Bye Bye Mr.Memory! Hello Mr. Insight

In the Alfred Hitchcock film 39 Steps, the opening scene features a stand-up act by a man introduced to us as Mr.Memory. People paid money to come to this show. He was someone who had committed at least 50 facts per day into his memory and could answer any audience question. The questions range from the distance between Winnipeg to Manitoba to baseball statistics. Today we do not need Mr.Memory nor do we  appreciate committing facts into memory. We have Google, or bing or the next big search engine.

If you look closely at Mr.Memory’s act it was still an entertainment act. If it was a rote regurgitation of facts the audience would not have paid good money to get there. He was witty and the audience was laughing.  Mr.Memory would have bombed if the audience were bored or laughing at him instead of at his jokes.

Google or not,  data, information and facts have  always been available to those sought them. Data might not have been free or there were transaction costs but was available. People protected data as if the value is intrinsic to the data. Value  is not intrinsic to data. Value is created from the insights one derives from these to serve a market and gain upper hand over the competition.

There is a quote that was attributed to Sam Walton (I cannot verify the authenticity): “I am not so much afraid of someone stealing my data as someone can make better decisions with it than I can”.  Whether or not Sam Walton said this the statement holds true.

Mr. Memory  may not have  job today but he knew then that his advantage came from doing something different with the information – delivering entertainment that competed for customer wallet share against other forms of entertainment.

Do you, as a decision maker, just seek data for its own sake or create actionable insights that deliver profits?

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.

Free Radical

[tweetmeme source=”pricingright”] As a follow-up to Mr. Chris Anderson’s talk at Haas Alumni Luncheon and his description of continuously decreasing marginal cost I talked about opportunity costs and when it replaced the cost to produce/store/serve one additional unit.

Let us set aside the cost discussion and focus on price. Mr. Anderson’s new book’s sub-title is “The Future of a Radical Price”. Free service with Ad supported business model is not new and Mr. Anderson says that as well. What he says about free model is the emergence of a “freemium” model. What is “freemium”? Mr. Anderson explains this in a letter he wrote to The Economist,

The big shift since the crisis has been the rise of “freemium” (free+premium) models, where products and services are offered in free basic and paid premium versions. Think Flickr and Flicker Pro (more storage), virtually all online games and even your own site (some free and some paid content).

So many users pay nothing and get limited service and some pay to get a different class of service. I am not certain why this is radical or new. Let us consider following scenarios

1. Taxation on Paying Customers: The free users are irrelevant to provide service to the paid customers. In this case the business is simply throwing away money by serving the free customers. There is nothing new here. Paying customers subsidize the free customers – so paying a higher price to support the marketer’s higher cost structure. What is in it for these customers to support the freeloaders? If the business one day decides to jettison all free users, it is simply eliminating a cost function that has no associated revenue and giving value back to paying customers.
2. Up-sell: The business depends on converting a part of the free users to paid users over a period but otherwise it does not need the presence of free users to serve paid users. In this case it is no different from a business spending on marketing to bring in paid customers. Any one free user  by herself is not important but as a collection she is. This is similar to a mail campaign that has 1% conversion rate. Each mail you send out by itself is not important, but it is as part of the whole bunch you send out. So suddenly eliminating free customers is the equivalent of completely cutting off marketing spend. As long as the business can hold on to current paid customers and  has other ways to acquire new customers it can cut-off free users. In this case too the model is no different from what exists  in non digital businesses. Incidentally, whether or not there is a  cost to serve one single free user is irrelevant because the relevant cost to consider is the total cost to serve all free customers.
3. Value Distribution: The business needs the presence of free users to serve its paid users, in other words presence of the free customers adds value that is shared between the marketer, paying customers and the free customers. This is the classic two sided market, like eBay, in which one side creates value and hence is not charged and the other side consumed value and is charged for that. One again this is not radical. The presence of free customers is essential for the service and the paying customers who are not subsidizing free customers but compensating them for the value add.

Price is about capturing value created for customers, if the business chooses not to charge for that value-add then they do not have a working business model. Free is not a price, definitely not radical,  it is either failure to capture value, customer acquisition activity or  simply matching price with value added.

Presence of Vice Products Increases Utility from Virtue Products

On a sunny afternoon you just finished your run and is hungry for a snack. Now consider these two scenarios

1. You walk by a fruit stall that sells only fruits and you buy an apple
2. You walk by a fruit stall that sells Snicker and other chocolate bars as well and you still buy an apple

In both these scenarios, which one of the two will you feel more virtuous? According to Dhar and Wertenbroch, you will feel  more virtuous in the second situation.

Selecting an unappealing virtue from a choice set that also includes tempting vices provides a positive self-signal (highlighting one’s ability to resist temptation) that enhances the utility of consuming the virtue

Utility from consuming the virtue when a choice is available is more than that when virtue was the only option available. Since consumer’s utility translates to their willingness to pay, can a marketer apply the findings of Wertenbroch and Dhar to increase perceived value of their virtue products and hence be able to charge higher price premium? Yes,  here are a few applications for this finding:

1. For the said two stores, the one selling both candy bar and apples can price the apples more than the other stores and the customers would gladly pay for it.
2. For a restaurant selling fresh green salads, offering a really greasy and fatty appetizer or entree  in the menu will enable it to price the salad at a higher price than it would have been possible with all healthy options. This is one reason why McDonalds is able to charge  premium prices for its salad options.
3. A broader example is green products, these qualify as virtue compared to regular products. Are customers willing to pay a higher price for green products? In a study done by Yale forestry department it was stated that half the people surveyed they were willing to pay a 15% price premium for green products. A marketer cannot take these results to imply that customers will choose green products at the point of purchase. But we infer from Wertenbroch and Dhar’s study that a marketer is better off, in terms of profit maximization, offering regular products alongside green products instead of just green products.

Take the most recent story from NYTimes on how chickens are killed before they are processed.

Two premium chicken producers, Bell & Evans in Pennsylvania and Mary’s Chickens in California, are preparing to switch to a system of killing their birds that they consider more humane.

When customers see these benignly killed chicken next to regularly killed chicken, their willingness to pay for the former is likely to be higher than that for the latter.

The Personal Brand

Every day when I drop off my child at school I read her a few books before I leave. Usually  few other children gather around as I read.  One day I had the largest audience, about 10 children.  I used all different kinds of voices I knew and held their attention throughout my reading. Then I decided to try something different, I told them that instead of reading another book I would tell them a story, something I had read from a library book about a man, a tiger and a fox. Five seconds into the story my audience vanished, only my own child stayed with me.

I realized that my customers, yes the children who were listening to my readings are my customers, had defined me and categorized me as a reader, someone who can verbally reproduce published works of others. They did not trust me, yet,  to produce something interesting without the help of books. My brand as a story reader did not extend to that of a story-teller.

That is a realization that I did not control my brand, my listeners  did. That is because I had not actively managed it when I started reading stories. If I had wanted to be seen as more than a story reader, to be an entertainer (my brand vision) I should have approached this more strategically. Immersed in reading stories,  I had allowed my brand to be defined for me.

Every opportunity you have to interact is an opportunity to build your brand based on your brand vision. Now that is power of personal brand management, be it reading stories to school children or working in an enterprise.

Are you actively managing your brand? If not, would you accept the same if your business’s brands are not actively managed and left to be defined by the market?  Start having a brand vision for your personal brand and build it with every interaction.

You Touch It, You Own It!

Do you feel instant ownership of items you touch in stores?

Does touching objects and the ensuing ownership lead you to value the objects more than you would have had you not touched it?

Does that higher value translate into higher Willingness to pay?

A recent study by two marketing professors from Booth School and Anderson school finds that the answer to all these questions is yes. A less academic version of the research report is available in  TIME magazine.

Professors Joann Peck and Suzanne Shu, posed the questions

Does holding an object and imagining that it is yours influence how much the object is valued? More generally, does mere touch influence the feeling of ownership and the valuation of an object?

The core premise that ownership increases perceived value (endowment effect)  in itself is not new and the authors do state twenty years of research on endowment effect. What is innovative in this research is finding that touch as a way to increase ownership and directly relating it to higher willingness to pay.

What does this mean to you as a customer?

1. As a tourist wandering the local streets for merchandise, resist the temptation to hold the item. Or have a partner and have them touch it while you negotiate.
2. If you are buying a new car, do not negotiate after the test drive. In fact do your test driving with a completely different dealership and buy from another.
3. If you are buying used car, do not negotiate right away or follow Tip-1.
4. If you are looking to buy a house do not imagine, this will be my workspace, this will be the baby’s room etc. Be aware of your agent telling you, “imagine yourself cooking in the kitchen and your kid playing here …”. Be detached.
5. At garage sales, don’t touch anything.

What does this mean to you as a marketer?

1. Do not try to sell, do not talk price . Let the customers play with the items. Engage the customers first then sell.
2. For new cars, make the customer test drive, take a picture of the customer at the wheel or standing with the car and give it to them.
3. Same for selling used cars.
4. If you are selling a house, buy Polaroid (do they sell them?) and keep them for use during showings. Encourage the showing agent to shoot pictures of the prospective buyers in the house and give the pictures to them. Make the visitors feel that they “own” it. This is the reason home staging works.
5. At garage sales, encourage touching your wares.

What do you think?