable pricing lessons for other entertainment, sports and premium-product brands.

Initially, ticket prices included $600 for arena seats up to $2,000 for general admission seating in front of the stage.  Not surprisingly, sales lagged from the outset.  The band had to discount prices to fill their first venue, the Staples Center, and subsequent dates.  For the Stones, the impact was lost revenue, a tarnished image and irate fans who resented others getting the same tickets for a lot less money. Though normally aggressive pricers, the Stones clearly overstepped this time.  No wonder some promoters were having a 19th Nervous Breakdown.

The band’s predicament is one that all premium brands can relate to. It is not uncommon for pricing to occasionally overshoot the perceived value or the customer’s ability and/or willingness to pay. The challenge is how to set or recalibrate your pricing and value proposition in a way that maximizes revenue, doesn’t damage the brand or anger customers who paid full price.

Here are a few successful strategies we’ve employed in the past:

Understand your patron

Given economic and demographic realities, the ability of thousands of fans to pay exorbitant concert ticket prices may be a thing of the past.  The Stones incorrectly assumed their fans would continue to see the same value and pay record prices for 70-year-old rockers performing a 40-year-old music catalogue. A more thorough understanding of their customer needs could have led to more segmented pricing levels, early-bird discounts, smaller venues or more delivered value.

Boost your value

The value of a concert experience is reasonably understood.  You pay high prices and get one or two bands performing in a stadium for two hours. Instead of lowering prices, the Stones could have increased the real and perceived value delivered by providing a free gift with purchase (high perceived value with low actual cost), more product (i.e. longer show) or offering bundles (sell a limited edition t-shirt with premium seats).

Communicating high, experiential value is also critical to maximizing sales. Premium quality goods have sophisticated brand values communicated through packaging, advertising and merchandising.  On the other hand, most musical acts tend to have generic brand values, lacking in authenticity or exclusivity.  To sustain premium pricing, brand managers need to ensure all elements of their marketing mix convey an exceptional brand image.

“Succeeding with premium pricing requires that customers clearly understand how your product is superior to substitutes or competitors,” says pricing expert Claire Johnson, senior vice-president and chief financial officer at CIBC Mellon. “The right price point compensates sellers for delivering a better product while leaving buyers satisfied with the value received — and a willingness to repurchase.”

Sell through other channels

When facing unsold tickets or extremely high demand, many acts and teams will use scalpers to distribute their tickets and protect their image. Acts will use scalpers to sell the best seats (so that fans blame scalpers, not the bands themselves, for inflating prices) or to unload excess inventory (so bands don’t look desperate).  Making this strategy work requires the bands to offer bulk blocks of seats and discounts to scalpers. This tack is analogous to premium brands selling their discounted merchandise at outlet stores.

Selectively, lower prices

Price is an important signal of performance, exclusivity and quality.  Reducing the price like the Stones did, especially through clumsy discounting, may provide a short-term revenue and volume lift but may end up doing long-term damage to the brand.  However, there are times when a price decrease is the right strategic move.  The Stones were publicly accused of gouging their fans.  Cutting the price may end up restoring some brand equity by demonstrating fairness and transparency.

The Rolling Stones invested 50 years of hard work to be crowned the “greatest rock ‘n’ roll band.” It would be a shame if poorly considered pricing decisions ended their run amidst accusations of greed, weak sales and sloppy execution.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

 

Better pricing

The way many firm’s price their products is at odds with their target value proposition, brand image and possibly, financial goals. A recent essay in the Harvard Business Review, Pricing to Create Shared Value outlines a better approach to pricing products and services. Shared-value pricing asks firms to collaborate with their customers to redesign pricing schemes that will increase total value and trust in the brand.  Properly built and implemented, the business benefits are compelling, including: improved customer retention & acquisition, higher customer satisfaction and greater financial returns.

Pricing gone wild

Pricing sends clear messages about what the company thinks of its customers and how it wants to deal with them. While many brand messages say, “We value you as a person,” the pricing practices often say, “We only care about your money.” For many firms, every customer, product and service is seen as an opportunity to be monetized — often in a sneaky fashion. Fee-driven industries like retail banking, airlines and telecom are notorious for ‘slice, dice and price’ approaches that regularly ‘nickel and dime’ consumers with many small charges. Other firms, moreover, go further by exploiting any consumer disadvantage (e.g., lack of information, limited choice, buying complexity) to keep prices unfairly high.

However, times are changing. Both B2C and B2B companies face immediate and serious business risks from ill-advised pricing decisions.  More positively, some forward-thinking managers recognize that they can increase revenues and improve their value proposition by collaborating with their customers to retool their pricing policies and goals.

A new pricing paradigm

With a shared-value approach, the company looks to increase customer value and reduce distrust by redesigning its pricing policies around a customer’s full gamut of needs (versus their own).  For example, managers could engage customers to help create new discount schemes, more flexible ways to purchase a service or lower-risk ways to consume a product. This customer-centric approach will transfer more value to consumers, improve trust in the brand, and drive higher product consumption  (as new users and current customers are attracted to a better value proposition).  In some cases, a shared-value approach can help increase prices.

Bruce Silcoff, president of loyalty solutions company Fairlane Group, is a pioneer in shared-value pricing.  “Successful, long-term, buyer-seller relationships are built on a fundamental commitment to shared goals and objectives,” says Silcoff. “While our competition still relies on disjointed fee-based pricing models to achieve profitability, we have been successful at attracting new business and garnering client loyalty by linking our revenue and profitability with the performance of client programs.”Advertisement

Marco Bertini and John T. Gourville, authors of the Harvard Business Review article, cited the 2012 London Olympic Games as an example of shared-value pricing in action.  In earlier games, pricing policies were regularly criticized for being inflexible, inaccessible and overly expensive.  For 2012, the London Olympic Committee’s (LOC) stated goal was to make the 2012 Olympics “Everybody’s Games,” a mission with a strong and intrinsic requirement for the five core principles of shared-value pricing.

Focus on relationships, not on transactions
Using a single, inflexible price or a complicated pricing scheme is about maximizing a firm’s revenues and operational efficiency, not fostering mutually beneficial customer relationships. The LOC’s approach was to value customers more than their money.  For example, they introduced a ‘pay your age’ pricing scheme and multiple pricing levels to increase affordability and flexibility.  They also sought to gain trust by guaranteeing that higher priced tickets would carry a better viewing experience than tickets costing less money.

Be Proactive
Managers often price in reaction to competitive moves or customer complaints, but rarely based on what matters to the customer (their needs).  To be proactive, the LOC eliminated a major sore point from previous games — the requirement that customers purchase tickets for popular and less popular sports within a bundle.  In its place, the LOC had each sport stand on its own, with its own flexible pricing plan.

Put a premium on flexibility
Inflexible pricing schemes reduce total value by making it difficult for firms to adjust prices in response to changing needs or to better share value with customers who perceive product value and features differently. To provide flexibility, the LOC introduced multiple pricing tiers to better appeal to different needs.  Furthermore, they refused to fix the number of seats in each tier, thereby ensuring they were satisfying actual versus anticipated demand

Promote transparency
Many companies maintain opaque pricing schemes in order to maximize revenue and minimize churn.  Not surprisingly, this often backfires by generating mistrust and churn. The LOC took a completely different approach. In order to better manage expectations, the LOC communicated regularly and fully on ticket availability and pricing, as well as the key features of the ordering process and pricing rationale.

Manage the market’s standards for fairness
A company’s pricing strategy should not be at odds with its customer’s expectations of what is fair.  The LOC went to great lengths to explain to the public (the people who paid for the games) the facts and rationale around pay-your-age pricing and discounts, as well as the percentage of tickets sold at each price band, corporate ticket allocations, etc. To reinforce that there was no preferential treatment, the LOC used a lottery to allocate the tickets.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Are bundles bad for business?

According to conventional wisdom, product bundles are a great way to build customer loyalty, drive revenues and improve your brand image.  With a bundling strategy, consumers who purchase one product are tempted with incentives to buy  another, often complementary product.  The marketing premise – supported by solid evidence in many firms – is that companies can maximize total customer revenue by offering a second product at discount versus selling each product individually. Not surprisingly, bundling has become popular in many B2C and B2B markets ranging from telecommunications to financial services.

Bundle with care

Does bundling’s good reputation hold up to research? No, according to professors Alexander Chernev and Aaron Brough in a recent article in the Harvard Business Review.  Their research found significant problems with bundling. Specifically:

  • Consumers will pay more for a single expensive item, such as a TV, than they will for a combination of that item and a cheaper one, such as a radio.  In their study, people were willing to spend $225 on one piece of luggage and $54 on another when the items were offered separately. However when the bags were offered as a package, people were willing to spend just $165 for both
  • Bundling will have a negative effect on the perceived value of a product when a less expensive item is added as part of a bundle. The research found that when consumers were offered a choice between a gym membership and a home gym, slightly more than half preferred the home gym. But when a fitness DVD was included with the home gym, only about a third chose it.

It’s all in your head

In 5 experiments, real consumers were shown a series of real brand name products—phones, jackets, backpacks, TVs, watches, shoes, luggage, bikes, wine, and sunglasses – varying in price.  Respondents in one group were asked how much they would pay for each item by itself, and those in another group were asked how much they would pay for a bundle combining a high-priced and a low-priced item.

Psychological factors – specifically a process named categorical reasoning – are behind this consumer behavior. People naturally tend to classify products as either expensive or inexpensive.  This categorization influences how they judge products. When an expensive item is bundled with an inexpensive one, people categorize the bundle as less expensive, and this lowers their willingness to pay for it.    

It’s the bundle and price points that matter.  Categorical reasoning does not happen when lower priced products are valued side by side against more expensive products. This effect is only seen only when the two items are considered part of the same offering. Moreover, categorical reasoning does not arise out of differences in the perceived quality of the bundled products. Devaluation can happen when both items are of similar quality and brand image but different price points.

Marketing implications

Bundles aren’t and shouldn’t go away so fast.  However, this research suggests that firms should use them carefully. For example:

  1. Get consumers to focus on non-price attributes like reliability, performance or design.  This will eliminate the price effect since people categorize along just one dimension at a time. The findings show that when customers focus on one of those attributes, they’re much less likely to categorize items in terms of their expensiveness.
  2. Design bundles where each product has similar perceived value, image and price points.

For more information on our products and services, please visit the Quanta Consulting Inc. web site.

Cloud Computing disrupts software pricing

The delivery of software is not the only thing being impacted by the rise of Cloud Computing.   Moving to the Cloud is also disrupting the traditional software pricing model with the potential to dramatically change customer behavior and impact market dynamics. In the future, CC leadership will be as much about getting the pricing model right as it will be about technical excellence.

The ubiquitous cloud

With CC, software applications are delivered as a subscription-based service over the Web much like a utility delivers power over a grid.  This scheme allows a user to purchase only what they need, when they need it, for as long as they need it.  Not surprisingly, customers are embracing this powerful value proposition.  Forrester Research estimates that over 33% of companies now get some of their software delivered as a service.  The market for Cloud-based services is growing over 20% per year.

Next to provisioning, the biggest impact of CC is how software is priced. Fading fast are the days when general-purpose software packages were sold in boxes with a one-time, perpetual software license fee plus expensive maintenance and upgrade charges.   Instead, Cloud-based services are sold through a subscription-based model – customers buy only those applications they need for particular tasks. Not surprisingly, this new paradigm has repercussions on the profitability, revenue and competitive position of every firm that sells digital products. 

Watch your back

According to Saikat Chaudhuri, a Wharton School of Business professor, “The disruption comes when bundles such as Microsoft Office don’t make sense anymore. Instead of big suites, lightweight applications will become the norm.” Today, customers are wary of big software upgrades that carry expensive hardware and operating costs.  Furthermore, they want applications that could be more easily and cheaply ported over to new environments like mobile computing where their users are.

Cloud-based disruption is everywhere.  Google is taking aim at Microsoft’s Office franchise with web-based services.  Cloud providers like Salesforce.com, NetSuite, and SuccessFactors are aiming to poach business customers from SAP and Oracle. Zynga, which publishes popular free games primarily on Facebook, is a threat to traditional game powerhouse Electronic Arts (EA). In this world, dedicated cloud companies with no legacy box revenues have the upper hand as they do not need to worry about cannibalizing their core business. 

If you can’t beat them…

Not surprisingly, traditional software providers are trying to maintain their market position and revenues by launching their own subscription pricing schemes and buying other cloud offerings.  It’s more preferable – though not easy – to cannibalize your own business in a controlled manner than let someone else do it to you.  Pragmatic vendors will also realize that it pays play offense as well as defense. For one thing, subscription-based offerings enable unique business-building opportunities such as the ability to run quick and cost effective product trial and cross sell programs. 

Growing CC penetration could also mean higher industry revenues for some markets.  A few years ago, we did a pricing study for an enterprise software vendor looking to deploy a cloud service in one of their largest product categories.  Management was concerned that total category revenues would fall after the new service was launched.  Our analysis found that adding subscription-based pricing did not lead to a fall in their business.  In fact, it led to modest revenue gains due to increases in lifetime customer value. More importantly, margins improved as a result of lower distribution and customer acquisition costs.

A brave new world

Industry experience suggests that market revenues and profitability will flourish in a CC-intensive world.  According to Wharton Professor Kevin Werbach, business is “…likely to grow, as recurring revenues and micro transactions replace big up-front payments. Look at the Apple App Store…. That represents billions of dollars in revenues for mobile software, which simply didn’t exist before.”  Professor Chaudhuri goes on to add that “As software is broken down into smaller parts, the [lower unit] pricing can stimulate demand.” As an example, the popularity of iTunes’ 99 cent song downloads may have hurt large music labels but not the plethora of independent artists who now enjoy more distribution than ever before.  For the software industry, market profitability will likely remain the same, but more players could share in the rewards.

A CC model also affords many opportunities to leverage pricing innovation.  Similar to an airline or utility, firms could institute variable pricing based on customer demand. For instance, a company could charge more for applications during demand spikes and less in off-peak hours. As in other industries, software vendors will use different models to generate the same profit, if not more, based on lower prices and a broader customer base.

CC represents a seismic shift in the software industry.  While its implications will take a couple of years to fully play out, the impact on pricing strategy and marketing is already being felt today. Pricing leaders take note: the time for strategic thinking and experimentation is nigh.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Revenue strategies for a zero growth world

A ‘new normal’ is hindering the revenue generation plans of many North American firms. This climate is characterized by zero (or negative) market growth, margin compression, and cutthroat global competition. Historically, price increases would be a manager’s number one weapon to drive incremental revenue. In this environment, however, it is extremely difficult to do this and still maintain market share. Moreover, most attempts to drive revenues through new product innovation end up failing. And, most markets continue to experience downward price pressure due to product commoditization and a growing private label segment.

To crack their revenue problem, managers should look to other industries for lessons on what works, as follows:

Go where the profit is

Many companies are discovering that higher margins and profits may lie, not in their delivered product or service, but in ancillary services that consumers need and competitors ignore. For example, Apple quickly figured out that its iTunes music service was easily as profitable, scalable and “sticky” with consumers – to the tune of $1.5B in revenues – as selling MP3 players and computers. Rolls-Royce, a leading jet engine manufacturer, discovered that servicing its engines and providing spare parts delivered higher margins and more predictable revenues than engine sales alone. Services now account for over 50% of Rolls-Royce’s revenues.

Super size your solutions

Managers understand that providing products and services deliver higher revenues than products alone. However, what is different today is the nature of these newfangled solutions. Industries as diverse as professional services, transportation, publishing and retail are creating novel solution bundles that take their businesses in new directions. For example, IBM, UPS and Amazon are leveraging their considerable IT and supply chain capabilities to offer client’s innovative performance enhancement solutions that include services like data analytics, consulting, cloud computing services and logistics management. For providers, these new solutions can improve operating leverage, deliver recurring revenue and increase client stickiness. At the same time, these new solutions are subtly redefining the provider’s mission and business model turning them away from a product-focus to an information and IT-driven businesses.

Monetize your latent assets

Content-based firms are beginning to mine the dormant value of their assets, brands and capabilities. Specifically, media companies are evolving from content producers to content custodians and facilitators. For example, leading publications like Bloomberg and The Economist have begun charging higher fees for their subscriptions and have enacted online pay walls. Importantly, they are also exploiting their extensive content and analytics capabilities to deliver research and knowledge leadership services.

Consider new pricing models

Pricing innovation can be cross-pollinated across many sectors. A variable pricing model – where the price changes in real-time based on demand, time or other factors – already proven in the airline industry can be applied to the hospitality, retail, software and entertainment industries. For the past decade, the big aircraft engine companies, including RR, has been providing engines at no charge but billed on a pay-per-time basis (plus support, of course). More than 80% of RR’s engines are now sold this way. New micro payment models like Zipcar (subscription-based and hourly car rentals from staggered locations) and iTunes (purchase 99 cents songs versus more expensive albums) allow consumers to purchase things in small increments from multiple parties, based on their unique needs. Very often, this model spurs product demand, delivers higher margins and increases revenue per use.

Pricing innovation can significantly impact a company’s business model. For a gaming firm like Microsoft, a change could involve the shift from a single X-box game launch every 1-2 years to a 365-day business, with packaged good launches sustained by frequent updates, downloadable content and extensions into social and mobile platforms.

Raise your prices

Contrary to conventional wisdom, it is possible (and essential with rapidly increasing input costs) to raise prices in low growth environments. However, managers need to be smart about how and where they do it. Opportunities to increase prices often exist in sleepy or price inelastic product categories where the firm faces weak or non-existent competition and channel partners, where their pricing is not aligned (i.e. it is too low) with value delivered or where the switching costs of leaving one supplier for another are high.

Organic revenue growth is very possible if leaders are willing to rethink their business model, better understand their customer’s needs & habits, and refine their product and service offering. All that is needed is curiosity, an analytical approach and courage.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Yes, you can raise prices in a recession

During recessionary times, most companies focus on maintaining market share and margins by slashing prices and cutting costs to the bone.  However, this is a shortsighted strategy for all but a few firms.  For one thing, only a small number of categories can support more than one low cost “value” brand.  Moreover, it is extremely difficult for any firm – outside of those with the largest scale economies – to achieve and sustain a leadership cost position.   As a result, competing on price turns into a Faustian bargain: battle it out with other price cutters (who usually have the same access to technology and supply chain) to keep market share while watching your profitability erode. 

Harvard Business School researchers Frank Cespedes, Benson P. Shapiro, and Elliot Ross suggest another approach, Performance Pricing, which offers companies a way to increase profits and maintain if not grow share. Traditionally, most managers set prices according to simple but crude cost-plus or average pricing policies or merely follow competitive moves. PP is a different strategy.  It sets price levels based on the functional and intangible value delivered by the products. PP uses premium pricing as a signal to the consumer of superior product performance, image and value. As such, PP seeks to maximize both the customer benefit and the selling company’s profitability. 

According to the researchers, PP seeks to create the largest possible gap between the total basket of benefits provided to customers and the unit cost, as a function of  the product’s  benefits, brand image and ability to exploit favorable pricing situations (e.g., time sensitive delivery).   Larger value gaps allow the firm to raise prices without compromising their value equation based on the premise that consumers will gladly pay higher prices for receiving more relevant and compelling benefits.

Fundamental to the notion of providing differential value is “framing” the price appropriately by customer need, purchase moment and type of buyer.  Specifically, a product can and usually does have different value depending on the context, thereby supporting different prices for specific transactions. In other words, the product is what the product does at the moment the customer purchases it, not what the industry or organizational culture thinks it is.  PP also has important implications for investment spending.  Capital and marketing investments would flow only into product and service initiatives that consumers value highly and that they are willing to pay higher prices for. 

PP makes no assumptions about standard pricing levels or industry returns on capital.  Performance-priced brands can deliver price premiums across the business cycle even in unattractive or declining markets.  A number of industries have benefited from this approach – also called value-based pricing – including logistics (Fed Ex), cement (Cemex) and truck manufacturing (PACCAR)

The following are key success factors in deploying a PP strategy: 

  1. Dispense with the notion of “fair” prices or industry-driven pricing.  Companies don’t determine what is fair, customers do and their assessment is based on the total value you bring.
  2. PP requires work.  It is not a simple exercise to understand your product’s value or what, how, when and why consumers buy.
  3. Firms must relentlessly communicate and monitor their delivered value to justify premium pricing.
  4. Don’t ignore costs.  Lower costs enable higher profits and help fund value-building activities.
  5. PP is an organization-wide process.  Bring together the “cost counters” like finance and the “value generators” like marketing so they can truly understand both sides of the equation and what the levers are.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Consumer Spending: The New, Not So Good, Normal

It is not an understatement to say that the current recession has been the worst slowdown since the Great Depression. For the first time in almost 80 years, US per capital spending has fallen two consecutive years.  According to a recent Booz & Co. study, this recession has triggered a seismic shift in consumer needs and spending habits towards value enhancement.  This change will have painful implications for unprepared firms in the consumer goods, retail, entertainment, hospitality and apparel sectors.

This ‘new normal’ will likely persist even after the recovery gains more momentum due to many factors:  high levels of household debt, lower employment and an aging population.  As well, existing trends will continue to encourage frugality including:  higher Web usage (for shopping and research); the growth of private label products and; the rising importance of discount sellers like Walmart and Amazon.

On two different occasions, Booz interviewed 2,000 US consumers across demographic, geographic and socio-economic lines to understand their spending plans, habits and behaviors.  The conclusion?  a wave of frugality is sweeping all demographic groups and segments. Higher levels of belt-tightening were noted among women and lower income groups. Other key findings include:

Consumers are driven more by price considerations – Conspicuous consumption has been replaced by a new value consciousness that dictates trade-offs between product performance, brand image and price. This trade-off is manifested by increased levels of online comparison shopping; trading down to lower-priced private label & value brands and a higher frequency of coupon clipping.

For the majority of consumers, value has become the most important purchase attribute – Right now, value brands are perfectly positioned to exploit consumer frugality.  However, consumers will continue to buy higher price point products as long as those product’s performance and image can clearly justify a price premium versus lower cost alternatives. 

Traditional segmentation strategies may miss new value seekers – Traditionally, retailers and marketers segment consumers primarily by demographics.  However, the study presents a more nuanced view of how consumers could be segmented by value-seeking behavior.  For example, 68% of all consumers reported exhibiting higher price sensitivity and increased  value-centered activities.  These activities include higher online usage (e.g., searching for lowest cost items, purchasing through online discounters) and increased purchases through lower cost offline retail formats.    

Firms can take a number of steps to mitigate revenue risk and build market share:

1.     Continue to drive product and brand differentiation

Negative growth periods often trigger heavy price discounting as firms look to protect market share.  To sustain this, firms usually dial back on differentiation-enhancing plans like advertising and functional upgrades.   This approach is misguided as declining differentiation reduces brand price premiums and harms competitiveness versus private label or low cost alternatives.  Companies must maintain their focus on differentiation by continuing investments in advertising, the customer experience and product performance. 

2.     Improve the value proposition

Decreased consumer spending does not automatically lead to value brand share increases.  Many best practice leaders like P&G, Benckiser and Kelloggs have maintained share in difficult times by improving product performance & convenience, right-sizing formats, and clearly communicating and aligning pricing levels (for consumers and retailers) to product value.

 3.     Optimize the Customer Experience

Look for opportunities to improve value and differentiate along the entire purchase and support spectrum.  Enhancing the customer experience can improve loyalty, foster cross-selling & up-selling and increase customer satisfaction.  Properly executed, customer experience initiatives can also raise operating efficiencies and reduce cycle times.

 4.     Know your consumer better

In order to sustain and communicate value, the ‘new normal’ requires companies to deepen their understanding of consumer’s needs and habits.  To do this, firms could undertake new segmentation strategies based on purchase behavior as well as using advanced qualitative research tools to explore sub-conscious and cultural drivers of behavior.

5.     Maximize opportunities for on and offline distribution

New retail formats like kiosks, co-branded stores as well as fully built out e-commerce platforms are 3 examples of how companies can simultaneously improve product distribution and reduce risk at a lower delivered cost.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Will Anyone Pay for the News Online?

Not too many will, according to a recent UK study published by Oliver & Ohlbaum, a media consultancy.  O & O surveyed British newspaper readers and subscribers about where and how they accessed their news on the Internet. Not surprisingly, Britons are similar to their North American cousins.  They are promiscuous content grazers who do not want to pay for online versions of newspapers they willingly purchase offline.  And why should they?  Readers have enjoyed free and unfettered access to the vast majority of newspaper content for well over a decade. 

However, other findings in the study are more interesting and will challenge the conventional wisdom of most newspaper pundits:

Conventional Wisdom:  People will buy their favourite newspaper and visit its website for the same content plus value-added offering such as videos and blogs 

Finding: People buy one newspaper but usually frequent other newspaper’s online properties.  For example, fans of the Daily Telegraph, Britain’s most popular daily paper, got just 8% of their online news at its web site.  Instead, these readers spent twice as much time at other newspaper web sites.

Finding:  People not only ignore their favourite daily’s web site but they tend to move down market and to other media channels.  For example, Daily Telegraph readers preferred to read online tabloids like the Sun and the Daily Mirror over their own or other similar quality online newspapers.  Conversely, Sun and Daily Mirror readers tended to visit higher quality newspaper web sites more often than their favourite tabloid web sites.  Interestingly, more than twice as many Daily Telegraph readers frequented a non-newspaper online news site, the BBC, than visited the Daily Telegraph web site.

Conventional Wisdom:  Online news aggregators like Google News, Yahoo!News and the Drudge Report are attracting newspaper readers directly away from newspaper web sites.

Finding:  Most people continue to visit directly their preferred newspaper web site versus going through an aggregator.  It appears that most readers do not understand or value enough the convenience of an aggregator and prefer to search for news themselves.

Conventional Wisdom:  Coordinated attempts by newspapers to charge for their content may be their best hope to finally create a profitable online subscription or content access model.

Finding:  People will strongly resist paying even if all newspapers begin charging for online content.  For example, when Guardian readers were asked to pay £2 per month to read their favourite newspaper online, only 26% said yes.  However, when the same people were asked the same question under a scenario where all equivalent newspapers charged for content, only 16% expressed a willingness to pay for their Guardian.  On the surface, this is a surprising result given that one would have expected the proportion willing to pay for their preferred paper to rise in a level-playing field.  Apparently, readers have gotten so used to getting their news for free “when needed, as needed” that they will strongly resist attempts by one or all newspapers to change the industry access paradigm.

North American newspaper executives should hesitate before jumping to conclusions from this study.   North American readers are not the same as UK ones, industry dynamics vary by market and the questions and scenarios were hypothetical. However, these findings do challenge the existing industry orthodoxy and should be considered.  However, newspaper owners should tread carefully with major access changes and think creatively about how they can modify a reader’s ingrained behaviours.

For more information on services and work, please visit the Quanta Consulting Inc. web site.

Microsoft: What’s in Store for their Company Store?

Microsoft, following other major brands like Apple, Nike and Ralph Lauren recently launched their first company store in Phoenix Arizona to showcase their latest Xbox, PCs and Zunes.  The Microsoft move is widely seen as a bit of catch-up with rival Apple, which at the end of 2008 operated some 247 retail stores around the world. Considering Microsoft’s product dominance, what took them so long to get into retail?

There are many good reasons for manufacturers to display its wares within their own retail environment. For example, a company can create the best merchandising and brand experience for their products and services. As well, companies can use retail space to build a footprint in underdeveloped markets or learn more about their consumers.  Despite these benefits and Apple’s trailblazing, Microsoft may have delayed retail expansion out of concern for triggering major channel conflicts with its retailers (or, cynically, to cope with an onslaught of walk-in users with buggy software). 

On the other hand, perhaps Microsoft uncovered what a Wharton School of Business and INSEAD study recently concluded.   Namely, that operating company stores in the same market as your retail channel does not saturate markets, create inefficiencies or promote channel conflict.  In fact, the opposite is the case:  the rising tide of a company store lifts all retail boats.

The researchers used a series of mathematical models to simulate and analyze the marketing and price-setting behaviors of independent and manufacturer-owned retailers.  The model showed that when company stores and independent retailers compete in the same market, manufacturers typically set relatively high prices for goods in their own stores. Higher price points creates room for independents to reduce discounting (versus when company stores aren’t present) thereby improving their margins. Additionally, the presence of company stores can induce independents to increase their marketing efforts resulting in greater support for the manufacturer’s brand and overall brand sales in the market.

Given these conclusions, do company stores end up putting the manufacturer brands at a disadvantage?  Not according to the research.  Independent retailers end up charging more for a given product when competing against a company store than they would if competing only against other independents. Having higher pricing is crucial for the manufacturer to preempt channel conflict and to support its premium brand positioning.  Furthermore, the research shows that independent retailers will undertake greater marketing effort when competing against a company store since they can benefit from significant “effort spillover” from the manufacturer’s store – the phenomenon of one retailer’s marketing and product education efforts helping to create a sale for another.

As for Microsoft, the question remains whether their stores will mirror the success of Apple or the failure of Gateway, a computer company that gave retail a try during the 1990s and closed its 188 retail shops in 2004.  A major reason for Gateway’s failure was its inability to create any in-store or brand sizzle for their discount PCs-in-the-box.  Microsoft’s first store is not lacking in “experiential” impact but many things can still go wrong.

Microsoft rarely undertakes an initiative without considerable research and investment.  Look for them to make an impressive retail debut, although achieving Apple or Nike standards may require a 2.0 launch.

For more information on services and work please visit our web site.