Behind Crest White Strips Multi-Version Strategy

P&G practically created the teeth whitening white Strips category. Introduced under the powerful Crest brand it helped create new revenue stream  after all  it is not easy to grow 10% YoY when each brand bring in $1 billion revenue. The part that interests and impresses me the most is their multi-version pricing for the White Strips category. While I expressed concern about P&G’s other brand Downy’s horizontal product line extensions, Crest White Strips serve as an example of effective pricing  strategy, tactics and execution.

Take a look at the Crest White Strips page from P&G and here are some insights on their versioning strategy:

Side bar – Value Tag: For brand managers from Colgate-Palmolive and Unilever this article is worth $9999 to you.

1. If one price is good two are better and four are even better if designed and positioned correctly. Crest offers four different versions of the product, offering increasing benefits from low to high end version.  This is vertical product line extension.
2. Versions are designed in such a way that customers self-select  themselves to the right one (Second degree price discrimination).
3. The lowest priced version is the Classic at $24.99 and the super premium version ($44.99) is the Crest Advanced Seal, introduced in early 2009.  That is a $20 price differential between the lowest and highest product creating great profit opportunity from up-selling.
4. The price jump is non linear and reflects customer’s diminishing utility. From Classic to Premium it is a $10 jump indicating customers assign most value in this upgrade. Between other versions it is $5 jump indicating customer utility flattens out or grows slowly as they move up the versions.
5. Note that the listings are benefits and not product features. Customers care about benefits  and not about the features – compare this to many of the technology offerings that simply list feature differences across versions.
6. Look at  the images showing the packages. These are designed to visibly show that not only are these versions different but also  help “tangibilize the intangible” (Ted Levitt).
7. In behavioral economics, the effect of  presence of high priced versions has been extensively studied. The netof those findings is that while these may not sell much, the  presence of high priced versions help improve customer willingness to pay for the other versions. But that is not the case with Crest Advanced Seal. I make this claim based on the number of reviews and rating for this product.
   

   Versions	Reviews	Rating (on a scale of 5)
   Classic	58	4
   Premium	34	3.75
   Pro Effects	17	3.5
   Advanced Seal	77	4

   If we use the number of reviews as a stand-in for the market share, Advanced Seal, despite being the super premium version, is their most popular seller. The ratings also indicate that customers are happier with their super premium version. At $20 price premium and arguably not much cost difference this is a big contribution to their profits.

8. Their Pro Effects, scored the least both in terms of number of reviews and rating. Until P&G introduced Advanced Seal an year ago, this was their most expensive version. We can hypothesize that it served then as the expensive decoy but did not add as much value to the customers and hence did not get market share. Going forward we should expect to see P&G allocating fewer marketing resources to this version and keeping its price levels.
9. All their prices end in 99, as seen again in behavioral pricing literature this is a good tactic. It is easy for everyone to have prices end with 99 but it takes marketing strategy and a clear understanding of customers to maximize profits.

Overall Crest White Strips serve as a great example of marketing strategy, versioning and pricing for profit maximization done right!

It’s Not What It Costs You It’s What Your Customers Value

Whether you are a small business or a large corporation marketing means Segmentation and Targeting. Marketing is about finding what is relevant to each segment and delivering at a price they are willing to pay. There is nothing more to it. It is however easier said than done. It does come  easy to companies like P&G that have done it for so long, institutionalized the process, has the resources to conduct customer research, gather insights and invest on new product lines to monetize those insights.

Not all can afford such unfettered access to intellectual or capital resources.

I saw a post by an artist, Ms. Michelle Moyer, of White Dog Studios, who makes and sells jewelery. Michelle is thinking about pricing her wares correctly. She says,

I think that artists undervalue their work far too often. When I go to shows or browse online and see handcrafted pieces selling for a price that I know will barely cover material costs, if at all, I cringe because this sets the market lower for my work. I believe that my work has value and that incorporates not just the material costs, but the time it takes for me to develop the design and make the piece.

I want to highlight a great point that Ms.Moyer intuitively figured out, it is the effect of reference price. Customers do not know the absolute value of the crafts. There is not a universal system that tells us how much we value Ms. Moyer’s craft’s vs. others. We look at prices relative to available options. While there is no common value for crafts, presence of lower priced competitive items sets a lower reference price for her customers.

Ms. Moyer  talks about rest of her pricing in terms of material costs and labor costs, and about how much artists value their work. Pricing is about capturing a share of the value you create for your customers. Your costs are irrelevant to your customers. Pricing needs to be based on value added to customers. It is not about what you value or what you think the value is, it is what your different customers think.

The value is not the same across all customers. In the book Game Changer, retired CEO of P&G Mr.A.G.Lafley talks about “who is your WHO?. The “WHO” refers to the customer. Mr.Lafley, goes on to say

“As you work to better understand the WHO, you’ll discover that people use your product for different reasons. They may have different occasions for when and how to use it; differences about what they think is a good value, and what they are willing to pay. One size does not fit all”

Ms. Moyer  is practicing a type of multi-version pricing,

I try to offer a range of pieces at various prices. For example, this bracelet, for sale on my Etsy shop, is only $20, which I believe is a fair and affordable price. This bracelet, on the other hand, took much longer to design and create, so it is priced at $70.

This is good but her  multi-version pricing is once again based on her costs rather than on segmentation or customer value. Taking a lesson from Game Changer, there are opportunities to find  the reasons people buy the bracelets, different occasions and how the customers use the bracelets.

It is not easy when you are a small business  who cannot afford to hire someone to do strategic marketing or invest in doing customer research or segmentation studies. Even a simple pricing of just one version of your product gets harder  when you make products that have no “common value”.  So the easiest route seem to be producing what is easy to you or pricing it based on your costs.

But it does not have to be as rigorous and formal as it is for a multi-billion dollar giant like P&G.  You can solve 50% of the problem by simply  starting a conversation with your customers.

This blog  and I can help you get started on the right type of customer conversation and finding what they value.  Write to me.

Related article: Small Business pricing.

Do we know value when we see it?

In past few articles I wrote about the price consumers pay and the price marketers get to charge. Those explanations depended on the value consumers get from buying the product. In B2B segments and in some  utilitarian product categories (like a light bulb) it is fairly easy to calculate economic value to the consumers.  But how can a marketer find the value added for the rest of the products? Do the consumers even know the value they get? I would like to remind you here that there is no magic value reader that is available.

I was looking at a JCPenney survey that asked, “Did you get value from your purchase?”. If customers do not know the value how can they answer this? Even if they did, this question does not help find what that value was.

There is one advanced analytical method, it is called by an esoteric and not so relevant name – conjoint analysis. Stated in simple terms the method is about

1. Consumers do not know the absolute value of products they buy but we can deduce that from their preferences and likelihood of purchase. Instead of asking  consumes for how much they value ask them about how likely are they to purchase a given product on a scale of 1 to 100. This is called “Utility” in conjoint analysis. Note that the use of the term Utility does not imply that the product is  utilitarian.
2. Any product can be modeled as a sum of its components, not just utilitarian features (like price and screen size of a TV) but hedonistic features like 1080 dpi and conspicuous features like diamond studded TV. The price should always be a component in your modeling.
3. Show consumes a series of products with different feature set and ask for their rating. From these ratings we can deduce not only the  utility values  of different products but also the relative weights they assign to the components.

This explanation barely scratches the surface, you can find more information on this in a SlideShare presentation I published.  The net is that there are analytical methods that can be employed to get consumers to reveal the values and what components go into that value equation.

With this setup and my previous classification of consumption I will try to model consumer behavior with respect to  utilitarian, hedonistic and conspicuous consumptions and the shift in consumer buying patterns from luxury product categories to “premium” or  utilitarian categories.

iPhone Data Plan Versions

at&t is most likely to offer a new data plan at lower price for its iPhone subscribers. Previously I wrote that they should not simply cut the price of current plan. Such a price cut would require them to add subscribers at a much higher rate than they are adding today to recoup lost profits. Obviously at&t is considering price discrimination using multiple data plan versions. As the saying goes, if one price is good two prices are better. Reuters reports that at&t executive confirmed versioning:

The executive said it would be costly for AT&T to cut the price of its unlimited Web surfing service. The minimum plan for iPhone users is $70 a month, which includes unlimited Web surfing and a certain amount of voice calls.

at&t is probably looking at  consumer surplus for different segments for these two plans to set the price of the new plan. The new version will come with severe bandwidth restrictions – it will be designed such that the new subscribers will self select themselves when presented with the two versions.

Those who want iPhone for its simplicity, cool-ness, music and games capabilities but do not care for bandwidth most likely did not get iPhone until now because of their lower willingness to pay for data plan.  These will now be incented to pick the low-priced data plan despite the restrictions. (These could be customers who would prefer an iPod Touch that has mobile phone capabilities)

Serious iPhone subscribers with need for email and extensive web surfing will be nudged to pick the current data plan and not the low priced restricted option.

In fact if at&t’s market research data indicates that there is a higher percentage of the first segment then they might even increase the price of current data plan while introducing the lower priced version.

Price Premium for Green

I came across a study conducted byThe Yale School of Forestry and Environmental Studies
through SigSigmaPricing blog. The study’s goals were:

To understand the perceptions of eco-labels and environmentally-friendly products held by Americans and Canadians. Are American and Canadian consumers interested in purchasing environmentally-friendly products? Do they prioritize environmental concerns over price and quality?

One key finding from this study is

many Americans say they are willing to pay more for “green” products. Half responded that they would “definitely” or “probably” pay 15% more for eco-friendly clothes detergent (51%) or an automobile (50%). Four in ten say they would spend 15% more on “green” computer printer paper (40%) or wood furniture (39%).

The price premium results are not something a marketer can act on. There are a few issues to note about the study:

1. This study was conducted by telephone survey and hence measure attitudes and not actual behaviors
2. The survey question was very specific and could be interpreted as leading –  here is their question

I’m going to read the same list of products and this time, thinking about your current financial situation, please tell me whether, the next time you make a purchase, you would definitely, probably, probably not, or definitely not pay up to 15% more for an environmentally-friendly product. First… [READ EACH ITEM.]

The 15% number came directly from the survey and not derived from responses and most could be tempted to say yes despite their actual behavior at the point of purchase.

If we need to find the true price premium customers are willing to pay for green products then either a conjoint analysis that exposes willingness to pay or a mini-market study that measures customer behavior is needed.

School Market Research

Results from our work with one of our clients