Last week I read an article in the Wall Street Journal, The Dubious Management Fad Sweeping Corporate America, which said that American companies were irrationally obsessed with their net promoter scores, NPS. Last year 155 S&P 500 companies cited their NPS during earnings conference calls, none of whom said their score was declining. All of the companies believed their scores were predictors of growth ahead. The WSJ article was skeptical, and I am too. In my opinion, NPS is like Average Selling Price (ASP) and Gross Margin – interesting, but insufficient as stand-alone metrics. The devil is in the details.
Two weeks ago I wrote a post Dynamic Pricing Made Simple, in which I explained the concepts underlying dynamic pricing. Stated simply, the demand for a product or service can vary depending on the situation, and the amount customers will pay in those situations also varies. Significant profit improvement is available for the companies that can identify those different situations, quantify the potential change in customer value, and set prices accordingly. Conversely, companies that are not prepared to manage a more complex pricing structure can cause long-term damage by implementing it poorly. I recommend taking a logical incremental approach to pricing improvement (do it in steps over time).
After Amazon bought Whole Foods in 2017 I wrote a post, Amazon Unlikely to Start Grocery Price War. This past week, Amazon announced some price reductions, Amazon Cuts More Prices at Whole Foods. So, was I wrong in my original post? No, but market competition has increased, and the company is adjusting accordingly. I still expect them to maintain a premium pricing strategy.
Much has been written about pricing power, which is the ability to raise prices and have customers continue to buy from you. Disney, Netflix, and Pfizer have recently shown us examples of exercising their pricing power to improve their overall profitability. Last week, I was reminded of Martin Shkreli, an example of an egregious abuse of pricing power. It clarified how important pricing power is to increasing profitability, but also of the need to be judicious in setting or increasing prices.
Apple recently lowered their estimates of Q1 2019 Sales, citing slower iPhone sales among other factors. Since then I heard from several people that Apple’s pricing strategy was wrong, and they had misjudged price elasticity. My response is to quote Aaron Rodgers, QB of the Green Bay Packers, “Relax.” While Apple clearly overshot with pricing in China and India, they must tweak some prices; but they do not have the wrong iPhone pricing strategy.
Apple recently lowered their estimates of Q1 2019 Sales, citing slower iPhone sales among other factors. Since then I heard from several people that Apple’s pricing strategy was wrong, and they had misjudged price elasticity. My response is to quote Aaron Rodgers, QB of the Green Bay Packers, “Relax.” While Apple clearly overshot with pricing in China and India, they must tweak some prices; but they do not have the wrong iPhone pricing strategy.
In July, the University of Pennsylvania announced the offering of online degrees in Masters and Bachelors programs, which are designed to appeal to price-sensitive students. Last month, Forbes Magazine published an article skeptical of Penn’s new offering, University Of Pennsylvania’s Louis Vuitton Problem. The Forbes article concluded that the online programs are really an experiment that is at risk due to the history of luxury brands damaging themselves by trying to appeal to more buyers. I agree it is an experiment; but unlike Forbes, I believe Penn will demonstrate that by keeping enough high-value features exclusive to the premium product, lesser-scoped products can be sold while protecting the brand’s image.
For my daily news, I subscribe to the Wall Street Journal, Miami Herald, New York Times, Washington Post, and the Florida Times-Union. Interestingly, I am likely to cancel the Times-Union soon because it charges the highest price and delivers the lowest quality. It is an excellent example of a business that tries to save itself as markets change by cutting costs and raising prices. However, the Times-Union does not appear to be getting healthier. More likely the paper is circling in a death spiral. The good news is we can all learn what not to do in those situations.
Five, five, five-dollar footlong. Who doesn’t remember that jingle? During the last recession, Subway announced their promotion for footlong subs priced at $5.00. Now, nearly 10 years after they introduced it, Subway has ended $5.00 pricing on the big sandwiches. It is about time! It is also a good reminder that although we want pricing strategies to be durable, individual prices should change with circumstances.
I am often asked where a client can lower prices to get more volume. Typically, they want to know which segments or customers are buying elsewhere and would switch to our client if offered lower prices. It seems like a simple question, but the answer is rarely simple and often frustrating to our clients. Our view is if you care about profitability, lowering prices to chase volume is often a bad pricing strategy.