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A few weeks ago, an article in the Pittsburgh Post-Gazette by Elizabeth Downer and Jack Brice, Tastings: Gouging by the glass of wine, highlighted the high prices of wine in Pittsburgh restaurants. The point of the article was many restaurants in the Pittsburgh area charge “far more than industry-accepted models” for a glass or bottle of wine. They also use the term “gouge” multiple times in the article. I have a different perspective. Although some of the reported prices seem a bit high, the restaurants either have a good pricing strategy, or they will not sell much wine and will soon lower their prices. Either way, it is not gouging.
I have often heard “A fair margin is 25%”, or “That’s a fair price at a 30% margin.” Those things are usually said when trying to set a price for a new customer or product, or in arguing for a lower price. My reaction is always the same. A fair price is determined by the value to the customer or customers, not your margin. When prices are set by simply adding a margin, one of three things can happen:
1. Your price can match the amount customers would be willing to pay based on the value they perceive
2. Your price can be higher than the amount customers would be willing to pay, and you would lose sales
3. Your price can be less than the customer value amount, and you would make less money than you should, leaving money on the table
This past week, the FTC announced they will propose new rules on internet traffic that would allow broadband providers to charge companies a premium for access to their fastest lanes, FCC to Propose New ‘Net Neutrality’ Rules. The proposed rules would prevent ISPs from blocking or slowing down specific websites, but they would allow ISPs to charge a premium for preferential service. An early and predictable response was the proposed rule is bad because it could force consumers to pay more for access to certain kinds of information, or disadvantage those who cannot afford it. My response is – that’s the way it should work. If the information or service provides value, the providers should be allowed to charge prices that reflect that value.
I have written blogs in the past highlighting the importance of data analytics in pricing, but it is also worth a reminder not to jump to conclusions. Last week the Wall Street Journal published an article, Doctor-Pay Trove Shows Limits of Medicare Billing Data, whose main point was there could be many reasons for a doctor to appear on the list of high Medicare reimbursements, and not all of those reasons are bad. Although it can be tempting, and perhaps efficient, to draw conclusions quickly (and politicians do that all the time), there are consequences for drawing incorrect conclusions.
Customer behavior does not always correspond with what you expect. Sometimes customers act in a way that might not seem rational. For example, customers frequently say they prefer transparent, no add-on pricing, but StubHub has recently learned they behave differently. Customers have said they prefer simple prices like $15.00 rather than $14.99, but evidence shows they actually pick $14.99 items more frequently. So if you are setting prices or developing pricing strategies, make sure you understand or test how your customers behave before making big pricing changes.
Your customer tells you they can get a lower price from a competitor. How can you respond to maintain your profitability and avoid a price war? First, make sure it is a qualified competitive offer, meaning the customer has the product in stock, their products and service are comparable to yours, and you understand the order requirements and delivery schedules attached to the competing offer. Then structure your prices so the customer has incentives to buy from you in larger quantities.
Sam’s Club made a smart move last week and announced they will be testing a new subscription service to battle Amazon; and they are likely avoiding a price war while defending their share. Sam’s Club Testing Online Subscription Service as Threat From Amazon Grows (in the Wall Street Journal). While other retailers have chosen to battle Amazon by lowering prices, Sam’s club is smart in that they will be offering a service, My Subscriptions, which is limited in scope (and therefore containable), is targeted at a specific segment of customers, and addresses the elements of value also targeted by Amazon.
At the halftime show of the Super Bowl, the Red Hot Chili Peppers joined Bruno Mars and played Give it Away. You know the chorus – “Give it away, give it away, give it away now!” Most of us have heard similar albeit shorter versions of that chorus in business many times. The value given away may be a discount, but is often not seen on the invoice. It may be shipping, extended payment terms, some type of customization, or even an ancillary product, and you could be asked to “just include it in the deal.” A VP of Procurement at Pepsico once told me, “That’s the free stuff after price has been negotiated.” If you have the backbone and the rationale to say “No, we can’t give it away,” your profits will increase.
Last week Amazon announced they are considering increasing the price of their popular Amazon Prime service by $20 – $40 over the current $79 price. This isn’t really a change in their pricing strategy, but rather signaling an adjustment to their price to better reflect the value of the service. If you are responsible for pricing in your own enterprise, you should pay attention to Amazon’s moves and consider how the lessons of the Amazon effort can apply to your pricing environment.
Amazon launched the Prime service 9 years ago, initially offering free shipping on 1 million items. Since then Amazon has added 18 million items eligible for free shipping and included Instant Video and a digital library for Kindle owners, all in an effort to make customers more loyal and generate more sales. In my opinion, their pricing strategy has been working, and there is room for adjusting the price of the service.
Get ready. I am expecting to see significant innovation in value pricing in order to better monetize the value of products and services. The recently announced test – AT&T to Let Content Companies Subsidize Users’ Data Costs, the US Appeals Court ruling against “Net Neutrality”, and Direct TV’s Attack on The Weather Channel Fees all illustrate that value is earned in multiple places. Companies owe it to all their stakeholders to determine all the places where that value is earned and capture the value through appropriate pricing mechanisms.
