Why you shouldn’t use your competitor’s pricing as your benchmark?

This is a guest post by Grishma Govani. Grishma builds and grows communities at early stage startups. She focuses on growth and customer retention by way of word of mouth, analytics and user behavior. You can find her on twitter as  @StrangeLoops


As entrepreneurs, most of us have studied our competitors thoroughly at least twice: once before we start building a product and once before we set our pricing. Before we start building a product, we gauge the market by understanding what products our competitors are selling, where they are lacking and what their customers are unsatisfied with. When it comes to pricing, most of the time, we wait until we are almost ready to ship our MVP.  At this stage, we tend to price our products proportional to the amount of value we are adding over our competitors.

For example, if we believe our customers will save time by using our product over our competitors, we will calculate how much time we are saving our customers. We will also try and understand how much that extra time is worth to our customers. The more time our customers save, the more value our product creates leading to a higher price point.

 The problem with this pricing method is it is a very short-sighted strategy. By using our competitor’s price as our benchmark, we will completely miss seeing all the new ways our product can possibly provide value to our customers. The portable bar code reader was one such product. The company that first made them used their competitors as benchmark to price the reader. They priced their product proportionally to the amount of time they were saving customers over their competitors. But they missed understanding how else they were adding value to their customers by completely allowing them to redesign their supply chain and logistics. Comparison pricing led them to undervalue one of the most innovative products in the market.

One effective way to address undervalued pricing is to get a full picture of where you plan on adding value even before you start building the product. You can start by mapping your customer’s minimum expectations and your competitor’s performance on the following three scales – product performance, operation/cost excellence (price) and service/community as shown in Dr. Barbara Kahn’s chart below for leadership strategies.

strat_lead

Based on this map, you can design a product strategy to add superior value on one of the three scales where customer’s expectations are high but are not being met. You, also, need to make sure your product is good enough on the other two scales too. This will form your hypothesis for a market strategy which you can then validate.

Evaluating your product along these three scales is a great way to understand value pricing while you solve actual problems your customers will pay a premium for.

Further Reading:

Read how a very innovative portable scanner completely missed the boat on pricing when they only looked at their competitors’ prices. Also, it gives an in depth look at how to develop your pricing. (http://www.mckinsey.com/insights/marketing_sales/pricing_new_products)

Here is a good article on why entrepreneurs are bad at finding competitors and tips on how to find your competitors. (http://www.berserkia.com/blog/doing-a-competitive-analysis)

Marketing, Pricing and Value: a Black Friday Story

This is a guest post by Gerado A Dada, an excellent data driven business leader I met through my blog. Gerardo has been at the center of the web, mobile, social and cloud revolutions across more than 15 years of driving business strategy and product marketing for leading technology companies including Rackspace, Bazaarvoice and Microsoft. Gerardo is the author of the blog www.theAdaptiveMarketer.com and is on twitter at @gerardodada.

Have you written your guest post yet?


 

Line at UGG Factory Store (1)Like most people in the US, during Black Friday week my inbox received an onslaught of promotional emails from every company I have done business with. All of them, without exception were promoting sales and discounts.

“When a marketer’s creativity runs out he defaults back to price discounts. “ (link: http://wp.me/pkYTD-6h). Creating a promotion or a sale is the default way to generate sales in the short term. Even though we know, deep down, that short term discounts erode value and train customers to expect discounts as JC Penney learned the hard way (link: http://www.fool.com/investing/general/2013/04/09/3-reasons-jc-penney-is-living-on-borrowed-time.aspx )

It was Black Friday and we decided to stop by the Factory Outlet in San Marcos – my daughter had an eye on a pair of UGG Boots that I was hoping to get at a good price. This is what I found:

(picture with a line of shoppers outside the store)

It was not that surprising to find a line outside a popular store, especially on Black Friday, but there were a couple facts that made this experience interesting for me as a student of marketing and consumer behavior:

UGG Australia was not offering any significant discounts. Many models were being sold at list price. A few had a small discount. I did not see any pair of boots being sold for under $175. A few feet away, a store had a big sign promoting 60% + an additional 30% discount on everything. You could get a high quality pair of booth for about $50. The other stores with long lines were Coach and Michael Kors.

These are my observations in relation to the experience:

  • Customers buy based on emotions. How can you explain customers lining up to pay over $450 for a bag made of PVC plastic? (optional picture) – by the way this product was backordered at the time I am writing this post.

  • The value of the product is not in its specifications, quality of the materials, features or benefits. The value is in how it makes customers feel. When you wear UGG boots and a MK bag, you feel like you belong, you feel fashionable, you feel successful. The product is the experience.

  • It’s not the price, or the discount, but the feeling that you are getting a good deal that counts. The shoppers in line felt good, even if they really did not get a good deal. The end price was not as relevant as the feeling that they were getting a good deal. After all, who likes paying list price?

  • Even premium brands need to provide the feeling of offering a good deal. It does not have to be a discount, though: sometimes free shipping, personalization or an accessory could do the trick.

  • All the talk about brands going away? Nonsense. Brands are, and will continue to be, extremely valuable. You can probably get a handbag of similar quality and similar design for 1/10th of the price at Target, yet customers happily stand in line and fork out their hard-earned cash for a brand.

My call to action to you: before you start you next price promotion, think about how you can build a brand, an experience, that makes customers feel great, and makes them happy to spend more money with you.


For marketing and de-marketing the first step is?

We have discussed enough about Greek yogurts, Coffee , Dry bar and Software. We even talked about Cronut. All those were cases of marketing. Now take a look at the following cases,

  1. A public school principal trying to keep a right “customer” mix in his school
  2. Public health officials trying to protect teen girls from skin cancer
  3. Conservationists trying to protect poor rhinos from being slaughtered for their horns

These cases are not that different from selling software or $40 blow dry. Instead of demand generation you are trying demand reduction.

The school principal does not want customers with expectations the curriculum cannot meet or those who won’t play a role in school’s growth.

The health officials are trying to teach the teen girls about detrimental side effects.

The conservationists are trying to eliminate the black market for rhino horns.

These three are doing de-marketing, trying demand reduction. And where does one start for de-marketing? The same place where one starts for marketing – customer segments and the job they are hiring the product for.

As The Economist writes about Rhino horn de-marketing,

The first step in “un-marketing” rhino horn is simple: find out who your buyers are and why they like the product. TRAFFIC, an organisation that monitors the illegal wildlife trade, has just conducted a survey to identify the most important buyers of rhino horn.

And the customer job  turns out to be,

It turns out that it is a luxury purchase by rich men in Vietnam: professional businessmen, celebrities and government officials.

In Vietnam horn is often bought for the sole purpose of being gifted to family, colleagues or people in authority. Buyers think that it affirms their social status—and that it is good for their health. They believe it possesses properties that detoxify the body and can therefore cure anything from a hangover to serious illness.

In business meetings, and other gatherings, rhino horn is sometimes ground to a powder, mixed with water and drunk. Rhino horn is made of keratin, like fingernails. Yummy!

How do they effectively do de-marketing?  In marketing one makes product pivots and positioning to make it the most suitable candidate for the customer job to be done. In de-marketing one does product pivots and positioning to make it the most unsuited product for the customer job to be done.

In case of rhino horns,

So how do you turn successful, well-educated men against a luxury good that conveys wealth and well-being?

Yet a better strategy may be to spread fear, uncertainty and doubt about the product. One idea being suggested is to inject rhino horn with poison that could make those that consume it seriously ill.

Anyone want to grind up and drink poisoned rhino horn?

Now if we can take this to saving sharks from connoisseurs or shark fin soup.

As Coroner I Must Aver …

A lot of people most likely do not understand what a coroner does.  I did not. For instance did you know that

  1. Coroners do not need medical degrees or understand pathology?
  2. Coroners do not need any training – medical or otherwise?
  3. Coroners do not perform autopsies?
  4. Coroners are appointed or elected by voters?
  5. To get the job they only need to be of legal age and have no felony convictions?

An year long investigative report by NPR goes into the details of the history and job of coroners and tells us what this job is about.

Once a person meets the basic age and criminal record …

“Basically, to be a coroner, you just have to be publicly popular. I guess it’s more of a popularity contest. Then you learn the job as you go.”

Actually there is no need to learn anything as well. They just need to pronounce people dead sign death certificates.

There are coroners everywhere you look in the management, marketing and social media world. They go by the name Gurus, Marketing ninjas and social media mavens  etc.  Just like a coroner these Gurus

  1. Don’t need any formal education
  2. Don’t need any training
  3. Don’t  have to run a business, met a payroll, struggled with product slips, market changes or internal IT systems
  4. Don’t need to look at a business anymore than what they see in newspapers  or their single visit to pronounce it dead (or alive)
  5. Don’t have to collect data, analyze or get second opinion
  6. Don’t need any basis in facts to pronounce you have reptilian brain, you are left brained, you need naps to kindle creativity, you get your best ideas in shower etc.
  7. They just need to be popular with enough people as followers who suspended their own curiosity and willingness to look for contradicting evidence

For all these factors the Gurus are just like coroners.

I see one difference though. I think coroners will get in trouble for pronouncing live people dead or dead people alive. On the other hand the coroners of management world, the Gurus, have no such worries. No one is going to call them out on their remarkable proclamations.

As coroner I must ever,

Blockbuster is not only merely dead but most sincerely dead!

How to fix your wrong 1.0 pricing?

fitbit-flexfitbit-forceFitbit, the San Francisco based maker of wearable fitness devices, recently announced a new device Fitbit Force. This new product launch comes less than six months since the release of their last device, Fitbit Flex. When you look at the two devices side by side they do look almost identical  with some feature additions.

The Force, as you can see, adds a display that gives more descriptive metrics than just four LEDs progress bar in Flex. Internally it also adds features like stairs counting.  It is still a product evolution. Yet, instead of choosing to call their new version as Flex 2.0 they chose to introduce a new brand, Force.   To give an analogy it is like Apple deciding to call iPhone 5s as  iPhone Force or some such name.

The answer to why they chose to introduce a new brand for a product evolution lies in how they chose to price Force. Fitbit Flex, when launched in May, was priced at $100. Force is priced at $130, a price realization of additional $30.  Surely you do not believe their marginal cost to add the tiny display or the altimeter is  $30 do you?

After  Fitbit launched Flex at $99, it is highly likely they realized that  a device someone sports on their wrist is lot more about image than about pure fitness. That is, in a basket of reasons why customers buy a product the hedonistic reasons outnumber and outweigh the utilitarian reasons. And hedonistic reasons carry higher willingness to pay over utilitarian ones (just look at the luxury market).

Another aspect is the profile of customer segment. Those who buy a fitness band to proudly display on their wrist are less cost conscious, have higher willingess to pay and have higher disposable income (wherewithal to pay).  So with $100 pricing, Fitbit was leaving too much money on the table by not capturing more consumer surplus.

They needed to fix this initial pricing mistake. And introducing 2.0 version was not going to do it because of previous reference price and its inability to properly serve the hedonistic aspect. Besides they would have to drop the price of Flex below $100 or discontinue it.

So they took a trusted play out of the pricing playbook – Shift the product category, which you can do by deliberate product positioning or by branding. With new brand, Force, they are telling their customers that this is a new category. More importantly their customers just want a reason to give more of their consumer surplus and this new brand gives them that reason.

Previously I wrote about this category shift in moving from free to fee. The same rules apply in fixing your past low price  mistake and getting price realization. It is a new device. It is a new brand. It is a new category. It breaks the comparison and helps them set a new higher price. It gives their customer a reason they are looking for to pay the new price.

Fitbit Force also took another additional step that results in better price realization. Flex ships with two bands for different wrist sizes. That was additional marginal cost with no profit driver. Force switched to one model one size, saving cost of extra band.  Don’t add a cost  component that does not serve a value driver.

Overall good moves by Fitbit. Not great, as I still believe there is more to be gained with even better price realization because wearable fitness devices are extreme form of hedonistic consumptions, they are conspicuous consumptions.

Can you think of another marketer who recently fixed their pricing using branding and category shift?  Amazon’s KIndle Fire HDX. Think about why they branded the new HDX thusly and its $229 price tag.

How do you fix your past pricing sins?

Your Mileage May Vary – Going Grubhub?

Does adding Grubhub to your restaurant channel mix help or hurt?

If the answer is anything other than, “I don’t know. Let us start with customers, business objectives and alternatives”,  it is wrong. There is one such categorical answer in recent Bloomberg Businessweek article.

The article quotes one case study, a restaurant that used to hire Seamless (now acquired by Grubhub) as sales channel found its margins go up despite smaller sales.

On its first night without Seamless (Aug. 16, a Saturday), Muñoz says Luz took $669 worth of delivery orders. That’s down about 16 percent from the $800 in orders the restaurant typically received on Saturday nights when using Seamless and GrubHub, another online delivery service that recently merged with Seamless. Instead of losing 14 percent of the total to commissions, though, Luz paid only $16 for credit card processing and other ordering-related fees, meaning the restaurant netted $653—just 4 percent off the $680 it would have made with the help of Seamless and GrubHub.

They use the word margin to refer to net amount they get to keep after transaction and channel charges.  Sites like Seamless and Grubhub create value by bringing in sales that restaurants would not have realized through other channels. They get their share of that value created by charging 10-14% commission.

As I wrote before, restaurants should be happy to pay this as long as they are making profit on each GrubHub transaction and it is new sale they would not have had otherwise.

Let us take this specific case of Luz restaurant. It appears from the numbers they have the wherewithal to generate $669 (average?) sales through their own gumption. What Seamless did for them is simply redirect $669 through its website and only added $131 worth of new sales.

If that is the case it does not make sense for the restaurant to pay 14% on $669 – sales they would have had without any help from Seamless.    Given these numbers it appears Seamless share is $112 from a mere $131 worth of sales.  The restaurant should have done this math before signing up for Seamless or explored its sales channel alternatives.

On the other hand if a restaurant has $200 in takeout revenue and Seamless increased it to $800. Then at 14% commission, Seamless share of value is $112 from $600 new sales they created. A far better number for some restaurants.

The answer for your restaurant is not a simple yes or not based on the extreme stories you see but starting with your customers, business objectives and channel economics. Do not rush to sign up or ignore Grubhub based on popular news stories.

Here is a much bigger question that even large enterprises grapple with – compensating sales team on repeat revenue.  It makes perfect sense to compensate the sales channel for acquiring new sales. But once you got that customer, aren’t they your customers? Should the sales channel be compensated for repeat revenue from the same customer? Especially at the same 14% level?