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I have written a number of blog posts about pricing strategies and business strategy in general. Setting strategy is fundamentally about making choices regarding where you compete and how you win. A very important part of making those choices is understanding how those choices affect other market constituents over a longer term. More specifically, considering and understanding the likely reactions of customers, competitors, potential competitors and regulatory groups is required to ensure business and pricing strategies are durable.
A few days ago Marriott announced they would be merging with Starwood Hotels & Resorts. Arne Sorenson, the President and CEO of Marriott International, posted a blog in LinkedIn Pulse – The Marriott Starwood Merger: Growth of Choices, Value, Opportunities explaining their rationale. The most important component of his post was travelers now have unlimited options available to them. The reason travelers have so many options is the significantly improved customer segmentation that has occurred. Segmentation is critical to creating options and pricing effectively in all industries.
Last month REI announced all 143 stores would be closed on Thanksgiving and Black Friday, REI will urge Black Friday shoppers to go outside instead. “We think that Black Friday has gotten out of hand,” said Jerry Stritzke, CEO of the chain that specializes in outdoor and fitness gear. Perhaps Stritzke can disrupt the holiday shopping season, but I doubt it. More likely REI’s posture is an effective price-communication strategy. He is really saying, “We are skipping the discount frenzy,” and he is counting on customer loyalty and low price sensitivity to maintain profitability.
A recent article in Business Insider, No one pays full price anymore – and it’s terrifying companies, highlighted the perils of discounting. The conclusion of the article was “Consumers just don’t want to pay full price for anything anymore.” While the pricing strategies of most retailers rarely start with discounting, they have trained their customers to wait for discounts, and then buy what they want on sale. The results are lower margins and shrinking profitability. There are pricing lessons to be learned from the pain retailers are experiencing; manufacturers and distributors in B2B markets should heed those lessons. It is dangerous to train your customers to wait for discounts.
Retail markets are very competitive and profit margins are generally low. Some luxury goods companies are exceptions to that generalization, because their pricing strategies revolve around selling the value of exclusiveness, very high quality, and excellent service. Their brand loyalty is very high. On the other end of the spectrum, retailers who rely extensively on discounting find their customers just will not buy without a discount. As a result they are experiencing significantly lower or negative profitability, store closures and in some cases bankruptcy filings.
In May I wrote a blog, The Myth of the Rational Consumer, in which I gave examples of consumers having problems with the cars they drove on the race track, but sticking with the brand anyway. In the subsequent five months, two of those car owners have reiterated that consumers often stick with brands and vendors for questionable reasons. Make sure your pricing strategies reflect this customer inertia.
Earlier this month Turing Pharmaceuticals raised the price of Daraprim from $13.50 to $750.00, an increase of more than 5000%. There were immediate outcries of price gouging from customers who take the anti-malarial and HIV drug, insurers, doctors and politicians. In the wake of the backlash, Turing reversed course last week and returned the drug to its previous price. Although I believe it is important to price products according to their values and I have defended Gilead’s very high pricing of Sovaldi, I think Turing was wise to change course. It is usually not a good decision to piss off your customers. Once they get angry, it is easy to lose them for good.
Last week an article in the Wall Street Journal, E-Book Sales Fall After New Amazon Contracts, reported that major publishing houses were experiencing declining e-book revenue. The article also pointed out that publishers had raised prices, and it implied the prices were the likely cause of declining sales. After all, price up, unit volume down means the increases caused the problem, right? It is possible that is correct, but the publishers need to be more rigorous in their analysis before concluding they should change their pricing strategies.
Jet_comA little more than a month ago, Jet.com opened its digital doors for business. Jet’s stated goal is to “make shopping more transparent, more efficient, and at the same time, a little more fun.” The pitch to potential customers is they will save money buying things on Jet.com instead of Amazon, Costco, and other online and physical stores. Jet promises to be the lowest price provider for consumers who pay an annual membership fee. Jet claims they will make money once they get up to scale. In other words, they will make up for these low prices with greater volume. I am skeptical.
For years cell phone service came with 2-year contracts and included a discount on a new telephone. In the past year, however, T-Mobile started a trend of unbundling the purchase of the phone from purchase of talk, text, and data services. Now all of the major carriers have moved to the unbundled model, with prices mostly dependent on data usage. This makes sense for many customers, but the carriers also realize that there are multiple customer segments and for at least one segment the bundle is the better option.
For many customers, the 2-year contracts had been unwanted shackles that prevented switching carriers or phones. However the carriers were subsidizing the purchases of mobile phones, and the 2-year agreement was needed to make the economics work. They had to recover the $200 – $400 in telephone subsidies somehow. Customers unhappy over the contracts and carriers struggling to make money while paying most of the costs of phones created an ongoing tension between customers and providers. So T-Mobile changed the dynamic.
n late 2013, Gilead Sciences released Sovaldi, a drug that can cure Hepatitis C in 90 days when used in combination with other anti-viral drugs. The initial price was more than $1,000 per day, and the total cost of treatment could exceed $80,000. In spite of a 90% cure rate for a disease that previously had low cure rates with longer treatments, many editorials, blogs, and TV segments castigated Gilead and other biotech and pharmaceutical companies as price-gouging profit mongers. Antitrust suit accuses Sovaldi maker Gilead of price-gouging and Gilead is accused of Price Gouging but is There Really a Legal Argument?
Recently a study by a panel of doctors and medical experts who help insurers set policies has determined that the drugs are worth the price – Gilead Pills at $1,000 a Day Are Found Cost Effective. In other words, the patients and insurers get more value from the drugs than they pay for them. Sovaldi is one of the highest selling drugs in the world after just one year. In addition, insurers are expanding the range of patients who can be treated with Sovaldi, further demonstrating that value pricing works.
