Archive for the ‘pricing’ Category

Combat consumers’ price sensitivity with smart pricing strategies

Monday, May 17th, 2010

When recession hits, pricers seem to grab onto a couple of tools: how soon to discount, and how much? It seems more risky to use other pricing approaches in bad times than in good, but, as authors Marco Bertini and Luc Wathieu point out in the May Harvard Business Review (”How To Stop Customers From Fixating On Price“), smart pricing strategies can also serve to remind customers about things other than a product’s… well, price.

Bertini (London Business School) and Wathieu (European School of Management and Technology) identify four ways pricing can get customers thinking about a product’s distinctiveness:

1) Structure – pricing based on value delivered rather than on traditional (e.g., feature-based) attributes can help customers rationalize cost by tying it to a particular benefit. Example: Goodyear charging higher prices for tires with longer lifespans.

2) Pricing high (but not too high) - if a product has some inherent advantage, a premium price can reinforce the product’s distinctive image. (This fits Apple’s pricing strategy to a T.) Bertini and Wathieu found that, for example, pricing organic produce at 50-80% above standard competition aided recall and raised intent to purchase. (A low premium had little effect, and, sadly for skim-pricers everywhere, so did a very large premium.)

3) Partitioning – If a product includes a number of different benefits, it may make sense to charge individually for those benefits in order to make them stand out. Write Bertini and Wathieu, “people are unlikely to factor a benefit into their choice unless an explicit charge is made for it.” They also agree that this strategy can be taken too far, as in the recent, nearly complete unbundling of the humble airline ticket, in which separate charges for restroom use are being seriously considered.

4) Equalizing price points – companies often charge different prices for similar items (for example, in Pennsylvania, milk prices go up with fat content – kind of counterintuitive, isn’t it?). Recall the record labels’ ultimately successful battle with Apple to have some iTunes selections priced at $1.29 versus $0.99. The authors state that removing the small pricing distinctions between similar goods can increase consumption overall, by simplifying the consumer’s job at the point of purchase.

iPhone data price complaints off base

Thursday, July 10th, 2008

Now I’m not a fan of megalithic wireless operators. But the criticism of AT&T’s pricing plan for the new iPhone 3G, especially the monthly cost for unlimited data, is missing the point.

The complaint, lodged by Walt Mossberg and others, goes something like this: “Yes, the new iPhone costs $200 less, but the unlimited data package costs $10 more per month. So after a contract of two years, you’ll be out $40 compared to the first iPhone.”

But the point is this. We are talking about the iPhone 3G. Its data rates are about three times faster than the old 2.5G EDGE technology on the first iPhone, according to Mossberg’s tests.

Which means, minute-by-minute, you’ll be getting more data (and thereby more value) from the iPhone 3G.

But there’s more. When available bandwidth jumps, people use far more of the service. New applications become possible. Video, for example, is much more reasonable at 400kbps than at 56kps.

So perhaps the comment should be, “For pretty much the same total cost as the old phone, you get a new phone with three times the power and 10-15 times the application utility. Why not stop by an Apple store and pick one up?”

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M&T Bank – piling on the fees, it’s a company easy to hate

Wednesday, June 25th, 2008

A funny thing happened to me at the end of April. While I was on a business trip, our personal checking account with M&T Bank dipped below zero. I didn’t get back from the trip till late Friday, then the weekend came. At any rate I didn’t find out about the problem till Monday, when I checked the balance on line.

During the time we were below zero, Ten checks and auto withdrawals came in, totalling about $500. On my online statement were ten insufficient funds notifications (NSFs). The first charge was $18. The second through tenth NSFs were $32.

Each.

[I have a business account with Graystone Bank. When this same situation happened a few months ago, they called me immediately and alerted me that I didn't have enough in the account to cover a check that had come in. They offered to hold the check till I made a deposit. Which I did. That day. No NSF fee, and my undying gratitude.]

As soon as I learned that our M&T account had dipped below zero, I rushed to the bank with a check. I told the teller my situation, and she saw that it was a very unusual case for us. I asked if they ever forgive NSFs for customer goodwill purposes. She said I had to call the manager of the branch where I opened the account in order to discuss any credits.

It took me a while to think about which branch we opened the account at, since we have been customers of M&T for almost eight years and have visited many local branches in that time.

When I finally remembered which branch, I called and spoke to the manager. He told me company policy is to forgive the first NSF. The others would stay. I told him how displeased I was with this, especially since M&T hadn’t bothered to give me any notification of the low balance (as Graystone had) so I could have made the deposit before more checks came in.

The manager said: we are a big company, and that is the policy.

Here’s how that response sounded in my ears: “F— you. Go somewhere else if you don’t like it.”

This episode reminded me of the great article in the June 2007 Harvard Business Review: “Companies and the Customers Who Hate Them,” by Gail McGovern and Youngme Moon of Harvard Business School. The article begins:

One of the most influential propositions in marketing is that customer satisfaction begets loyalty, and loyalty begets profits. Why, then, do so many companies infuriate their customers by finding them with contracts, bleeding them with fees, confounding them with fine print, and otherwise penalizing them for their business? Because, unfortunately, it pays.

Regarding my experience with M&T, here’s a most salient excerpt:

Companies can also profit from customers’ bad decisions by overrelying on penalties and fees. Such charges may have been conceived as a way to deter undesirable customer behavior and offset the costs that businesses incur as a result of that behavior. Penalties for bouncing a check, for example, were originally designed to discourage banking customer from spending more than they had and to recoup adminstrative costs. The practice was thus fair to company and customer alike. But many firms have discovered just how profitable penalties can be; as a result, they have an incentive to encourage customers to incur them – or, at least, not to discourage them from doing so.

Which is my perspective in a nutshell. Shame on you, M&T. You have earned the hate of at least one customer.

Related posts:
Companies that profit from customers’ mistakes–watch out
Things customers hate companies for

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Shop Talk Podcast #11 – (not) raising prices: a mistake

Tuesday, June 17th, 2008

From The Mistake Bank:
The following story discusses how something as well-meaning as holding off on price increases until there’s no other option often backfires.

Click (Not) Raising Prices – a mistake to access the podcast.

Related Posts:
Business as usual costs you money
The sneaky price increase

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US third broadband option an elusive goal

Tuesday, May 20th, 2008

Earthlink’s withdrawal from the municipal WiFi business, leaving the future of networks in Philadelphia and other cities uncertain at best, and similar news from MetroFi, has closed a chapter in the search for alternatives to the phone company and the cable company for a third broadband competitor.

Third-tier cities and rural areas are most affected. When the cables and telcos are offering higher-speed services (like Verizon’s FiOS), they are doing so in the major metro areas. So it’s not surprising that cities themselves are getting, perhaps reluctantly, into the broadband business. The efforts of Chattanooga, Tennessee, to build out a municipal fiber network, are profiled in a recent article in the Wall Street Journal.

While covering US broadband problems profiled before in this blog, like lower coverage, high prices and relatively low speeds compared to other countries, the WSJ article usefully shows the impact on customers, especially business customers, of poor broadband availability and performance:

In a converted saddle factory here, Jonathan Bragdon, 38 years old, runs a 40-person company that he says couldn’t exist without a lot of affordable Internet bandwidth. Seven of his employees live and work in other cities, including New York and Leeds, England. His business, called Tricycle Inc., transmits high-resolution 3-D simulations of carpeting to interior designers.

More important than download speed for such work is upload speed. Yet, on most connections it often takes longer to upload files to the Internet than it does to download them from the Internet. With Comcast, Mr. Bragdon was getting a download speed of eight megabits a second, but an upload speed of only one megabit a second.

About two years ago, Tricycle switched to the EPB’s fiber network. Mr. Bragdon says that lowered his costs several-fold and gave him the flexibility to upgrade to speeds as fast as 100 megabits a second. “With the rivers and the mountains, young people want to live here,” says Mr. Bragdon. “But you need good bandwidth to work here.”

Let’s hope businesspeople like Mr. Bragdon can get the bandwidth they need, from whatever provider. And if the cables or the telcos won’t provide it everywhere it’s needed, perhaps the municipalities will have to.

Related Posts:
US broadband prices vs. the rest of the world: nothing has changed
US consumers need a third broadband option

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Sign ‘o’ the times

Wednesday, May 7th, 2008


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Free, unsolicited product management advice for Verizon Wireless

Thursday, April 3rd, 2008

As I mentioned yesterday, I am using EV-DO to connect to the internet here in Vegas for CTIA. It’s more economical and reliable than the hotels’ and convention center’s WiFi hotspots. What I didn’t say is that the way I contract for this service is convoluted and actually, on my analysis, loses money for Verizon. Details to follow.

It’s got me feeling a bit guilty, so I would like to offer them some free advice. If they implement my ideas and wish to share perhaps 10% of their incremental profits on the change, I’d be happy to accept. [VZW, you can email me at inquiry (at) caddellinsightgroup (dot) com for my PayPal info.]

Here’s the situation with EV-DO. I have a Blackberry, using a 10MB per month plan costing $24.95 per month on top of my voice subscription. This is fine for emailing and web browsing through the Blackberry, but not enough to support what I’m doing this week–blogging, video uploading, etc.

For that application, VZW requires I buy unlimited data access for $49.95 per month, and on top of that buy tethered modem service (that allows me to use the Bberry as a modem for my computer) for an additional $15 per month.

As a result, it would cost me $39.95 extra per month to subscribe to this EV-DO service. Except for the fact that I need it for perhaps 15 days per year. The rest of the time, cheap or free WiFi hotspots do the job. So I can’t justify an ongoing subscription for this service.

But here’s the thing: VZW allows me to sign up for the service, then, when I don’t need it anymore, I call them back to cancel. The billing is ugly and almost incomprehensible, but at the end of the day I only get billed for the days I use EV-DO, at the rate of about $1.33 per day. A bargain for me.

But not for VZW. Here’s a litany of costs they incur, each time I set up the service:

Calls to tech support: 2 @ $10 (one call to activate, one call to deactivate)
Letters informing me of a change in service: 2 @ $2.50
Incremental billing costs for changes, prorates, etc.: unknown

Total: at least $25

For this trip, I will use the service for four days. Meaning VZW will get incremental revenue of $5.33, but spend $25, for a marginal contribution margin of ($19.67). Ugh.

Here’s my idea. VZW should offer a daily plan. [Virtually every other wireless ISP offers such a plan.] I would pay $5 per day for that plan. Have the signup be online rather than through tech support, meaning the incremental cost should be near zero. Have me sign up for exactly the number of days I need, and have deactivation be done automatically by the ordering system.

Related post: “Worst Practices in Product Management

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A salesperson’s lesson on growth

Friday, November 16th, 2007

A number of years ago, I was in an internal training class with some of my colleagues. One guy in particular was a salesperson I had always thought of as being a bit shallow. Anyway, during a break in the class, I got into a discussion with him about the effect of Home Depot and moving commercial development out of city centers, putting Mom and Pop hardware stores out of business. And in the discussion he was, to my surprise, against a lot of that development. I was saying, you know, wasn’t it a good thing that due to these superstores things could be cheaper and that people could buy more things? And I remember him saying in response: why do things need to be cheap, why do we need more things?

It really shocked me, because my assessment of him was way wrong. I had definitely not pegged him to be such a thoughtful person. I’ve remembered those words for more than 10 years and as I reflect on it now, his response and his thinking had a lot of the Buddhist in them.

Voice-to-Screen messaging – powered by SpinVox

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Worst Practices In Product Management

Friday, September 21st, 2007

I had a call with Verizon Wireless yesterday afternoon that went something like this:

Me:

“I got a Blackberry recently and I was trying to use it as a wireless modem for my laptop and I’m having trouble.”

Tech Support:

“Let’s try some things.”

…time passes. We try lots of things. Problem persists…

Tech Support:

“I checked and I found out that you need to activate a feature to enable you to use the Blackberry as a modem. The feature costs $15 per month.”

Me:

“What? I am already paying for data access, by the megabyte. Modem support costs $15 more?”

Tech Support:

“Yes, I’m sorry. Would you like to speak to Customer Service?”

…on hold for a while…

Customer Service:

“Yes, sir, that feature is $15 per month.”

me:

“How come that wasn’t clear when I signed up for the Blackberry service? Plus, I’m already paying you $150 a month.”

Customer Service:

“I’m sorry, that’s the only way we sell it… think of it this way: It’s only $0.50 per day.”

me:

“But I only need it occasionally. I can’t justify paying $15 per month for occasional use.”

Customer Service:

“This might solve your problem. You can activate it when you need it, then deactivate it when you’re done. You’d only pay for the days you use in that case.”

me:

“I have to call once to activate, then again to turn it off? Every time I want to use it? Why don’t you have a daily access?”

Customer Service:

“That’s the only way you can do it.”

me:

“I might try that, but it’s unfortunate that you don’t have a plan that helps the occasional user, like me. And I don’t like having to pay $15 or even $0.50 per day for something that should have been included with the data feature I already bought.”

Customer Service:

“I’m sorry. Can I help you with anything else today?”

* * *

So: no resolution. Tech Support and Customer Service were fine, creative, even approaching that state of bending the rules to satisfy a customer. (Installing rigid processes that force this kind of behavior is a worst practice depicted nicely in a recent post by Dave Snowden.)

It’s Product Management I have the problem with. First of all, an additional fee for my laptop to use megabytes I’m already paying for is bad. (It’s done so that people who pay $60 per month to use the Verizon PCMCIA card in their laptop won’t feel that they’re getting ripped off–even though they already do.)

Second of all, not having an occasional-use plan and forcing me, the customer, to do work to synthesize this plan (call to activate, call to deactivate, every time I need the service) is also bad.

Finally, I am a $150 per month wireless customer. (VZW’s ARPU is around $50.) I’m a Verizon VIP. Yet there’s no accomodation built into the product for my kind of customer.

It’s just poor packaging all around. And it needs to be fixed. This is one of the reasons mobile phone customers hate their suppliers.

Aaargh.

Friday Haiku #1 – Apple’s Product Announcement

Friday, September 7th, 2007

Two hundred dollars
Off the price of an iPhone.
Early buyers steamed.