Behind Crest White Strips Multi-Version Strategy

P&G practically created the teeth whitening white Strips category. Introduced under the powerful Crest brand it helped create new revenue stream  after all  it is not easy to grow 10% YoY when each brand bring in $1 billion revenue. The part that interests and impresses me the most is their multi-version pricing for the White Strips category. While I expressed concern about P&G’s other brand Downy’s horizontal product line extensions, Crest White Strips serve as an example of effective pricing  strategy, tactics and execution.

Take a look at the Crest White Strips page from P&G and here are some insights on their versioning strategy:

Side bar – Value Tag: For brand managers from Colgate-Palmolive and Unilever this article is worth $9999 to you.

  1. If one price is good two are better and four are even better if designed and positioned correctly. Crest offers four different versions of the product, offering increasing benefits from low to high end version.  This is vertical product line extension.
  2. Versions are designed in such a way that customers self-select  themselves to the right one (Second degree price discrimination).
  3. The lowest priced version is the Classic at $24.99 and the super premium version ($44.99) is the Crest Advanced Seal, introduced in early 2009.  That is a $20 price differential between the lowest and highest product creating great profit opportunity from up-selling.
  4. The price jump is non linear and reflects customer’s diminishing utility. From Classic to Premium it is a $10 jump indicating customers assign most value in this upgrade. Between other versions it is $5 jump indicating customer utility flattens out or grows slowly as they move up the versions.
  5. Note that the listings are benefits and not product features. Customers care about benefits  and not about the features – compare this to many of the technology offerings that simply list feature differences across versions.
  6. Look at  the images showing the packages. These are designed to visibly show that not only are these versions different but also  help “tangibilize the intangible” (Ted Levitt).
  7. In behavioral economics, the effect of  presence of high priced versions has been extensively studied. The netof those findings is that while these may not sell much, the  presence of high priced versions help improve customer willingness to pay for the other versions. But that is not the case with Crest Advanced Seal. I make this claim based on the number of reviews and rating for this product.
    Versions Reviews Rating (on a scale of 5)
    Classic 58 4
    Premium 34 3.75
    Pro Effects 17 3.5
    Advanced Seal 77 4

    If we use the number of reviews as a stand-in for the market share, Advanced Seal, despite being the super premium version, is their most popular seller. The ratings also indicate that customers are happier with their super premium version. At $20 price premium and arguably not much cost difference this is a big contribution to their profits.

  8. Their Pro Effects, scored the least both in terms of number of reviews and rating. Until P&G introduced Advanced Seal an year ago, this was their most expensive version. We can hypothesize that it served then as the expensive decoy but did not add as much value to the customers and hence did not get market share. Going forward we should expect to see P&G allocating fewer marketing resources to this version and keeping its price levels.
  9. All their prices end in 99, as seen again in behavioral pricing literature this is a good tactic. It is easy for everyone to have prices end with 99 but it takes marketing strategy and a clear understanding of customers to maximize profits.

Overall Crest White Strips serve as a great example of marketing strategy, versioning and pricing for profit maximization done right!

Pricing For the Bottom of the Pyramid

When the value to the customer is not clear or hard to quantify it is difficult to go to market with the right price. Take the case of new market entry, while your customers in old  markets may connect well with your value message it is not the case in new markets where the  customers may  not have heard of your brands.

The problem is complicated when the new market is made up of low value, low willingness to pay  customers as in the case of Bottom of the Pyramid. Customers truly lack the resources and wherewithal to spend a whole lot on your products but do stand to get value from your products.

Introducing your product versions from your established and affluent markets into these emerging low WTP markets is fraught with perils. Wrong price will not only result in losing profits but you losing out completely to the local and regional brands.

I wrote about using relative price when the value message is not clear to your customers. The idea is to position your product and price it to capture a share of the budget spend in the particular area. A similar idea, with a variation, would work for bottom of the pyramid as well. Understand the total spend of the customer and what they spend on absolute essentials – then design and deliver a version at a price that is relative to these essentials and profitable to you.

Take the case of P&G, which is going after markets like villages in India and China. Here is what their approach is:

Products, too, have to be adjusted. Procter & Gamble has had to break down products like shampoos and soaps into smaller and less expensive sizes. In these countries, for instance, P.& G. makes sure that a small package of shampoo, enough for one or two uses, does not cost more than the price of an egg.

It is not enough that you compare your price against other direct substitutes and alternatives. You need to survey the whole range of customer spend and understand that you are competing for a share of the customer’s tiny wallet. If you did not understand your shampoo will be competing against eggs you will end up introducing a package at a price that is way beyond the reach of most customers. Note that this is not about cutting your price to meet the low WTP but versioning your product so that it is both priced attractively and can be delivered at a cost that is profitable to you.

Success at the bottom of the pyramid does not mean low prices – it is still delivering great value at the right price.

Aligining Price With Value – Metering Vs. Versioning

In any  all you can eat pricing model, be it a lunch buffet or at&t iPhone subscription pricing, as long as the  total revenue  exceeds total costs, the business will make a profit  regardless of whether they lose money on any one customer.  There will always be a distribution of customers based on value they receive and price they pay

  1. Some customers get more value than what they pay
  2. Some don’t get as much value as they paid for

The problem occurs  when  the first segment uses a higher proportion of the service and risk completely starving the second segment.

AT&T says,

the heaviest data users, saying that 40 percent of AT&T’s data traffic came from just 3 percent of its smartphone customers

To provide appropriate level of service to the second segment AT&T needs to size their services so the big appetite of the first segment is served. Facing customer backlash from slowness, AT&T is trying to reduce data usage by the heavy iPhone users – this implies they are either working on introducing metered pricing or a multi-version pricing.

Either of these plans require that their subscribers understand the value they get from the current unlimited plan. If the customers do not know  how much value they have been receiving they will balk at any changes to current pricing. AT&T has a leg up on this, they have been itemizing  data plan usage minutes (page after page if you received paper bill) even though the plan is supposed to be unlimited. It is arguable how many customers look at paper bill but the auditing does provide a way for AT&T to make a case with its customers when they introduce new pricing plan.

For example,

“Dear customer, do you know, on the average, you used 100 minutes of data service for 1GBytes download in the past 12 months. That’s $50 in value per month and $30 more than what other customers like you receive. To better serve your needs and those of all our customers like yourself we are introducing a new pricing plan …”

Which one will it be? Will it be metering, charging per minute or megabyte of download of data usage? Will it be a set of new data plan versions offering a combination of minutes and download? Which has better chances of succeeding?

I do not believe it will be usage based pricing. It does not align with the current minutes plan and the  problem it introduces with customers constantly worrying about using the data service.  AT&T already has a track record in executing a successful multi version pricing plan for its wireline high speed service (see figure left). Modeled after this we should expect to see three to six different data plans at different price points, each offering a combination of minutes and download (GBytes).

Versioning is about offering multiple versions at different price points so the customers self select- in this case it also helps to better align the value customers have been receiving with the price they pay.

Pricing different movies differently

[tweetmeme source=”pricingright”] The question of, “Why are all the movie tickets priced the same?” have been studied at length*.  Economists express surprise at how primitive movie pricing is and how sub-optimal it is to charge the same price for all the movies. Marketers are surprised by the absence of basic tenet of marketing – segmentation and targeting, positioning the product and capturing value. Movie ticket pricing are indeed a greenfield for practicing price discrimination offering large un-captured consumer surpluses and value from price sensitive moviegoers.

Most pricing recommendations for movie theaters ask for

  1. Higher pricing for weekends
  2. Higher pricing based on mega budget films with stars
  3. Higher pricing in the opening weeks and then reduced pricing (like Hardcover, softcover books pricing)

These methods were usually pushed aside because of the logistics of implementing them ( Movie Mystery. By: Hessel, Evan, Forbes, 00156914, 1/29/2007, Vol. 179, Issue 2) or complexity in estimating weekend box office sales. Others offered conventions as the reason for not adopting variable pricing at movies.

To be fair, movie theaters do practice  price discrimination. They sell the morning shows at a discount bringing price sensitive customers who are willing to make the trade-off (Second degree). They give discount to students (Third degree). They sell discount tickets through supermarkets that can be used after the first two weeks (Second degree).

But the basic question remains, when everything else is held constant except for the movie itself, why are the tickets for two different movies priced the same? For example, at an AMC multiplex  the 4PM screening of two new animated movies, Planet 51 and Fantastic Mr. Fox, are priced exactly the same $10.75.   Fantastic Mr. Fox is based on a book by renowned children author Roald Dahl (a very good book if you have not read alrady) and Planet 51 is a slapstick comedy of reverse ET.  Why can’t these be priced differently? Why cannot movie theaters practice price discrimination across movie titles?

The answer, I believe, lies in utility customer gets from different movies. Movie theaters can charge different prices for different movies only if the customer utility and hence their willingness to pay varies across different movies.  Stripped to the barebones, all movies are perceived as the same by customers – these are all entertainment. In other words different movies are simple horizontal product line extensions.

Based on the marketing study that found horizontal product lines are perceived identical by customers and hence have no difference in customer willingness to pay I hypothesize that customers will not accept pricing that varies across movies.

While pricing different movies differently is not possible, movie theaters can and do charge different prices when the movie varies in format or experience like 3D and IMAX 3D. For example, AMC charges $11.75 and $12.75 for 3D and IMAX 3D shows of Disney’s Christmas Carol. This is possible because the 3D shows are vertically differentiated and the perceived value to the customers vary from the baseline version.

The net is movie theaters cannot increase profits by pricing different movies differently but can do so by offering vertical differentiation in the form of 3D movies (of course this is not under the control of theaters but the studios), better seating (practiced in most other entertainment venues) or better experience (specific auditoriums with better speakers).

Footnote: Other movie ticket pricing references

  1. Movie Mystery. By: Hessel, Evan, Forbes, 00156914, 1/29/2007, Vol. 179, Issue 2
  2. Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles by Richard B. McKenzie (p157-163) (My review of this book here)
  3. Why are all movies the same price? – Marginal revolution
  4. Antitrust and Pricing in the Motion Picture Industry. Yale Journal on Regulation Summer2004, Vol. 21 Issue 2, p317-367, 51p
  5. The Wisdom of Crowds by James Surowiecki (p98-102)
  6. Stanford GSB Research on Why Movie Popcorn costs so much?

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.

Why are the Raspberry and Strawberry Yogurts Priced the Same?

You are walking along the dairy aisle, picking up Yoplait yogurts. You prefer the 99% fat free version, so you load up on some strawberry, some raspberry and some vanilla. The price? All of them priced exactly the same,  59 cents. (Let us ignore the one time promotions they run on one flavor to clear out the stock). After picking a dozen or so 99% fat free version you look up and find Yoplait Whips and it also has almost the same line up of flavors. Price? 79 cents.

  1. Why does the price vary across the types of Yogurt (let us call this vertical product line) but not across the flavors within a product line?
  2. Does it cost the manufacturer the same to make raspberry and strawberry yogurt? Should the cost difference be reflected in pricing?
  3. Do customers value the different flavors differently?
  4. Why does the price vary across product lines?
  5. Does a marketer stand to gain more profit by doing vertical line extension or by increasing variety within a product line?
  6. Can the marketer increase market share by increasing variety within product lines?

In their paper published in Marketing Science( Spring 2006, Vol. 25 Issue 2, p164-174) Stanford GSB professor Michaela Draganska and Kelloggs’ Dipak Jain asked just these questions and found the answers for the rest of us marketers.

We find that consumers value line attributes more than flavor attributes. Given that consumers value line attributes more than flavor attributes,  firms have a lot to gain by pricing their product lines differently whereas they have little to lose from pricing all flavors within a line the same. We also find that the value of a product line is not merely a function of the number of  flavors it includes: The calculated inclusive values indicate that more flavors do not always result in increased utility for consumers and hence higher market shares.

Firms’ profits would not significantly increase if they were to price  flavors within a product line differently. Therefore, the current pricing policy of setting different prices for product lines but uniform prices for all flavors within a line appears to be on target.

What does this mean to marketers? This tells what true versioning means, it is not just changing colors or toppings. Do not chase market share by making minor tweaks, this does not result in  profit increase. Strategy is about making choices. When in doubt about where to invest your R&D and marketing dollars, instead of expanding variety within a product line (horizontal versioning)  go for product line extensions (vertical versioning).