Pricing Long Sleeve Vs. Short Sleeve

Price: $98
Price: $119

WSJ is now selling bike jerseys. More than the design what is interesting is their decision to offer two versions at two different price points. Short sleeve at $98 and long sleeve at $119. This is an effective versioning strategy, recognizing that different customers have different  needs and willingness to pay. They created two versions at two different price points to match the segment’s needs and capture value. If one price is good, two are better.

This type of versioning is what I describe as vertical product line extension.  Another option for WSJ would’ve been to introduce multiple different designs (say with different “news stories on the jerseys”). That is horizontal versioning.

Marketing studies show customers’ willingness to pay varies along the vertical dimension and does not vary along the horizontal dimension.

What does it mean to a marketer?

Versioning can translate into multi-price points and higher profits only if the value to the customers varies across them. Simply creating multiple colors is not versioning. Each customer has different willingness to pay but a marketer cannot capitalize on that through horizontal versioning.

Profitability of Product Proliferation – The Case of Downy Simple Pleasures

Update 3/26/2013: P&G recently discontinued Downy Simple Pleasures and relaunched it as Infusions

Recently P&G has been promoting a new line of Downy fabric softener called Simple Pleasures. This is a premium product compared to their regular Downy line and it offers at least five different scent choices. On top of that Downy brand is running a contest to generate more scents.

How many Downy scents does the market need or can support?

downy_simple_pleasures Brands have been competing for the shelf space and wallet share of customers by expanding their product line both vertically and horizontally. The reasoning is finding every niche and filling it with a version at a price customers are willing to pay. That is the reason a typical supermarket stocks 30,000 to 40,000 SKUs. That is the reason you see raspberry, strawberry, key lime pie, vanilla and all sorts of yogurts. While conventional wisdom may say to the brand managers to keep expanding, data show otherwise:

  1. Customers do not value different variations  (colors, scent, flavors)within the same product line differently
  2. Retailers cannot set the prices differently for strawberry flavored vs. raspberry flavored yogurts
  3. Increasing products horizontally (color, scent, flavors) do not result in increase in market share or profits

In an NPR story on Walmart earnings report, they interviewed a few customers shopping at a Walmart. One of them said,

Ms. HAVENER: Do we really need to carry 19 different tackle boxes, or do we need to carry six different tackle boxes? And were so really looking at clarity of offering.

This is one data point, but the broader story line is Walmart has been systematically reducing SKUs, decluttering shelves and pushing back on manufacturers on number of SKUs they want to stock. Walmart is the leader in retail market share and it is by no means alone in pruning shelves. Retailers like Walgreens and those in UK are doing exactly the same.  Retailers, especially Walmart, are known for religiously tracking revenue per square feet (it is actually per cubic feet) of retail space. All the retails space and shelf space may be sunk cost, but there is an opportunity cost associated with every SKU they decide to stock. Retailers are finding that customers value fewer options more than proliferation and the reduced inventory helps with profits when sales are down. So why are we seeing increase not decrease in SKUs from brands?

When P&G’s customers were trading down to private labels, P&G responded by vertical extension of its product lines like Tide Basic and Tide Ultra. As a multi price point   strategy to keep customers within the brand family that is the right approach. But I am not convinced with their horizontal line extension.

When a brand is already $1 billion in annual revenue (P&G has at least dozen of them) is product proliferation the only way to find growth? Given the  pressure from channels and the data showing otherwise why is P&G flooding the market with a product that differs only in the scent but otherwise has no functional utility to the customer?

P&G is arguably the best in class data driven and customer driven marketer, not just in CPG space but across the entire brand space. May be Google edges them out but that is another story. What are they seeing that the academic researchers and retailers are not?

Multi Version Pricing Now Playing In Luxury Segment

In a down economy how do you keep price sensitive customers from switching away from your brand without losing price premium? The answer is anything but groundbreaking, multi-version pricing. Offer products at multiple price ranges so you can move customers within your brand family. Price sensitive customers will self-select themselves and buy lower priced products while you keep the price premium of your top of the line products. Nestle, the CPG leader, clearly stated and follows this rule

And you see how we through the brands are allowing the consumer to have different price points.  These are all Purina products.  You see it in dog food; you see it in cat food how we have spread over different price points the product portfolio and yet using the Purina brands there rightfully. Even small businesses like salons practice effective multi-version pricing.

Now the luxury segment, which have just one price, is gearing up for multi-version pricing. As the book Richistan noted, “pricing for this segment was like pushing an open door – no resistance”. Not anymore. The downturn is starting to impact the rich, who are becoming price sensitive in their own level (which is quite different from price sensitivity of a supermarket shopper switching to private label). Financial Time’s segment on Business of Luxury profiled how the down economy is hurting the  price insensitive luxury segment. What do analysts recommend?

most analysts say companies with products spanning price points are more protected than those, like the French silk and leatherware group, that are more tightly focused. A broader portfolio means manufacturers can cater to consumers trading down, and can provide muscle with third-party wholesalers and retailers.

From small businesses like salons to large corporations like Nestle, from canned goods to luxruy goods the business principle is simple, “Keep the customers in your brand family by offering them products across a wide price range!”

The Price We Charge

As a consumer we all value products differently and even value the same product differently based on time and context. That defined our willingness to pay. For a marketer that is a complex problem to solve. How should they price their products so they are making all profitable sales that are possible and not leaving any money on the table?

A consumer would love to leave with a “smile on their face” after paying a price for a product. A marketer on the other hand would like to completely “wipe that smile off the face”, that is extract all consumer surplus. But how can the marketer do this for every consumer?

Intuitively we can see here that at a given price some consumers are priced out, some leave with a smile and the rest leave with no smile.

In “The Price We Pay” I talked about an hypothetical device that can tell consumers how much they value a certain product. Now let us invert that device, this time it helps marketers. Every time a consumer walks in,  the marketer points the device at them and it tells the consumer’s true willingness to pay and the marketer gets to charge them that. Just like the previous one  this device does not exist as well. This is the reason for the different price discrimination schemes and multi-version pricing. All designed to maximize profits.

The question is how best to do this. This is a whole lot science that just art. Look for more articles on these topics in the coming weeks.

Multi Price Point Strategy From Nestle’s Playbook

Versioning
Versioning

Update: I learned today from a boom about Cadbury’s that Nestlé sells 1 billion products worldwide. That is at least one billion prices. That is mind boggling. But the number sounds suspect to me considering their total revenue. Can someone fact check?

In the Nestle 2009 roadshow presentation (PDF) there are three slides that read like a lesson on multi-version pricing. One of the slides is shown in this post (advance thanks to Nestle). The numbers are not exact currency numbers but rather a price index showing relative price position. Nestle says in the transcript of the presentation,

You see here an example of PetCare which has shown and proven also to be a very strong resilient and defensive sector in bad times. And you see how we through the brands are allowing the consumer to have different price points. These are all Purina products. You see it in dog food; you see it in cat food how we have spread over different price points the product portfolio and yet using the Purina brands there rightfully.

Nestle is one of the few companies to report profits this quarter. As I wrote in my previous post, one reason is their price increase. Nestle’s multi-price point strategy seems almost so simple and easy that it will not be a surprise if anyone reading this raised the following questions:

  1. If it is this simple why not everyone do just this?
  2. If this works for Nestle why would it disclose this secret to the rest of the world?
  3. If this is so effective why not have more products at different price points, in fact take it to the extreme and have one price per person?

The answer to the first two question is the the same,

  • This works for Nestle only because of the brand equity and the strong brand loyalty of its customers. Neither of these can be build overnight.
  • Pricing and multi version products are aligned perfectly with the core strategy. In the case of Nestle its competitive advantage comes from a tight integration of its R&D, product innovations, comprehensive geographic presence and from its people, culture and values.

Multi-price point may seem easy to copy but without getting every strategic component right simply copying it is not going to help a competitor.

So why not take multi-price point to the extreme? This requires much longer discussion and I will write on it in a later post. But if you have your thoughts on this please share.