The Pricing Story You Likely Did Not Read About

You likely read the many opinions about Netflix pricing. This isn’t about that. This is about something boring, something you do not think about much (even though your safety depends on it) and something you buy only every five years or so.  It is highly utilitarian consumption but does have hedonistic and conspicuous aspects to it.

Tires!

Specifically Goodyear’s tire pricing case study. I am not breaking news for you, it was in the news. Most of you likely missed it. It is not about Goodyear using Customer engagement, Co-creation, Business Model Innovation, Social Media, Gamification, Product Innovation, Superior Design,Decoy pricing, Viral campaign etc. So none of the Gurus wrote their opinion on it.

The story has none of the popular components to it. It is very dull. It is just a story about how Goodyear  relied on first principles of strategic marketing to increase revenue and most importantly increase profit.

Here is the link, if you do not have access you should find a way to get it.

The headline is,  Goodyear increased revenue by 25% with just 2% increase in number of tires sold. Most strikingly its turned a profit of $143 million from a previous year loss of $19 million (I did not check income statement to see if there were any one time charges).

How did they do it? None of the quick fix recipes. It simply started with their segmentation. Until an year ago, Goodyear sold more tires to auto makers than they did to customers. The problem with auto makers is tire is yet another component that adds to their cost. They want the cheapest possible tire both in terms of quality and the price they are willing to pay.

Goodyear stated,

the key to its turnaround has been concentrating on fewer but higher priced products targeted more toward consumers than auto makers.

The impact on its pricing?

Four years ago, almost 40% of the tires it produced were low-end tires retailing for about $60 apiece.

The average likely pulled down by even lower wholesale prices to car manufacturers.

With their new strategy to focus on consumer segment (rather than auto makers)

Almost 75% of its tires now sell for $130 and up.

Note that the price change started with their customer segments. The product mix did not change until they made the strategic choice about customer segment to serve.

Knowing the current customer mix and making a strategic decision to change it to drive revenue and profit is not innovative. But given that most have forgotten the first principles of business in favor of the fads of the time, following first principles would soon be called innovative.

That is is a pricing story worth telling many times.


Note: Not all the profit increase can be attributed to segmentation strategy change alone. They did some operational efficiency changes (another boring act) and negotiated deal with union.