Delighting Customers Just Right

What does delighting customers mean?  Stated differently,  what delights customers? Many have offered their own opinions and recommendations. Most fall in the general category of beating customer expectation by a mile.  Examples like throwing in something extra when they least expect, sending a thank you card to customer or flowers for life events are ubiquitous.

But let us drain the murky pond of opinions and get back to the basics. We have data that points to what delights customers – it is when they willingly pay a price for a version of product we offer and feel good about it. You build and offer the product at a price that delights them and at a cost that is profitable to you.

The product packs the right set of values that are most relevant to them for the price point. They are more delighted to swap their cash for the product. Stated in economic terms, they get positive consumer surplus and you as marketer get better profit than otherwise. Perfect synchrony.

Nothing more. Nothing less. No need for gimmicks, to throw in an extra or send handwritten thank you note. If the customer sees positive consumer surplus at the offered price point you are done.

See this on display with Apple. Take the case of ear phones they pack with different iPods, iPhone and iPad.

  1. With the $49 iPod shuffle Apple ships the older style ear phones
    specs_headphones_mediumRemember Apple’s messaging when they introduced the newer EarPods that fit the natural shape of the ears? Wouldn’t customers be delighted to get that over the older models?
  2. With $199 iPod Touch Apple ships the EarPods but without the Mic and remote volume control.
    earpods_medium
    Wouldn’t customers be delighted to get the same one they get with iPhone? Wouldn’t the Mic be useful when you make Skype or FaceTime calls on iPod Touch? If customers want to add that convenience they can buy for the model that retails for $29.
  3. With iPhones Apple ships the EarPods that has Mic and remote control.
    earpods_mic_smallThis makes sense after all it is a phone.
  4. With its most expensive iPad model, iPad Pro that costs $1079 apple ships nothing. That is right, not even the cheapest earphone that ships with $49 shuffle is included with $1079 iPad.

This is not just one example making the case but an example illustrating the principle of pricing, value allocation and consumer surplus. Yes we all will feel happier when we get the EarBuds with Mic thrown in with iPod Touch or iPad. But the point is we are already delighted to get the product as is at its price point. Once we stand up and reveal our preference there is no need to do anything more, even if it is to add EarBuds that likely cost less than a dollar for Apple.

When it comes to customer delight ignore the platitudes and focus on the simple principle that customers express their delight when they swap their cash for your product. If your product does not offer value that leaves positive consumer surplus they are not going to buy your product. Therefore not delighted.

Do you understand customer delight?

Charging Men and Women Different Prices

A supermarket in Germany is now selling separate men’s and women’s sausages. It is the same meat but the packaging and pricing are different.

The version targeting women is half the size of the version targeting men. And for good measure it is priced more  than men’s version. To see the price difference you need to look very closely at how they listed unit price for the two making the comparison difficult.

For women’s version they list unit price for 100 grams. For men’s version they list unit price for 1 kilogram. This requires customers to stop in their tracks and do the additional comparison math even though it is a very simple conversion.

Note: If you do the math you will see this could be just a case of non-linear pricing (volume discount), more on that near the end of the article.

One another difference in packaging is labeling –

The male sausage features an alluringly-clad woman – in front of a flaming background – while lady shoppers are being drawn to part with their hard-earned cash by a topless gentleman with excellent muscle tone in front of a serene, cloudy background. (Source and Picture Source)

So is this good or bad price discrimination? Gender based price discrimination is just plain wrong. I have written about Good and Bad price discriminations before.

Journalist  Susanne Enz sees this as “dull sexism.”

The sausages’ marketing, she said, implied that “men eat a lot and heartily, while women mainly want to be thin… Women are there to please, while men are allowed to enjoy.”

There is lot of truth to what Enz says here but there is also lots of bad marketing while not necessarily bad price discrimination here. For price discrimination to be labeled good  and effective it has to meet the following two criteria

  1. To be labeled good: Customers must have choice and control to buy whichever version they please and not limited by who they are but only by their willingness to pay and wherewithal to pay. (See Amazon pink watches)
  2. To be labeled effective: Price fences between versions must be defined such that those who can and willing to pay for higher priced version will not adversely self-select themselves to the lower paid version. Like 13″ 256GB MacBook Air vs. 11″ 128GB MacBook Air.
    Sometimes the fences end up done badly that they also punish those who can only afford the lower price version – like roof-less third-class train cars in olden days. (See tyranny of versioning)

Let us evaluate the German sausage  pricing on these two criteria.

Good Price Discrimination

Do the customers have choice? Yes. Both women and men can choose any of the two versions. So it is a case of second degree price discrimination (which is the best form of price discrimination despite its ominous name) and better than third degree price discrimination.  Third degree price discrimination is when the super-market checkout clerk charges one price for women and another for men at the time of checkout.

This is not that different from the  shaving gel case study I wrote a while back. Since nothing prevents  women from choosing the cheaper version targeting men, this is good price discrimination.

There is also merit to Enz’s statement that it implies, “men want to eat more”, but I would not take that claim any farther.

Not So Effective Price Discrimination

What are the price fences here ? Price fences are the features and triggers that make sure the higher willingness to pay  segment stays with its positioned version and not tempted to choose the version targeted for lower willingness to pays segment.  The fences here appear to be the amount of meat and the  picture on the label.

There is merit to the supermarket’s thinking that smaller sized version will be more attractive to women and hence setting a higher price.  But their price fences are awful – using pictures of “alluringly clad women” on men’s version and “topless gentlemen” on women’s version. Both are insulting to respective genders.

One variation that would have made improved this bad situation is – using “alluringly clad women” on men’s version and use a sane and sombre labeling that appeals to women’s intellect on women’s version. This would be the equivalent of roof-less third-class cars and shaving-gel. The hypothesis here is, women will be disgusted by the picture on the other version and will naturally gravitate towards their version with better picture.

So this gets mixed grade on effectiveness criteria.

Finally is this a case of price discrimination or simply a case of non-linear pricing unnecessarily confused with irrelevant packaging aspects?

If I do the math based on unit prices I see on the picture, the respective unit prices are

250 gram version has a unit price of €0.80 per 100 grams

500 gram version has a unit price of €5.98 per  kilogram, or €0.598 per 100 grams

Non-linear pricing is where you give better unit price to customers when they buy more units. Like Costco giving you better unit price on the 50 gallon mustard bottle. It appears that the price difference here fits that mold. Why the marketer chose to erect price fences and extract additional rent from women customers is beyond me.

What do you think? Is this good and effective price discrimination?

Let me leave you with a thought experiment. You likely know most public toilets in Europe charge you for usage. What if they charged different prices for men and women?
Will that be good price discrimination?
How will you make that both good and effective?

Amazon Price Discrimination Done Well

I wrote a while back about price discrimination and its bad rep. It is actually not all bad. My attempt to rebrand it as price harmonization did not catch on. The right kind of price discrimination is offering multiple versions at different price points so customers will self-select themselves to the version they want to pay.

Like you pick retina display with MacBook Pro or SSD disk over HDD. This is second degree price discrimination. With price discrimination, as long as you do not restrict customers from choosing certain versions and let them choose any of your versions then it is perfectly acceptable.

The success of second degree discrimination also depends on packaging and pricing the cheapest version such that it helps bring-in low-end of the market without being attractive to those who would gladly pick the higher priced version had there not been the cheaper version.

Amazon has a product that very nicely executes second degree price discrimination, while also capturing a little bit extra consumer surplus from one of the genders. (Yes, pure gender based price discrimination is bad but I will show you why in this case it is not the case.)

Take a look at the 3 versions of the same model of GPS watch.

The first version

base-gpsThe base model without heart rate monitor costs you $147.35 (at a discount of $52.64). If you want heart rate monitor to go with the black model, it is sold separately for $45, bringing the total to $192.35.

Now the second version

red-gpsIt is the red model with included heart rate monitor, priced at $184.91. That is $7 cheaper than black base model plus heart rate monitor add-on.

Why is the drab base model priced such that its combo price is more than buying bundled red model? Because they are targeting the base model  at low-end customers with lower willingness to pay.  And if some of those insist on heart rate monitor with that color they likely value it more hence have higher willingness to pay and should pay $7 extra over the bundled red model.

Also note the list prices of the base and red models – $199.99 vs. $229.99 – a difference of $30. But how they are discounted is much different from the $30 difference. You would expect discounted price of red model to be just $30 over black base model. Instead it is $37.56 over base model. In other words the amount Amazon has to discount to make the sale goes down as they move up the model.

That is $7.56 in profit from effective pricing.

Finally, the pink one

pink-gpsThe pink model, arguably a choice targeted only at women, is $1.22 more than the red model. But still cheaper than black combo.   Nothing prevents men from buying it so the pink model pricing is not at all a gender based price discrimination. But helps to capture additional consumer surplus from women who most likely will buy it. (I am succumbing to stereotype here! Sorry!)

So is $1.22 a big deal? For the razor thin per-product margin Amazon operates at and the volume it does, it most likely does. The $1.22 flows directly to their net-income.

Overall a very fine management of pricing.

But don’t attempt this at your business – most businesses, especially small businesses and startups do not have the volume, data and computational wherewithal to fine tune pricing to this level. Worse, most are not even in the right zipcode to attempt any such fine tuning.

Ask me what your business should do instead!

 

 

 

You can’t let your past cannibalize your future – Note on iPhone 5 Sales

Image representing Apple as depicted in CrunchBase

You most likely know by now that Apple is cutting back its demand for iPhone 5 components. Analysts who did the supply chain check attributed to the slowing iPhone 5 sales. And among the many reasons they quote the one that stands out (and probable) is

The less-expensive iPhone 4 and 4S is eating into iPhone 5 sales. With a two-year contract, the iPhone 4 is free and the iPhone 4S is $99, and they might be popular enough among consumers that not everyone is opting for the iPhone 5, which costs $199 with a two-year contract in the U.S.

The number to watch out for in Apple’s earnings report is the average selling price (ASP) of iPhone line. We have seen similar drops before when Apple decided to keep its $399 iPad 2 product. Now it appears it is iPhone’s turn.  (By the way, you can learn a lot from earnings reports.)

This is basic second degree price discrimination – when offered multiple versions at different price points, customers self-select themselves to the version that offers them the most consumer surplus. But to execute effectively on the multi-version strategy the business must raise appropriate version fences such that those who have higher wherewithal to pay and prefer the higher priced version are not tempted by the lower priced version and switch down.

In case of iPhone 4 and iPhone 4S, these are extremely very well done products that offer lot more value especially when combined with the lower prices they are being offered at. And these older (yet superb) models are cannibalizing iPhone 5 sales.

Most people say, “it is better your products cannibalize your own than others doing it to you”. While no cannibalization is good, that statement would make sense if newer higher profit generating models replace your older models before your competitor does that to you. You can’t however let your past cannibalize your future. It also says something about your future product pipeline.

I also don’t believe we have seen the end of iPhone downturn. Here is what I wrote in GigaOm about effect of iPad mini (before it was released)

iPhone: The crown jewel. It is harder for most to see how a smaller tablet could threaten the iPhone. Consider this in the context of total cost of ownership of an iPhone over two years: At $100 per month for mobile service fees and at $199 for the device, it costs $2,500. Mobile service providers are moving towards just one bundle of voice and data at $100 per month. If there were a $299 4G iPad Mini, some may consider a regular phone for occasional talking and the iPad Mini with $40 data fee as an iPhone replacement.

Is Apple, a company that is unusually excellent (here, here and here )in multi-version pricing strategy, starting to stumble?

Pricing Flash Storage in Tablets – Don’t Call This As Markup

The New York Times Bits blog laments about the giant markup Apple and Amazon charge on flash storage. Bits blog not only complains about the price vs. cost difference but also caught on to the price difference between Kindle and iPad for the same storage.

Kindle: 16 gigabytes for $300 and 32GB for $370; to enjoy 16 extra gigabytes of storage, a customer pays $70 more. For its smaller 7-inch tablets, Amazon charges $50 more for an extra 16 gigabytes.

iPad: You can get a 16GB model for $500, a 32GB model for $600 or a 64GB one for $700. That’s $100 extra for that first 16GB bump, then a relatively cheap $100 to get from there to 64GB.

At the outset let me point out I have lamented on the same topic as well but mostly admired it and only lamented it a bit as a consumer. Let me point out how the flash storage prices vary even within Apple’s different product lines,

Apple Pricing

Yes both Kindle and iPad are able to extract lot more consumer surplus with their flash pricing. That is because they figured out their customers value the additional capacity lot more and are willing to pay the additional $100 (or $70) for doubling capacity. This is not markup and the fact that flash costs 50 cents per gigabyte should not matter.

Using words like markup comes from cost based pricing (add up all the costs then mark it up to get the price, hence markup), as is shown by this text in the same Bits blog post,

Of course, when you buy a new gadget, you’re not just paying for a slab of components. The maker of the product is trying to get you to cover the cost of research and development, manufacturing and advertising, and still rake in some profit.

Note how sure the author is – “Of course, you understand the price you pay is …”.

Let me do my own convincing and point out that – of course  customers are not concerned about your costs. They are not paying the price to defray your costs. Besides R&D, Manufacturing and Advertising costs are sunk and are not attributed on a per unit basis.

Customers pay for what they value and marketers charge for that value. If marketers figured out a way to deliver the value at  the lowest possible price it does not mean they have to pass on the savings as lower prices unless they are forced (by market forces) to do so.

Call this effective pricing and don’t call it as markup.

As a customer do I lament alongside Bits blog? I do. But as a product guy I admire their pricing.

For extra credit see my articles on

  1. Nexus 7 flash pricing
  2. Second degree price discrimination infographic
  3. Why Apple does not include earphones with iPad?

Just because there is a gap in product line

Recently I wrote an analysis on the implications of rumored  iPad mini on Apple’s profits. The best case scenario, one that will result in another billion profit, is the one where Apple successfully positions iPad mini as yet another device we need between iPhone and iPad. This may sound like a recent piece in The Onion,

Any other scenario is fraught with risk of cannibalization, not just to its iPad but to its iPhone and iPod Touch products as well.

Recently there was another article that looked at price points of iPod and iPhone product lines and made a prediction about iPad mini. The premise is based on Apple CEO’s comment about price umbrella,

“one thing we’ll make sure is that we don’t leave a price umbrella for people” in the tablet space.

The chart we see on the left is simply a representation of Apple’s current price points using bar-chart. From the iPhone and iPod examples it asks us to make a leap of faith about iPad.

Strategy is not about nicely completed artificial triangles. Absence of iPad in the lower price points does not point to a gap but Apple’s choice for profit share and not market share.

If filling the gaps in the price points is the driver then you we should have several sub $500 laptops and desktops from Apple. Just open the flyer from Fry’s and count the number of laptops available in the $400-$700 range and compare that to the price of MacBook and Macbook Pro laptops. Shouldn’t Apple be worried about yielding that market to others?

This is not to say there will not be a iPad Mini but pointing out that the case being made for iPad mini lacks any kind of rigor or evidence.

The gaps in the price points says nothing about the segmentation or the demand.  Nor does it say what happens to demand for current products when a newer cheaper one comes along.

If one is going to use charts to make a case for iPad mini, it will look something like this

This is the representation of the demand for iPad and iPad mini. We do not have data on how these demand curves look like. May be Apple has this information. What this chart tells us is the impact of the demand for $499  iPad when there is a $299 iPad mini. As long as the profit from iPad min sales exceeds the lost profit from cannibalization of other products, Apple will introduce iPad mini. Not because they do not like gaps in someone’s bar-chart.