Wheel of Fortune Pricing Wrong

As a consumer driving our economy, can you explain what does the price you pay for things mean to you?

As a business charging customers for products and services, can you explain what the customers are paying you for?

It more important for the second category to understand pricing than the first, otherwise there won’t be a viable business to talk about. But more often than not we see failure in not only answering the question but in general in how they set pricing. More businesses do pricing wrong than right. To compound the problem we see incomplete, incorrect and inapt pricing methods from news stories spread around as innovative and panacea.

Take for instance a story on food truck pricing from The Washington Post.  It is about a food truck selling pizzas with a spin on pricing. You spin a wheel, if you land on 99 cents you pay just 99 cents, if not you pay $9.99. Pricing based on statistical modeling and probability? Let us not get ahead of ourselves.

Where do you start for answering the pricing question? You start with the customer segment and what job you want the customer to hire your product for. Let me let you in on a secret, pricing need not be innovative,  it just needs to be a share of perceived customer value.

In the case of the food truck let me point out some clear problems:

  1. Food truck is a fragmented market with many options available to the customer
  2. Customer expectation of food truck is that it is gourmet – so to speak
  3. Customers who regularly eat out for lunch pay for food truck from lunch budget, customers who try food trucks occasionally pay for it from their entertainment budget. This matters.

The gimmick in pricing, with the thrill of scoring a pie for 99 cents may attract a few, for a while. But the initial excitement fades away quickly and it is not an unmet need. There are many options for customers seeking excitement.

The product as we read in the story is just ordinary, nothing gourmet about it. Even at 99 cents, the first bite into the ordinary pizza will be a buzz killer. Imagine the feeling of customer who paid $9.99.

The food truck owner was quoted saying he makes a profit on 2 pizzas (one sold at $.99 and the other for $9.99). Be that as it may,  there is a complete failure of understanding of customer and in delivering a compelling product. Pricing is being used as a way to attract sales than as a share of value created.

How do you do your pricing?

Can iPhone ASP Recover?

Yesterday Apple announces its fiscal Q4 2016 earnings report. As expected iPhone revenues continue to dominate total revenue. And there is one number that every analyst has been tracking, that is derived from reported iPhone revenue and unit sales, the Average Selling Price (ASP).

Why is this important number?

While the volume of iPhones sold gives an indication to adoption the ASP number tells specifically about the demand for the newly announced iPhone 7 and iPhone 7 Plus models.

Take a look at this chart on the history of iPhone ASP over past three years (with the line added to visualize ups and downs). I updated this from my last article to show Q4 numbers and projected 2017 Q1 numbers.

As I pointed out last time, the ASP was expected to move up this quarter and next. But did it go up enough past quarter when iPhone7 was available for sale for only a short time and will it go up high enough the current quarter that includes Holiday buying season.

Most analyst predictions for the Q1-2017 ASP (issued before the earnings came out) expect $674 to $679 in Q1. Last time Apple had a full version upgrade was from iPhone 5S to iPhone 6 in Q4-2014.  Then ASP jumped from a low of $564 in Q2 to $687 in Q1, a 22% jump.

An expectation of $679 from $595 is a more modest 14% jump. But the reported ASP shows challenges to hitting the $674 to $679 target. This is because of one primary reason

The storage capacity of lowest priced iPhone 7 model is 32GB vs. 16GB in iPhone 6 and 6s. This tempted more customers to pick that version even though they could afford to pay for higher capacity. That is more customers see 128GB is too much for their needs to pay $100 more, unlike last time when they saw far more value from 64GB.

Apple is trying to mitigate that by allowing Jet Black models only in 128GB and 256GB capacity points. They also increased the price of iPhone 7 Plus by $130 vs. $100 in iPhone 6 Plus. While these two mitigating factors helped, it is a lot more likely that most models sold in Q1 will be the 32GB models, suppressing ASP.

Apple set a record $691 ASP in same Q1 last year. This time it is going to come in closer to $640  to $650.  It turns out there is such thing as diminishing marginal utility when it comes to iPhone storage capacity.


Five Problems With Fitbit Healthcare Costs Claims

Fitbit, the maker of bands that count steps, recently made following claims from its two year “study”,

after two years, employees who opted in to the wearable program cost on aver- age $1,292 less than employees in the control group.

Sounds plausible? Or even compelling for businesses to make their employees wear $150 Fitbit devices for reaping close to 10X healthcare savings?

Not so fast. let us look closely at the reported results and more importantly the so called study.

  1. Single clustered sample – The measurements are done on employees of a single corporation.  Regardless of the size of the test corporation, this is not random sampling as geography, demographics and several other factors adversely affect the results. Any savings claimed from the study are not applicable generically to other companies.
  2. Opt-in Study –  The study asked for volunteers to opt-in to wear subdisdized Fitbit bands. Those who opted-in were called “treatment” group and those didn’t are called the “control” group. This is simply the wrong method for measuring effect of a “treatment” because it is like putting your thumb on the scales to favor the treatment group.
  3. Not controlling for other variables – For results of a study to be attributable to specific treatment, the researcher must control for all other variables. That is not the case with this study. For starters the people who opted-in may already be on their path to better health, or may be doing a few other things like eating right and regular vigorous exercise. On the flip side, those who did not opt-in to wear the Fitbit may have other illness that prevent them from walking 10000 steps. That is, there are too many confounding variables that Fitbit did not control for in this study.
  4. Where is the placebo?-  If they are studying the effect of their Fitbit band the control group must be given a placebo like another band or dummy band that fakes step counting. That is how done in correctly executed randomzied control trials. You can see the self-serving nature of this study. Had they used the $18 band like Xiaomi as placebo or even a simple bracelet that fakes step counting they would have found no statistically significant advantage to using Fitbit.
  5. Using really large samples – You may be surprised to see this as a flaw in the study as most often you hear too small sample size as the issue. The so called treatment group had 905 people and the control group had 1784 people. As I have explained before, samples larger than 300 exaggerate differenes that are not there. Had they randomly picked 300 people from these two groups and compared results, that would be more defensible than this large sample comparison.

The net is, the results are meaningless and not actionable because the study is flawed.

Finally I leave you with this wisdom from authors of a real clinical study on these wearable step-counters,

“The notion you can give out a bunch of watches and suddenly people will get more active is just silly.”

Or they would get healthy and save $1300 a year is downright outrageous.

Who is your competition?

Apple Watch is not a threat to us –Fitbit CEO 

Pencil and paper is our competition – Intuit

I always say that our real competition is Netflix – Soulcycle CEO

standoutfromthecrowd1What do you think of how these businesses define their competition? If you rank these statements in terms of

  1. Relevance
  2. How actionable they are

How would you rank them?

After writing down your answer ask yourself the question – Do we get to decide who our competition is or do we simply recognize what customers reveal as our competition?

Before answering the competition question we need to start with our target customers. Starting with customers first tells us what problems are customers trying to solve or stated another way like Clayton Christensen did, “what job are customers trying to get done and hence hire a product for that job”.

If the customer job to be done is not that clear to find your competition or there are other confounding factors just ask the simple question – If customers hires a product, will they still hire yours? If the answer is no, then that is your competition.

A moment’s reflection on the customer focus and that we are solving a customer problem will convince you that we do not get to pick the competition but the customer does. With that in mind then look back at your ranking of the three statements.

The first and to this day the best in customer centricity remains Intuit’s definition. If you look their manifesto on the competition, you will notice how they describe what customers are doing now rather than what other products like theirs are doing in the market.

The other two, should not get any ranking because they are neither relevant nor actionable.

In the case of Fitbit,  they refuse to see beyond fitness and tracking as customer job to be done. They treat as if customers have a separate budget for wearable devices that just track activity and another pot of money for Apple Watch. That leads them to incorrectly state their competition. We can only hope this is stated for external consumption and internally they do understand all their real competitions.

In the case of Soulcycle, they defined it too broadly and hence ended up with Netflix. The reasoning likely is based on their thinking that customers hire Soulcycle as entertainment and anything that competes for customer time and attention is their competition. But it is easy to see that context, time and job-to-done are completely different for Netflix. More importantly the rule of exclusive hire does not apply here. If you look closely at from what budget are customers pay for Soulcycle, you will not find Netflix but fashion, food and pop culture. Saying Netflix as competition makes the strategy irrelevant and unactionable.

How did your ranking compare to this?

How do you define your competition?


What is the Point of Continuous Measurements? Fitness Edition

If you are one of tens of millions of people who bought some kind of activity tracker in the past years, you are into continuous measurements.

You are told to take 10,000 steps everyday. You take that as gospel or indisputable scientific statement (spoiler: it is neither). You squeeze in extra steps throughout the day or stay awake trying to hit the mark before the midnight strikes. You feel elated when the band on your arm vibrates to tell you that reached 1000 steps. Goal achieved.

You wear the band in bed. The band apparently tracks your sleep pattern throughout the night. You are happy to see a graph the next day morning and feel proud when you shove that graph in the faces of your co-workers, mostly to say how little you sleep. Goal achieved.

The two metrics are not enough for some. For additional $50  you can get devices that continuously measure your heart rate. It gives you such joy to see heart rates measured every two minutes and mapped as time series graph. Congratulations, you are alive. Goal achieved.

For another $100 more you can measure even more, like the GPS coordinates of your movements. May be you are a runner or cyclist and like mapping your path. Everyday you run the same path and collect GPS metrics and see the mapped path on your smartphone. Can we say goal achieved?

l_mobile_fitness1200What you see here is activities and measurements get confused with goals and the very act of continuous measurement becomes the goal. Stop for a moment and ask

  1. Why is 10,000 steps a goal? Why not any other number? If 10,000 is good is 12,000 better? Does that make me fit? Fitter? Fitter than those who do not wear the band and count steps?
  2. What is the point of seeing a graph on how I slept? Is there anything I can do to change a particular duration when I tossed and turned?
  3. What am I doing with heart rate measurements from every 30 seconds? Why should I measure it so frequently if I am not under observation for some medical reason? What do I do with measurements from yesterday, and the days before that all look the same?  Is one measurement per day not enough?
  4. I run the same path everyday or may be same 2-3 paths. Why am I collecting GPS coordinates everyday?

Since most do not ask these questions, nearly 100 million of them, I am here to help raise awareness on the futility of measurements for measurement sake. Let me categorically tell you that none of these are goals and none of these measurements are relevant.

First you need to ask what is the real goal. The goal should be about fitness and living healthy. Then we ask, how do we measure fitness. The Mayo Clinic gives us simple metrics and methods to measure our fitness. None of those involve continuously counting steps or sampling heart rate. Then we find out what are the options to improve your fitness, weigh the pros and cons of those options and pick the best possible under constraints.

When you look at options available, there is really only one — 60 minutes of activity at elevated heart rates. Once you do that at the beginning of the day, you can get on with rest of your day without distractions. That is the path to your fitness.

Finally you may ask what is wrong with counting steps if it gets me moving? The problems are multifold – you are measuring the wrong thing, you are optimizing for wrong metric, you mistakenly convince yourself you are improving and you miss out doing the right thing. All those forced walks to get a few steps do not elevate your heart rates and hence do not help you get fit.

It is time for you to toss that activity tracker (don’t you dare call them fitness bands), give up your obssession with contunuous measurements and start with right fitness goals.

Focus Groups Fall Out of Favor – That’s a Good Thing

focus-groupLet us ask a focus group for our product features, shall we?

Did you utter these words or hear someone else do so recently in deciding the next step of product development or market development? It is not all bad because at least they considered taking some input and collecting some data before making decisions. But this is also totally wrong approach if you think 10-20 people talking a room under observation can help you decide.

The recent Journal Report from The Wall Street Journal had a very good piece titled, “Focus Groups Fall Out of Favor”. The article makes the case that in the present day Big Data and social media there is no role for focus groups. Reading the article, it was clear why – as suspected most people were using focus groups incorrectly for making big decisions.

I have written in detail in the past about how focus groups are misused. I recommend you read

  1. Anyone can convene a group, ask questions and write it up
  2. Watching a focus group going horribly wrong
  3. Who makes the hypothesis?

I will add to those key mistakes pointed out in the Journal article. In many of these cases the focus group is not only a poor fit but also the wrong tool.

  1. The focus-group approach famously went awry for Coca-Cola Co. in the 1980s when extensive—and pricey—focus-group testing and market research led the company to replace Coca-Cola with a New Coke formula widely rejected by consumers.”
    We do not know for sure Coke used focus group to decide New Coke. If they indeed did only use focus groups then we know why it failed. Stated preferences of extremely small samples is not reliable method to change taste of billion dollar business.
  2. a moderator would ask a room full of moms which of the company’s products they liked most. The moms always responded that they fed their children the company’s healthiest offerings when, in fact, the best sellers are high-calorie snack food.”
    If the goal was to find which product performed better, why would they ask that from a focus group? Shouldn’t they look at the sales data, by geography, by stored and combined with store card data to see cohorts and distribution? Not only were the moms stating what made them sound better moms but also the required data is readily available with better accuracy and precision elsewhere.
  3. “Kathy Fish, Procter & Gamble Co.’s chief technology officer, says that men, when asked how many swipes it takes to shave their face, will usually estimate 10 to 15. In reality, it’s more like 30 to 40. “
    Even if the participants gave accurate response that would have been useless as the sample size is too small to draw any meaningful conclusions. This again is wrong use case for focus group. If P&G needed this data they should have used large panel of users who would log this data daily. Or in the world of IoT (Internet of Things) a connected razor that can collect this data easily.

Finally I will leave you with a big learning from the Journal article.

It’s very expensive to find that progressive-leaning, millennial new mom who has the time to attend a focus group,”

This is indeed a very profound statement. This tells you why focus groups do not provide enough data to move on to decision phase. Focus groups only help you uncover hypotheses that you can test with larger group of people.  The people in focus groups are not going to be the target segment. And that is perfectly okay if you are going to test the hypothesis you developed with the right target segment in a simpler manner.

How do you make decisions?