Chipotle and Excellence in Pricing and Content Marketing

This is a story with two threads. One about Chipotle’s recent announcement that it will increase prices and the other about its hit Scarecrow video and associated iPad game. I will bring these two together to show you the excellence in pricing and how any content marketing activity must help serve this pricing purpose.

First the pricing news. In its last quarter earnings statement Chipotle said it will increase prices in 2014 .  This despite reporting spectacular improvement on all metrics

  • Revenue increased 16.7% to $2.37 billion

  • Comparable restaurant sales increased 4.3%

  • Restaurant level operating margin was 26.9%, a decrease of 110 basis points

  • Net income was $247.8 million, an increase of 14.4%

The decision to raise prices has nothing to do with how your current profits are growing. Their reason for this price increase?  You guessed it, costs.

 it may raise prices in the middle of 2014 to offset higher food costs. The price increase will be between 3% and 5%, CEO Steve Ells said

Nicely done, as we have seen before. And the stock market reaction? The bid up the stock, showing confidence in this better price realization.

I want to make sure you see that the food costs are used only as plausible reasons to help customers digest the price increase. Let us look at its current food costs and its share of revenue.

Their 2013 third quarter revenue was $827 M and food cost was $277 M. Purely for financial accounting purposes their percentage gross margin is 66.5%. As you can notice they are not just scarping by, trying to grab last morsel of cilantro rice from the bottom of Burrito Bol. That means they did not set the price based on food costs to begin with and hence to say they will increase prices because of food costs is just effective messaging.

That is one half of the pricing story.

Say costs increase twice as fast as inflation, by 4%. On average 3% to 5% price increase will recoup them if demand did not drop. How can they make sure the demand does not drop?

The other half is making sure customers continue to pay $8.20 for a burrito and feel good about it That requires investing in the brand and making customers feel great and hip about the brand.  That is served by their Scarecrow video.

Content marketing experts jumped on the incredible view metrics of this video to draw their own lessons about telling stories, talking about bigger picture etc. But think about the ROI on such content marketing effort. Imagine yourself going in front of CEO for an ask for running a content marketing campaign.   Social media experts may convince you to ignore ROI and focus on,  you got it, “the bigger picture”, “return on engagement”, “share of conversation”.

Here is some sane words on this from Eric Jacbson, CFO of  Amplifinity,

there is only one definition of marketing ROI. It is…

ROI = (Net Present Lifetime Value of Customer) / (Marketing Cost to Acquire Customer)

This brutal metric is the only way to know if a marketing initiative is working.

The second cold truth is that almost nothing works.

It is all about tying the bigger message and stories to price increases they can pass through without any associated demand drop. As you chomp down your spicy sofritas you feel good about being part of a bigger story and hardly even notice the price increase.

All those feel good stories are for naught if you cannot tie it back to ROI in the form of increased prices without drop in sales.

Who does your pricing and content marketing?

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?

Free to Fee With Product Positioning Shift

ref-priceHave you been giving your product away for free and now want to charge for it? Afraid of backlash from your users? Wonder what would make your freeloaders fork over $4.99 a month without complaining about it in twitter?

I have been recommending businesses to focus on the reference price. That is the price customers have  been trained to pay and expect to pay for a product. Any increase from that reference price will be perceived as a pain by the customer and any decrease as a deal.

The reference price problem is severe when the price is frozen at $0, that is you have been giving away your product for free. Changing the price of a pint of ice-cream from $2.99 to $3.49 is difficult but not as difficult as charging $2.99 per week for access to your free online content. The latter is several orders of magnitude more difficult than the former.

Difficult does not mean impossible. You can indeed successfully move reference price in the minds of customers from $0. One such way is using choices, specifically premium priced choices as seen in this research,

Reference price solution alone does not address the free to fee problem says Uri Simonsohn, professor of marketing at Wharton School. According to him the second dimension is – It is the  category problem.

Imagine, for Thanksgiving, you go to your parents’ for dinner and after a nice dinner they say, ‘That’s going to be $10 per person’.

You would be upset.

We expect this category of products to be free like mom’s love is.

If we come to expect a product to be in “forever free” category then reference price is not going to cut it. Moving from free to fee for this category is like charging for mom’s love.

Is there a solution?

Yes – product positioning shift combined with reference price.

Customer Job To Be Done Growth Matrix
Customer Job To Be Done Growth Matrix

Think of your product as something your customers hire to fill a need. You have an active role to play in telling your customers what job you want them to hire your product for. That is product positioning.  When users have come to perceive your product in the forever free category you have a positioning problem. Somehow you have lost control of positioning and let them decide what job they want to hire your product for.

The way to shift that is to change the job – telling your customers what new job you want your product to be hired for. That is serving new jobs of customers (should we call them customers if they are not paying?) you already have.

This may require minor product changes – pivots- but the key is your deliberate action to take complete control of product positioning and telling customers which new jobs your products will serve.

Hopefully you will choose new jobs that they are used to paying for and not yet another mom’s love type jobs.

4 Ways You Can Put Google Customer Surveys To Work Today

As I previously wrote, Google Customer Surveys is a true business model innovation. It helps publishers unlock value from their digital assets and enables market researchers reach new audience they otherwise would not have found. I expressed my reservations on their positioning in my previous article

But I do not get what they mean by, “look for correlations between questions” and definitely don’t get, “pull out hypotheses”. It is us, the decision makers,who make the hypothesis in the hypothesis testing. We are paid to make better hypotheses that are worthy of testing.

Since I wrote that article, their Product Manager emailed to say they removed their statement on, “pull out hypothesis”.

This is a limited tool with ability to ask just one question and no way to ensure that the same user will answer multiple questions for doing customer level analysis.

There is one more item which is their minimum sample size. You cannot order anything less than 1000 samples.

Despite these reservations I see Google Customer Surveys as an effective tool for product/brand managers, researchers and small businesses for these purposes:

1. Aided Recall:  Present them a choice of different brands ask them how many of these they recognize.
When you are trying to get very quick and high level data on customer awareness or preference of your brand, this is a great tool. The results are especially actionable when you get extreme results like no one knows about you.
If you are trying to find which brand they recognize the most then you can do that as well with different question type. However, due to its question format limitation, Google Customer Surveys cannot help with Unaided recall.

2. Finding Consideration Set: Present them a choice of different brands and ask them how many will they consider buying for solving a particular need. This is similar to Aided Recall but the question is more focused. You are not simply asking about awareness but whether your brand makes it into their consideration set.

3. Brand Association: Present them an image or a statement and ask them to pick a tag-line or brand they believe goes with it. Another variation of this question is asking them to associate your brand with an unrelated field. A typical example is, “if our brand were a movie actor, who will it be”.

Ability to use images is a very powerful feature. It creates many different opportunities. For example for testing your advertising copy or the images you use in your collateral. It is better to poll your audience whether the image you used looks more like a bean bag or boxing glove before you launch your expensive advertising campaign.

4. Consumer Behavior Research: This is a whole class of hypothesis testing you can do with Google Customer Surveys. While it is not a tool for A/B split testing, you can use it test your hypothesis on customer preferences or their susceptibility to anchors and other nudges. Before collecting results you need to specify a reasonable hypothesis that is worth testing. When you collect data you can test for statistical significance using Chi-square test to validate your hypothesis. Do keep in mind that sometimes data can fit more than one hypotheses

There is however a big limitation because of the length of questions you can ask (as you see in the third option in the image on the left).

There you have it. A tool with limitations but is effective for specific areas. It opens up new ways to collect data and test when none existed before.

A corollary for this post would be cases where you should not use this tool. That includes finding price customers are willing to pay or asking them about how important a single feature is. You have to wait for another post for the reasons.

Brag! Let the World Know that You Can Play Didgeridoo While Riding Unicycle

I was watching CyberChase a PBS Kids program (with my 5 year old). In one of the skits (CyberChase for Real) they do at the end of each episode, Harry (played by Mathew Wilson) was looking for a job. He wonders,

I can play didgeridoo while riding a unicycle but I do not see anyone hiring for that.

Later he tries  out for the job of  handing out menus for a sandwich shop while wearing one of those larger than life tomato costumes. Finding low conversion rate (or high bounce rate) he starts by analyzing the  menu. Harry concludes that  the sparse menu, listing just four sandwiches, was the reason for low conversion rate. He spruces it up by enumerating all possible sandwiches based on  meats, toppings and bread types. As he hands out the new menu with 60 different sandwiches, the conversion rate goes through the roof.  Harry’s boss was happy with all the business.

If we stopped the story here one could be absolved for treating this as a case study of applying, data, analytics and experimentation to add business value and the employee getting rewarded for it.

Alas, that was not the case. The sandwich shop owner walks out and says,

You did a good job driving lot of customers to the store but we want lot more marketing than someone just  standing with tomato costume and handing out flyers. We hired a guy who can wear the tomato costume and play didgeridoo while riding a unicycle. Please hand-in your costume.

That is sad but not totally unrealistic ending to the story.

To start with Harry did not tell his manager about what he is capable of and how all his different skills can add value to the business. Next, when he saw a problem with menu design he went ahead and fixed it.  He did not tell his boss about his methods or results. The hope (we can only surmise) was that “Great work will speak for itself”,  which as Harry and we found out later was not the case.

This is the number one myth listed in the book, “Brag! The Art of Tooting Your Own Horn Without Blowing It“. In this very well written book, author Peggy Klaus, makes a convincing case for the importance of letting the world know what you are made of, your accomplishments  and how having you in a team is valuable to that team.

You can assign blame on the boss for not taking the time to know her employees, what they are capable of,  how to effectively engage them and finally reward them for their accomplishments. That is leadership failure. In the long term such lack of leadership will affect any organization and hopefully such bad bosses would be cast aside. But in the short term, it is you who suffer from your failure (or reluctance) to make your value proposition and your failure to position yourself in the minds of your “customers”.

If you do not position yourself someone else will and to your detriment.

If you can play didgeridoo while riding a unicycle and crunch multivariate regression at the same time – Go Brag! Let the world know.

What Job Will Your Customers Hire Your Products For?

When marketers narrowly define their product(service) and its end use it is very easy to declare that the product is unique with no competition whatsoever. True, there may not be a competition that offers a product that is similar to yours but the customers may have many alternatives that render your product useless. Customers could be more than happy to live by without your product.

Instead of looking for similar products and how to position your product features you need to ask the question, “What job will your customers hire your brands for?” (Clayton Christensen). Answering this question helps you see what you are truly competing against, be it competing brand, other unrelated alternatives or simple customer apathy. Your messaging and positioning should be defined to address this final job. This is true whether you are a startup with the next social media application or a giant like Pepsi with billion dollar global market.

Let us take Pepsi’s case. Pepsi’s messaging for the US and European market reads, “Refresh Everything”. The messaging is not really about thirst, or encouraging use. It is more at an emotional level and less at utilitarian level. Even their previous messages were all defined at the emotional level (Drink Pepsi Feel Young, The Joy of Pepsi etc). They are positioning their brand to serve the job of making the customer “feel cool/young/hip”. The job the US/EU customers hiring Pepsi for is not quenching thirst. For this job Pepsi is not competing with water or milk but with Coke. The competition is clear and everything Pepsi does in these markets is aligned to gain advantage over this competitor.

But take the case of Pepsi in India – a marker with billion people that promises so much yet where most global brands are struggling. What is Pepsi’s competition in India? Coke? Local brands? Coke is struggling and many of the local brands were bought out or do not have the resource wherewithal of Pepsi. So can Pepsi declare it has no competition in India?

Their current messaging is less emotional and more utilitarian. Plastered across billboards and all newspapers are promotional Ads from local eateries. All these Ads offer “Free 200ml Pepsi” with a meal. All these Ads have the tag line, “Food tastes best with Pepsi”. What is Pepsi competing against? It is competing against tradition and a really powerful alternative – Water.

Customers in India prefer just plain water during their meals over any other beverage. Pepsi is not trying to get the customers to hire its brand over Coke but replace water. It wants the customers to fire water and hire Pepsi because,  “food tastes best with Pepsi” (let us ignore the veracity of this claim for the scope of this discussion).

Pepsi did not get this right the first time, its initial messaging in India was just a slight adaptation of the emotional messaging that worked in developed markets. However, in India , its fiercest competitor Coke turned out to be not its competition but plain old water. As Pepsi realized this its messaging and promotions are aligned to fight this competition.

Do you know your competitors?

Do you know what job your customers will your hire your products for?