Using pricing segmentation to drive sales and profits.

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You can use pricing segmentation to drive your business’s sales and profits.

It had to happen sooner or later: Samoa Air has announced that they will sooner begin charging customers based on weight.

Is this fair? Most consumers would think not. (Though of course their opinion might be swayed based on how impacted they would be by it.)

Discriminatory (or segmentation to use the proper term) pricing is nothing new. Grocery retailers will often charge different prices depending on a store’s customer base and level of competition. Up until recently car insurance companies have historically charged more to male drivers based on statistical risk. Cinemas regularly offer discounts to daytime screenings to try and fill seats.

I’ve no doubt that many will be quick to criticise Samoa Air for their new pricing policy. However, at least take a moment to commend them for being innovative and daring. There is a lot of opportunity for innovation in pricing. Whether it is pricing a product or service differently by geography, time of day or age you should always consider how segmented pricing could be utilised in your business.

Do you operate a service-focussed business, such as, a restaurant, that suffers from peak and off-peak trading patterns? Could you use pricing segmentation to boost those off-peak trading hours? Are you a specialist retailer who could benefit from a membership scheme that offers two prices per product: one for members (the lower price) and one for the non-member.

The takeaway here is to remember that pricing shouldn’t always stop with the single price. Try and think of ways that pricing segmentation could be used to maximise your sales and profits. And if you need any more evidence that pricing segmentation is a good thing than look no further than this video.

Apple and a cheaper iPhone.

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As sales growth begins to slow investors are calling for Apple to release a cheaper iPhone.

Apple doesn’t seem to be able to catch much of a break at the moment. The last few months have seen some rocky moments: the bug-ridden launch of its Maps application, concerns over labour practices and slowing sales growth.

It is the latter that has been the cause of the firm’s stock price falling from a high of $702 in September last year to $431 today.

Investors and analysts are concerned that Apple’s premium price positioning is leaving it exposed on two fronts: by competitors at the higher end who’s devices have improved rapidly in the last year and lower priced competitors who are gobbling up price-conscious consumers.

So what does a company like Apple do in this situation?

Apple has two choices: continue focussing on the premium end of the market to maximise profits or consider making a lower priced device as well.

Apple has always been steadfast in focussing on profit and not market share. To do this it focusses on innovations that add value to its products. But there is a risk to this strategy: Apple is in a platform war. Failure to release a cheaper iPhone could see the share of Apple’s iOS software platform which runs on the iPhone shrink even further against Google’s Android OS. That would risk app developers focussing more time and money on developing for Android instead of iOS.

As such, Apple needs to understand the risk on its gross margins of launching a cheaper iPhone. Exactly how many consumers might buy the cheaper iPhone instead of the standard device? Luckily for Apple it will already have some data on this. It’s been selling older model iPhones at a lower price point for years. It will also have learnt from selling the iPad mini.

So what should you do if you find your business in a similar predicament? There are several key things to understand:

    How big is the lower-priced market?
    How fast is it growing relative to your existing segment?
    What features could be added to your existing products or services to add value and justify your premium pricing?
    Do you have the resources to compete in both segments of the market?

If the rumours are to believed it seems highly likely that Apple will indeed release a cheaper iPhone. However, it is most likely that it will be stripped of certain features that will help make its premium offering retain it’s existing value.

A British pub fights back.

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A British pub is using pricing to try and win back customers.

Every few months I arrange to meet for drinks with an old friend. We always meet in the same town and at the same pub. Only this time something was different. The pub was advertising – with very basic A4-sized posters – “Customer Appreciation Month”. The offer is a 10% price drop on all food and drink for the month of February.

Firstly, a little bit of context. The British pub is in trouble. Some estimates have said that up to five pubs are closing each week. (Some think the number might be even higher.) There are many possible reasons: lifestyle changes, the ban on smoking in pubs, but perhaps the biggest is price. Whilst prices in British pubs have been rising, the price of alcohol in supermarkets seems to getting more and more competitive. (I’ve also written about minimum alcohol pricing here.) The result is people opting drink at home instead of their local.

So, as the Landlord of a British pub it might seem like dropping your prices is the next logical step to winning more custom, but think twice first.

Quite simply, if you’re lowering prices you need to make up the margin somehow, which in this case, is increasing unit sales. (Here’s a way of measuring that, btw.) In this example the increase can either come from your existing customers buying more drinks or by pulling in new customers.

And here is the big issue I have with this campaign: it doesn’t discriminate. In the case of a pub it is difficult to price differently between new and existing customers without upsetting the latter.

However, there is another way. The offer is a price reduction at all times of the day. What could be better is to target those times of the day when trade is quiet. Cinemas have been known to do this for decades. Alternatively, introducing some kind of loyalty scheme could be a way of rewarding customers whilst encouraging them to spend more.

The point to take away from here is that when faced with a deep-pocketed competitor lowering your prices across the board is not the answer. Seek to add value wherever you can, but if you have to lower your price then do it tactically and don’t be afraid to discriminate.

HMV administration a failure to create value.

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The HMV administration highlights the need for retailers to constantly search out ways to add value to their customers.

Roughly two-weeks ago HMV went into administration. In recent years the retailer has become the last standalone seller of CDs and DVDs and one of the few high street retailers still selling video games.

HMV has been battered by both the supermarkets and online retailers, such as, Amazon as well as services like iTunes. These competitors have beaten HMV on both price and convenience. In short: they are adding value when HMV is not.

It’s a classic case of selling a directly comparable product and not adjusting your strategy because of it. Whilst HMV has had an online store for years it has failed to foresee the decline in the very products it sells. Amazon foresaw this years ago and released the Kindle to sell digital books. It’s taken this a step further by moving into streaming and downloading services for movies and tv shows and releasing the Kindle Fire.

The result is that HMV has been left selling what almost amounts to a commodity. When exactly the same product you sell is available from a competitor for a lower price you should be concerned. You have two options: price-match or seek an alternative to add value for your customers. HMV has done neither.

Price-matching wasn’t an option. HMV simply cannot afford to compete on price.

The second-option, adding value, should have been the route taken. However, HMV failed to give consumers a reason to visit and buy from its stores and not buy from an online competitor that offers greater convenience. Instead of moving into streaming services HMV instead opted to sell tablets and phone accessories in store. These products have also become pricing commodities like the rest of what it sells.

And whilst HMV seems like it will live to see another day (a deal has been reached to sell its debt to Hilco) it seems highly likely that its future is still short-lived. As more consumers move to streaming services and the next-generation of games consoles place more emphasis on downloads HMV’s core products will cease to be relevant. No pricing strategy can save it now.

Minimum alcohol pricing: Will it work?

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Minimum alcohol pricing might not be the panacea the government is hoping it will be.

Last week the UK government announced plans to set in law minimum alcohol pricing of 45p per unit for all alcohol sold in England and Wales. The aim is to reduce the incidences of alcohol related crime and ill health that the government says are blighting UK society. But how successful will it be?

There are two key groups of alcohol consumers that are the target of minimum alcohol pricing legislation: “pre-loaders” and alcoholics.

“Pre-loaders” (or binge drinkers) are consumers who choose to consume a vast quantity of alcohol in one evening and do so by buying cheap alcohol from supermarkets before heading out to bars and clubs, where alcohol is more expensive. The government claims that by raising the price of alcohol it will simply put it out of financial reach (at least based on current consumption quantities) of many “pre-loaders”

Alcoholics on the other hand drink an above average amount of alcohol and do so almost every day. To them it’s an addiction and a necessity to get them through the day. Like “pre-loaders”, the government hopes that by raising the price many alcoholics will simply decide that alcohol is too expensive and quit.

This is essentially all about price elasticity: how sensitive is a consumer to changes in price? Are they price sensitive (elastic) or price insensitive (inelastic) to changes in price? And here there is a key difference between the two groups mentioned above.

Of the two groups “pre-loaders” are certainly to be considered more price elastic: they like to drink, but they don’t have to. They buy cheap alcohol from supermarkets both because it’s cheaper than drinking out and convenient. However, it’s worth remembering also that most binge-drinkers are young adults, particularly students. These consumers consider socialising (and with it alcohol) as an important part of their lives. They are likely willing to spend an above average amount of their disposable income on alcohol. For that reason they are not likely to be as price elastic as the average consumer and not as sensitive to minimum alcohol pricing.

Alcoholics on the other hand are largely price inelastic: alcohol to them is an absolute necessity. Whilst raising the price of alcohol might make it harder for them to consume as much as before, they are more likely to try and find ways to pay for it. Simply raising prices through minimum alcohol pricing will be unlikely to make them give up without some other form of help, such as, government-funded support groups.

So we have two groups: one somewhat price sensitive and one price insensitive to minimum alcohol pricing. So where does this leave the government’s plans? Well in fact it will most likely penalise those consumers who only ever drink in moderation, particularly in the home. They buy their alcohol during the weekly shop and consume it at home in front of the TV or with friends. They might still do so if the government’s proposals get the green light. They’re just going to have to pay more for it.

The ethics of disaster pricing.

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When suddenly hit with a natural or man-made disaster it’s necessary to have a disaster pricing strategy. In such a time is it right to raise your price?

During the recent destruction wreaked by hurricane Sandy there were accusations that some organisations had sought to benefit from the disaster by raising prices.

Uber, a company that lets customers order a taxi via their smartphone, was one such company that came under fire for its disaster pricing. The company’s dynamic pricing system kicked in when demand begun to shoot up during the storm. The result was rocketing prices at a time when people were struggling to move around the city. Angry customers accused the company of profiteering. The Attorney General of New York, Eric Schneiderman, even came out and warned companies that they could be prosecuted if found guilty of profiteering from the storm.

So can raising your price during a natural or man-made disaster ever be justified?

It’s important to remember that the usual rules of supply and demand exist during a disaster as much as they do in normal situations. If consumers start to panic buy then demand will soon outstrip supply. If you are soon going to run out of supply of your product then raising your price might be what’s needed to protect against the approaching downturn as your product or service becomes unavailable to sell. It might even mean the difference between lay-offs or not.

What’s more raising your price could stop some customers from hoarding product at the expense of those who are less well off. Yes you could place a limit on the number of purchases per customer, but there are often easy ways around this.

An economist like Ayn Rand would be quick to say that any disaster pricing should favour the seller. With a suddenly in demand product they should have every right to maximise the profit from their hard work.

The opposite argument is utilitarianism – the greatest good for the greatest number. In this argument it’s simple to say that a disaster pricing strategy that means raising your price, whilst in your interests to maximise profits, isn’t what’s best for society. A suddenly higher price could put a key product or service out the reach of the less well off.

It’s also worth thinking about the future. Whilst it might good to hoard cash for the bad times it might mean that customers don’t come back when the good times do return, should they feel taken advantage of.

In fact, keeping your price the same and making that known to customers might be seen as a gesture of goodwill and win some crucial brand loyalty. It’s worth bearing this in mind with any disaster pricing strategy.

So in conclusion it’s possible to say that there are in fact some ways of justifying a price hike in times of emergency. However, in the long-run it’s highly unlikely to be in yours or your customer’s best interests to do.

The iPad Mini and Apple’s profits.

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Even at $329 the iPad Mini price might be too low to protect Apple’s profits.

iPad price table with new iPad Mini pricing

iPad price table with new iPad Mini pricing

Apple has finally announced the iPad Mini. A few weeks ago I wrote about how the iPad Mini was a necessity for Apple to avoid being undercut on price by the competition.

This was made even more clearer with the aid of a price chart put together by Ryan Jones. But, now the product is real and we have official pricing, how does it compare to the expectation?

Firstly, Apple has added six newly priced models – three different storage combinations with two wireless options.

Perhaps most interesting is that Apple hasn’t simply just added cheaper priced models with the iPad Mini. Instead, it’s also used the device to place more price points thought out its existing product mix. Notably there are two new price points between $400 – $500. And of course there has been much debate about the entry-level iPad Mini price of $329. Also, Apple didn’t discontinue the iPad 2.

iPad price chart with iPad Mini pricing

iPad price chart with iPad Mini pricing

There is still the issue of the Amazon Kindle Fire and the Nexus 7. Both start at $199. Apple has reduced the price gap from $200 to $130. But, the iPad Mini is still 65% more expensive.

But, even the price of $329 is a big risk for Apple. The company has admitted that the iPad Mini has a significantly reduced gross margin compared to the company average. The risk is that those who would have bought the larger iPad will instead buy the iPad Mini, cutting into Apple’s profits. Even when considering the practice of product sabotage (which I wrote about here) the $170 difference between the two is large.

It’s therefore possible that Apple’s profits will take a hit if the cannibalisation isn’t offset by large volume sales of the iPad Mini. But, if the company can sell enough, even with a lower GM level, a higher cash margin should keep investors happy.

Using product sabotage to justify your pricing.

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Using a technique called product sabotage could help you justify your pricing and encourage customers to trade up.

When trying to sell a product or service you are trying to justify your asking price in return for the benefits (perceived value) you are offering in return. That’s it. Simple.

However, we all know that it’s not that simple. One technique you can use to try to increase sales and justify your pricing is product sabotage. The name doesn’t quite do the technique justice, but here’s how it works:

With product sabotage you deliberately create a range of products or services that exist to help you upsell to your best and most profitable products or service. The lower tier product or service is deliberately limiting on features. This is because when prospective customers make comparisons between different products they don’t just do so between different brands, they do so between different products and services within one brand.

Take supermarkets, for example. Most supermarket chains in the UK have a budget range, a mid-range and then a luxury range (at the least). Supermarkets know they won’t be able to sell the luxury range to all customers. But, what they can do is try and upsell as many as possible to the middle range from the budget range. The mid-range will contain mostly the same product inside the packet as the budget, plus or minus a few tweaks. The difference, however, is in the price. You can expect the mid-range product to be 10%-20% (or higher) more expensive. And that will mostly end up as extra margin to the supermarket.

So how do they upsell? The trick is to make the lower tier or budget product notably less compelling than the next tier product. Tesco is a prime example having up until recently made its Tesco Value range appear particularly basic and unappealing with its simple blue and white striped packaging.

The tactic of product sabotage has long been used in software too. Software vendors will offer a whole range of products starting from the basic (“sabotage product”) that offers only a few features up to the full feature product. Microsoft used the tactic with Windows 7 and seems ready to use it again for Windows 8.

(Here is an article that’s actually about the design of pricing tables, but it demonstrates examples of product sabotage by numerous software companies.)

There is a key point to be made before you rush off to launch a new cheap and nasty budget range. The range shouldn’t simply exist just to enhance your higher margin product or service. It should be able to stand on it’s own. It should even have the power to attract new customers. (Better to have them than not, in most instances at least.) The key is to offer only the most essential benefits in this product in order to entice customers up to your higher margin product. You shouldn’t forget to shout about why they should upgrade.

Remember also that the buying process doesn’t end with the purchase. Offering a lower tier range with basic features will help to reassure those customers who put their faith in your more fully featured product that they made the right decision.

Price and the iPad Mini.

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Apple has yet to announce let alone release the iPad Mini. However, one key reason it most likely will is price.

For all the hype you could be forgiven for thinking that the iPad Mini is all but confirmed in name. Both analysts and tech journalists think that the iPad mini is a near-certainty this side of Christmas.

Just months after launching the first iPad Apple’s late CEO Steve Jobs said introducing a smaller iPad, the so-called iPad Mini, would be a bad idea. Users would need to sandpaper down the size of their fingers to get the best experience, he said. However, one reason why Apple might need to introduce the iPad Mini is price.

Take a look at this:

iPad Mini Price Chart

A price chart showing pricing for all models of the iPhone, iPod and iPad.

This is a price chart put together by a engineer Ryan Jones and it shows exactly why Apple might need to introduce an iPad Mini.

Historically Apple has first introduced a product into a new market at the upper end of the price quartile before then introducing lower-priced variants. The first iPod was the now-named iPod Classic. This was then followed by the smaller and lower price iPad Nano and subsequently the even cheaper iPod Shuffle. The company has done this in order to not be undercut by competitors and protect its potentially higher margin products. Despite what company executives say to tech enthusiasts and analysts externally, internally they know that price is a serious consideration for consumers when hit with the “Which one?” dilemma.

What’s more Apple is already starting to be undercut by some serious competition. This summer Google introduced its own tablet built by ASUS, the Nexus 7, starting at just £159. That’s £170 (52%) cheaper than the cheapest iPad. Furthermore, Amazon’s Kindle Fire also starts £159. Both these devices are considered to be the most serious competition to the iPad yet.

This all builds the case for an iPad Mini. But there is more to it than that. What we don’t know are margin details. Apple will only release the iPad Mini if it can be made to meet the margins required for a particular price point. And the final part is the Apple doctrine. The company is fiercely proud of the fact that product quality and user experience always take precedent over anything else. The company will only release an iPad Mini if they can make a product that meets their exacting standards at the desired price. £250 iPad Mini would be worthless to Apple if the user experience wasn’t absolutely right.

That said, the chart above puts a serious case forward as to why Apple will likely NEED to find a way of developing a 7-inch tablet (if it hasn’t already) in order to protect its share of the fast growing tablet market. The company recently boasted how in the last year its tablet share has gone up despite the influx of competitor devices. That might not last if consumers begin to give more weight to price when deciding which tablet to buy.

Mobile payments: Which strategy will win?

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Starbucks, Square, Wal-Mart, Apple and Google are all making attempts to dominate mobile payments.

A few months ago I wrote about the latest developments in mobile payments. However, in those last few months a lot has happened and a lot is about to happen. Here’s a rundown of some of the latest activity and what it means for retailers and consumers alike.

Starbucks partners with Square

Starbucks has signed a deal with mobile payments firm Square. The deal will see Square handle Starbucks credit-card payments and vastly enhance the visibility of Square to millions of Starbucks customers.

Wal-Mart releases iPhone mobile payments app

Wal-Mart has started trials of an app that could be the start of launching mobile payments in-store. The ’Scan & Go’ app will allow a customer to scan their shopping with an iPhone before then paying at a dedicated self-service checkout.

Apple’s Passbook app

Apple is expected to launch its Passbook loyalty app as part of the release of iOS 6 next week. The app (as described here) allows the user to store loyalty cards, boarding passes and vouchers. Participating retailers can then scan a QR code to deduct cash that is already tied to the card. The app doesn’t support mobile payments as such. However, it is likely something that Apple will add in the future.

Google Wallet adds Passbook-like features

Not to be outdone, Google has announced that it will be upgrading its own mobile payments app, Google Wallet, with features similar to Apple’s Passbook. The upgrade will allow the user to store loyalty cards, boarding passes and tickets. It will also be location-based, bringing up the loyalty card relevant to the store you are in.

Which strategy will win out?

Predicting which of the above approaches to mobile payments will win out is not easy. I firmly believe there is a bright future for Square. The company offers elegantly simple payment solutions for small businesses. Its software is very intuitive in comparison to the point-of-sale systems yours truly has used in the past. If it can persuade more and more (and larger) retailers to use its software then it stands a real chance of becoming a big player in mobile payments. Its solutions are also cross-platform, working on both iOS and Android as well as the web and don’t require costly Near-Field Communication (NFC) equipment.

I struggle to see the Wal-Mart approach taking off. Whilst retailers may like the idea of customers using their own app for processing mobile payments there are drawbacks. The biggest is the sheer number of apps. Most consumers will not want to have multiple apps installed on their phone for each retailer they shop with. Also, the process of paying for goods on a mobile device will be slowed down if, upon a first visit, the customer has to install an app before paying. Only the largest retailers, or those with the most loyal customers, may be able to pull this approach off.

This is where Apple and Google come in. Both run the two biggest mobile operating systems in the world with hundreds of millions of users. By bundling mobile payments software with their operating systems they can become big players in the space. Retailers will have concerns about what data the two companies decide to share and they keep to themselves.

It’s for that reason that the current state of play in mobile payments appears to favour Square, Apple and Google.