Perfect Packaging and Pricing – Delighting customers doesn’t mean over-delivering

Think about this pricing puzzle for a moment.

Apple includes a standard, good-enough, headphones with all its iPods. Even the cheapest iPod shuffle, priced at $49, comes with one. But there is none included with iPad. Even the most expensive Wifi version, priced at $699 does not include headphones.

If you consider the marginal cost of iPad, it is safe to say it is less than 50% for 16GB iPad and even lower for 64GB iPad. If the cheapest iPod shuffle can include one, it is highly likely the headphone don’t add too much to marginal costs (may be a $1).

Then why there are none included with iPad?

If your answer included words like – consumer surplus, perfect product packaging, utility and willingness to pay – you can skip the rest of this article and go straight to the bonus puzzle at the end of the article.

While you think about this puzzle let us take a diversion to what has become the conventional wisdom in customer satisfaction. Number one advice from customer satisfaction/loyalty proponents is turn your customers into loyal and raving fans. And how would a business achieve that? By delighting them, by going the extra mile, by delivering remarkable customer service and not by nickel and diming for extras.

Conventional wisdom is neither conventional not wisdom. The basic economic theory about consumer surplus and pricing is you don’t leave too much consumer surplus – in other words you don’t give more than what is absolutely needed with the product at a given price point.  From that perspective, Apple is offering the perfect Goldilocks package – include only the absolute minimum that is needed to sell the product.

Every additional item you include to the product package must deliver incremental value to customers that can be translated into incremental pricing for you. If either the customer does not see value or the value does not translate into higher willingness to pay, you should not be including it. (See also Value Step Function).

A moment’s reflection will convince you, an iPod shuffle  is pretty much useless without the headphones. So the headphones are indispensable. For an iPad, headphones are purely incremental and no way reduces the value from the device. Customers are hiring the iPad for a different job. By better positioning the product for those jobs Apple is able to avoid including headphones and as a result make $60 million a year in pure profits ($1 per headphone and 60 million iPads sold)

May be you buy this economic argument from selling the product perspective. What about driving loyalty? Wouldn’t the customers be even more delighted if Apple were to throw-in headphones with iPads?

In a research I conducted two years ago, I showed that you do not have to beat customer expectations by a mile to gain loyalty. Beating it just enough will do.  There is no statistically significant difference in customer’s propensity to recommend your product whether you just met their expectations or gave away the farm.

On a related note, Kindle Fire priced at $199 does not include headphones as well. That is likely driven by cost given Amazon’s approach to pricing.

How do you decide what to include in your product?  What is your perfect packaging?

Bonus puzzle:

Why didn’t apple offer yet another iPad offering at higher price with premium headphones?

Price Realization Through Creative Package Sizes

[tweetmeme source=”pricingright”]The most common type of price realization method employed by CPG brands is using creative packaging to reduce the amount of product for the same price. We seen examples of this from Cadbury and Haagen Dazs. If you walked by ice cream aisle and looked at Haagen Dazs (14 oz)  and Ben and Jerrys (16 oz) you would not be able to tell the difference. What is the best possible way to  change package size so the customers won’t notice it? Chandon and Ordabayeva, researchers from INSEAD, did experiments on customer perceptions of package size   changes and conclude that, “Downsize in 3D, Supersize in 1D” (pdf). From the three experiments they conducted they found

that changes in size appear smaller when products change in all three dimensions (height, width, and length) than when they change in only one dimension

 

tutti_frutti
Wider base and Shorter height

 

There is another not so uncommon practice of creative packaging for price realization that seem to have taken the lesson from Chandon and Ordabayeva and applying it to extract more revenue per customers. I came across a frozen yogurt chain called Tutti Frutti  that in theory does unbundled pricing, selling yogurt and toppings per ounce. They charge a flat price of  35 cents per ounce. They give you a choice of containers and ask you to serve yourself any of the flavors and toppings available. The fun is in letting each customer serve themselves and in the container design (shown left).

Their intention, I surmise, is to maximize price paid by the customer every time they make a purchase. One way is to get a customer to purchase more than they intended which can be achieved with a container with wider  cross-sectional dimensions (radius) and shorter height.

Does this work? In a 2003 study,  professor Wansink of Cornell  did experiments “to determine whether people pour different amounts into short, wide glasses than into tall, slender ones.”  He found that “both students and bartenders poured more into short, wide glasses than into tall slender glasses”. So it does work. Professor Wansink is also the author of the book, Mindless Eating and  writes a blog on healthy heating habits.

Won’t consumers figure this out? Is this a viable way to increase customer revenue per visit? No, definitely not. Judging from the comments in Yelp on Tutti Frutti people figured this out. The first time a customer buys she is going to be shocked to see the bill, as one Yelp reviewer noted her surprise from a $8.5 charge for a container. But from next time on they are bound to be more careful in pouring yogurt into their cups.

Haagen Dazs and Ben and Jerry Pint

I was at Target yesterday and took a closer look at the ice cream display. The same freezer display had both HD and B&J. The containers looked almost same in size, but you an see a subtle difference if you looked longer. The difference is more obvious when you pick the containers up and read the size printed on the packaging, HD is 14 oz and B&J is 16 oz. The price, HD is $3.29, $0.20 more than B&J.

HD is making 12.5% more just from size reduction. Will a customer picking up the ice creams notice the per oz cost? Definitely Ben and Jerry noticed it and pointing this out to the rest of us.

It is not just HD, many other CPG products are now undergoing shrinkage as marketers reduce the size for the same price. The marketing speak for this is “price realization”. I for one tend to believe products are priced lower than what they should be and completely agree with price realization methods. A marketer should not make it part of their messaging to  go after shrinkage of their competitive offerings as this limits their own price realization methods in the future.

Some customers, like this blogger, may look at this as deceptive marketing tactics. There is nothing deceptive about this, the real size is still printed in big size on the packaging. In a typical supermarket a customer has many options, in fact way too many options and can easily choose other products. The stores are also actively pushing their private labels.  What the CPGs are doing is the right strategy, focusing on preserving profit and forgoing revenue and market share.

What do you think?

Ben and Jerry On Redefinition of Pint

Can't we talk this over a pint?
Can't we talk this over a pint?

Ben and Jerrys (owned by Unilever) is not happy with a competitor’s ( most likely Haagen Dazs)  redefinition of pint as 14 oz instead of the standard 16 oz. Haagen Dazs (brand owned by General Mills but Nestle produces and sells ice cream per their  licensing agreement). Both Unilever and Nestle recently reported higher quarterly profit from price increases.  Reducing package size is what Cadbury Plc described in their earnings statement as  part of their, “price realization”.

Should Ben and Jerry’s take a strong position on this?