Is Target’s Price Matching Policy a Mistake? Yes, but not for reasons HBR says!

English: Logo of Target, US-based retail chain

 

Rafi Mohammed, a Harvard Business Review blogger asks, “Is Target’s price matching policy a mistake?”. If you have not been following the price wars, Target stores recently announced that they will match published prices of their competitors.

 

If you buy a qualifying item at a Target store then find the identical item for less in the following week’s Target weekly ad or within seven days at Target.com, Amazon.com, Walmart.com, BestBuy.com, ToysRUs.com, BabiesRUs.com or in a competitor’s local printed ad, we’ll match the price.

Back to Rafi’s question. The answer is yes. But not for the reasons Rafi offers in his HBR blog post.  As I wrote recently, Target’s policy is wrong because they are taking on a competitor who is strategically irrational.

Rafi’s argument, surprisingly (surprising because Rafi is a pricing professional) is centered around the cost to operate brick and mortar stores.

Amazon for example — have significantly lower cost structures than brick and mortar stores? That makes it close to impossible for a chain to set the same product price both on its web site and in physical stores that is competitive with an Internet-only retailer and still yields a profit.

This is confusing cause and effect. Amazon chose low prices and then cut its costs mercilessly to deliver products at such low prices. Target chose to reach customers with higher willingness to pay (and disposable income) and offer them a store experience to buy products. They incurred the cost of operating stores for two reasons, one they needed to do that to deliver customer experience and two they could still make a profit from the higher prices customers were willing to pay.

Prices come before costs. You don’t incur costs and expect your customers to offset that with higher prices.

Rafi’s recommendation for Target is,

Target should instead match prices of online rivals with a comparable “apples to apples” service: order from Target.com. If a customer sees a lower online price, Target will match only if ordered from Target.com.

It does not work that way. What is the differentiation here? What compelling reason does Target.com offer to those who otherwise would choose Amazon (based only on price)? I should note that Rafi is also the proponent of 1% price increase philosophy, and that recommendation does not work here as well.

What are the real recommendations? If prices come before costs, customer segment and their needs come before prices. So any pricing strategy recommendation to Target must start by asking what customer segment does Target want to reach  and what should be their offering (product mix, service and delivery model)? May be it is the equivalent of “same day delivery”, or a unique product mix that isn’t available in other channels, or the ease of returns. Target has to find out what is relevant to its target segment and decide.

In my tweet question to Forrester Retail Analyst Sucharita Mulupuru, she replied

For same products where the channel adds no value, she says, charging higher prices is not going to be possible. Her two recommendations are developing private labels (that can yield price premium as well) and Unilateral Pricing Policy (UPP) where the manufacturer sets a fixed price that all channels have to sell for.

If you take this to the extreme, it is likely we will soon see total vertical integration in retail channels – from the very devices we use to browse and buy,  to products we buy  and even the method of payments we make. Not far fetched if you consider the reasons why Amazon is trying to get Kindle in every hand.

And yes, HBR is right but how it arrived at the answer is wrong.

 

If you are selling Enterprise Apps you don’t start with freemium

I thought the word freemium went the way of singing fish and MySpace and hoped I never have to write yet another article with this portmanteau in the title. Unfortunately wrong ideas  and false beliefs don’t die easily. They are not replaced by some profound truth because the believers suddenly achieve self-realization. As Kathryn Schulz wrote in her book, Being Wrong, bad ideas die hard because they can only be replaced by another equally bad idea. Until another such bad idea comes around we are stuck with freemium.

This time we are presented with some profound advice on go to market strategy for Enterprise Apps by Scott Irwin from Rembrandt Venture Partners. In his article for GigaOm , Mr. Irwin recommends freemium as the first option for go to market strategy for Enterprise apps before inside sales and before enterprise sales.

Those who are already sold on the idea of freemium will see this as further evidence supporting their case.  Those who are new to the idea will likely see the popularity of the post as evidence for its veracity. Those like me are not going to be convinced as usual. The problem this time is the flagrant errors in the case Mr. Irwin makes by recommending freemium for enterprise apps.

If you stopped reading here, think about it – Enterprises have a budget and have wherewithal to pay. Why shouldn’t you charge for your value-add?

Now to the flaws in Mr. Irwin’s argument.

  1. Ignoring Customer Needs: There is absolutely no mention of the customer segmentation and their needs. Why are customers hiring the Enterprise 2.0 Apps for? If you do not understand your target segment and their needs you cannot deliver them an effective product. And if there is an urgent your product fulfills why should you not charge for it? These are enterprise customers and they have a budget to pay for these apps that add value.
  2. Ignoring Customer-Channel Alignment: Mr.Irwin starts out by making a case with Salesforce.com, a company I admire for its disruption of the enterprise software landscape and its marketing. But it should be noted that they very carefully chose their initial go to market strategy that aligned with how enterprises buy software – building an highly effective enterprise sales team backed by phenomenal marketing. It was not freemium that helped Salesforce.com grow to $3 billion a year company. Sure their product was easy to setup and use but they were not just fighting against customer apathy, they were competing against strong players with significant sales prowess. Do not for a second think freemium would help compete against entrenched players or serve as free marketing.
  3. Choosing Irrelevant Examples: If the topic is about go to marketing for Enterprise Apps the examples used should at the very least use such companies. Not Evernote, a consumer based webapp. When it comes to freemium examples, for the past two years, there have been no other examples than Dropbox and Evernote. Such a model of try the free version and upgrade to premium may work in consumer segment (barely, only 3% upgrade to paid version) but the competition is not going to let that happen for enterprise segment.  In addition any such popular example also suffers from biases.
  4. Choosing Selective Evidence:  Mr. Irwin makes a case using SurveyMonkey, specifically goading us to make app fun so users will use it. First, why should making the app fun be mutually exclusive to charging for it? What about many other applications that are fun to use and but not free. If we want to stick with the same application family as SurveyMonkey, we have SurveyGizmo which you know decided against freemium model to target enterprise customers. There are many other examples of applications that are fun to use and not free. By using selective evidence Mr. Irwin not only succumbs to biases but leads his readers down the wrong path.
  5. Anything but Charging For Value: Rest of his article is presented as a recipe for freemium. If you did not have your segmentation right, you do not have your product strategy or go to marketing strategy right. Any other revenue model, however innovative it is, is not effective. Yes Atlassian and others adopted pay to charity, pay what you want, pay with WOM etc models. Likely these models were relevant for them because they started with right customer segmentation. But all those do not apply to your business.

Why are management gurus, entrepreneurs, startup gurus and now venture capitalists  dead set against getting fair share of the value they create for their customers?

There is Marketing Research and then there are the rest

Why bother with marketing research at all?

If you have already decided on the path to take, product to develop, its pricing and  its routes to market –  save your time and money and go right ahead, there is nothing marketing research can do for you.  Of course you might believe that you already know the right answers and marketing research will help add analytics backing to your case. If you are not looking to do anything different based the data you find, there is no incremental value from marketing research to you.

Why can’t I do it myself ?

Yes you can. You are very good at what you are doing and you took the right step of seeking information for your decision. But you are the decision maker, you are too close to the problem. Your biases will most likely push you to seek data that attests your notion rather than seek the right information let alone seek data that contradicts your notion.

I plan to talk to customers and validate my hypotheses, isn’t that enough?

What are your hypotheses? How many customers? How did you choose them? What do you plan to ask them?  If you are simply verifying whether there exists few customers who are vaguely interested in a product that you have then yes, that is enough. The information you get from a few customers you talk to cannot validate any hypotheses about product features, pricing or segmentation. The output from “getting out of the building” and talking to prospects/customers is not data but informed hypotheses about their preferences, characteristics, buying processes, and segmentation that need to be validated across the wider market.

Isn’t it sending out surveys research?

No it is not. While a survey is an essential component of marketing research, sending out a canned survey or the one you designed yourself is not. First, there is the key step of doing qualitative research – customer interviews, focus groups, following the customer (ethnographic studies) and yes “getting out of the building” – that helps you find the language of your customers, the extremes of their preferences,  and hypotheses about them. Then comes survey or surveys custom designed to seek specific and relevant information  using rigorous data collection and analyses processes to validate these hypotheses. Remember, marketing research starts with talking to your target market and not with a canned survey.

Why would I spend money on hiring a professional do it?

Yes, there is cost to acquiring the information the right way, but what is the value of information to your venture?

Do Not Think Like Your Customers

What does it mean to think like a customer?

Which customer segment exactly?

How static is that thought, what else influence customer thinking?

Why should a  marketer think like her customer?

I will start with the last question and say, a marketer must not think like a customer but must understand what the customer is trying to solve with your product.

When a marketer thinks like a customer, they are just thinking how she would make buying decisions as a customer and not how her customers make their buying decisions. Besides not all segments think the same, which one do you want to focus on? Even within the same segment customers think differently based on the purchase occasions. Their thinking is also not static, it is malleable through marketing.

Trying to project your shopping behavior or generalizing one customer behavior across all segments will lead you to make pricing and product mistakes and lost profits.

In a Times article on a small business, Crispy Green, that is addressing its growth strategies its owner Ms. Anita Liu said

I think like a shopper. What I don’t want in the middle of a recession is for prices to go up on a favorite snack.

In case of Crispy Green, the problems are more than just pricing, it involves understanding target customers, defining Go-To-Market strategy and ultimately what the business goals are. But focusing on the pricing problem, intuition and instincts are not the way to make business decisions.

Yes, some customers will not like price increases in the middle of recession, but will they stop buying? What percentage of sales will you lose (i.e., price elasticity of demand)?  Will the price increase deliver incremental profits?

Don’t think like your customer but understand what they want in their life and how your product can play a role.