Using decoy pricing to maximise profits.

Use decoy pricing to encourage your customers to trade up.

The main objective of any pricing manager is maximising revenue and profitability. It’s not easy and is in fact an endless task. One way we can try to achieve this is through trade up. If we can encourage our customers to buy our most highly priced (and presumably highest margin) product then we’re happy.

So how do we do that? One method is decoy pricing. Decoy pricing is whereby you offer three similar products of which two have a similar or equal price. The products are scaled variants.

This is best illustrated with an example…

Take a look at these two products for a subscription to a magazine.

  • One-year online subscription $59.
  • One-year online and print subscription $125.

Which would you choose? The majority of people would probably opt for the first product as at $59 it is far cheaper than the second. Now imagine if the product offerings were this…

  • One-year online subscription $59.
  • One-year print subscription $125.
  • One-year online and print subscription $125.

All of sudden the combined online and print subscription seems like incredibly good value for money.

This example comes from research conducted by Dan Ariely for The Economist. His research showed that by including the middle product (the decoy) it gave consumers an easier way of understanding the benefits of each product and lead to more purchases of the $125 online and print subscription. Without the middle option more customers chose the $59 option.

You don’t just see decoy pricing used for magazine subscriptions. It can also be deployed in the travel industry, in software, telecoms, consumer electronics and more. How could you use it in your business?

(A similar – but different – tactic you might like to read about is product sabotage, which I’ve written about before.)

Why the Amazon Fire Phone price isn’t cheap.

Jeff Bezos unveils the Fire Phone

Jeff Bezos unveils the Fire Phone

It’s been about three-weeks since Amazon unveiled its first smartphone to the world: the Fire Phone. Now the dust has settled it’s possible to try and understand exactly what Amazon is trying to achieve with the Fire Phone pricing.

Some commentators have criticised the company for not doing what it’s done in the past with the Kindle and Kindle Fire – sell at an incredibly low price to sell as many devices as possible and make money selling content. Admittedly, that was what I was expecting before the announcement.

However, when you look at what the device actually does it becomes much clearer why this isn’t a device being sold cheap. A feature Amazon took time to talk about during the announcement was Firefly. The technology allows you to use the phone’s camera to identify literally millions of different objects. Once identified you can then very simply purchase them from Amazon. It’s this feature which hints at the Amazon’s strategy – the whole purpose of the Fire Phone is to get users to buy more goods from Amazon and bring them ever more into the Amazon ecosystem.

So what does this mean for the Fire Phone price? Or put another way: why isn’t it cheap? Surely the more people who use this phone the better for Amazon? Possibly not.

For the answer you need only look at IBM’s latest report into mobile shopping. The report shows shopping via a mobile device to be growing at a fast pace and beginning to account for a significant chunk of total online spending. The IBM report details that the average online transaction in the U.S. is worth $132. This compares to $124 for tablet users and $108 for smartphone users. And here’s the nugget that we’re looking for: users of Apple’s devices outspent Android users by 37% in November 2013. Why? Well users of Apple’s devices tend to be wealthier quite typically because Apple prices its devices much higher than competing Android devices. And for that reason they have more money to spend.

And that’s why the Fire Phone price isn’t as cheap as other Amazon devices. It needs to sell the device to people who then have the disposable income to buy goods from the company through the phone. Selling the device at cost would most likely sell more devices, but if Amazon’s strategy is for users to then buy goods from the company via the phone then this would be unlikely to happen if those users have a lower level of disposable income.

Is Microsoft’s Xbox One price cut the right move?

The Xbox One launch. Microsoft needs more fans like these in the UK.

The Xbox One launch. Microsoft needs more fans like these in the UK.

Last week Microsoft announced it was it cut the price by $200 just months after launch.

In a normal scenario I’d advise against a straight price cut. Microsoft’s actions are a result of struggling sales because of an inability to communicate the value of its product vs. its biggest rival the PlayStation 4.

But, there is a bigger point to the Xbox One price cut that might be immediately obvious.

Technology companies are selling much more than a single product. Much like when Apple cut the price of the iPhone, Microsoft is selling an ecosystem. Getting a large user base is important to entice developers to the platform who can in turn write games to tempt even more people into buying the console as well as to retain existing owners. It’s important to get that traction early before a competing platform, in this case the PlayStation 4, becomes too dominant. Given the social nature of gaming there is the impact of network effects to consider as gamers opt to buy the same console as their friends so as to allow them to play together. Furthermore, the more games a user buys the more invested they become in the platform, making switching both costly and time consuming.

Whilst the price cut does speak of a little panic it does also hint at Microsoft’s belief that price is an important factor when people choose which platform to buy into. The company should also be commended for its bundle offer (£399 for the console with the major game Titanfall) that is closer to value pricing.

Clearly Microsoft has its work cut out growing Xbox One sales in the UK, but the price cut should help. If it can help it sufficiently enough that those extra customers stick around for years to come and in doing so buy games, accessories and other media, then it most likely will have been worth it.

Killing your pricing with bad customer language.

Using the right communication in your pricing is crucial.

Using the right communication in your pricing is crucial.

So, you have your pricing strategy. You’ve outlined which of your products/ product groups are EDLP and which are EDLP+. But, have you figured out the best way to communicate your pricing through customer language?

Take a look at this:

Imagine a deal for an item that was selling at £10, but has been cut in price to £5. Now look at these examples of customer language:

  • Save 50%
  • £5
  • 50% Off
  • Half Price
  • Was £10, Now £5
  • Was £10, Now £5, Save £5
  • Was £10, Now £5, Save 50%
  • Each of these different examples are saying the same thing and many of us are guilty of using a combination of them across our product range. The problem is that it can be hard to influence the perception customers have of your pricing when your communicating in so many different ways.

    So, which do you use? There’s no hard right or wrong answer. Sure there’s a truck load of academic research about this, but ideally you will need to test.

    It’s an important thing to try and get right. It could mean the difference between a sale or not and the same is true of volume deals:

  • 3 for £5
  • 33% off when you buy 3
  • Was £5 each, £3.33 each when you buy 3
  • Was £5 each, £3.33 each when you buy 3 (33% Off)
  • Was £5 each, £3.33 each when you buy 3 (Save £5)
  • Save £5 when you buy 3
  • Buy 2 Get 1 Free
  • 3 For 2
  • So what should you do? You should aim to streamline and only use a handful of value and volume languages. Secondly, understand whether to communicate in £s or in percentages. Which is more important to your customers and which communicates the price/ saving better? This will be influenced by your price architecture: for big ticket items it might be £s, but for lower priced items percentages may work better. Remember also that some customers may find it difficult to work out what a percentage saving actually means for their wallet.

    As I said, you’re going to have to test. There are many ways of doing so: if you’re an online retailer you can present different mechanics to different customers. If you’re a physical retailer then use a defined period of time to test some mechanics. However, always work out a control.

    So, as my mother used to say, “It’s not just what you say, it’s also the way you say it.” And so it is with your pricing too. If you do decide to do this I’d love to know how you get on.

    Can charity stores be too expensive?

    An Oxfam store. The charity is one of the largest in the UK.

    An Oxfam store. The charity is one of the largest in the UK.

    Are charity stores becoming too expensive? That’s a question that The Observer newspaper has posed. It would appear that regular shoppers of charity shops feel that they are being priced out. This is because of charity shops apparently choosing to stock more expensive donations.

    The bigger accusation is that charities are becoming more corporate, opting to maximise revenues and profits at the expense of customers.

    But, is there really anything wrong here? Charities are much the same as corporations in that they have stakeholders. They have employees, customers, communities etc. However, the key purpose of charities is to raise money for those in need. It is these people who are perhaps the most important stakeholders. If raising money for their cause is achieved by selling an old tie for £2 or a second-hand designer jacket for £150 then so be it.

    There is, of course, the risk of some seriously bad PR. So bad that it could drive some customers away. The better solution could be that charities offload expensive items in some other way, such as, eBay. (This will likely still cause some outrage.)

    It’s important to remember that like every other retailer charity stores are expected to pay rent for stores situated in increasingly desolate high streets. They need a pricing strategy to support it. Larger charities can be smarter by moving expensive donations to more affluent areas. Ultimately though, charity stores are exposed to the same market forces as businesses. This is particularly so given the proliferation of charity stores during the recession. Competition is fierce. They will soon adjust if revenues begin to decline.

    Product bundling: when is a good time to use it?

    Microsoft CEO Steve Ballmer presents Microsoft Office 2013.

    Microsoft CEO Steve Ballmer presents Microsoft Office 2013, a classic example of product bundling.

    When is a good time to bundle different products/ services together?

    Product bundling is what it sounds like: bundling multiple products into one package with a single price. It’s nothing new and is common in certain product categories: software (e.g. Microsoft Office), games consoles, airlines and even restaurants (the three course meal).

    So why bundle? Product bundling can be good for several reasons:

    • It can improve your offer by easily providing a total price for all your associated products and services.
    • It saves the customer time from having to work out the total cost for themselves. (Remember that convenience and speed are key priorities for some customers.)
    • It can make it harder for your competitors to price match if they can’t identify which parts of the bundle are your most profitable. (This only works if you only sell the products as a bundle only and not separately.)
    • If you sell software, bundling different software applications together can be a good way of trying to bring more customers into your ecosystem.

    So should you use product bundling?

    It’s a difficult question to answer and a lot will depend on the competitive environment that you are in and what you are trying to achieve. I’ve highlighted the main benefits above.

    Remember though that bundling does have its critics. A regular complaint is that it can make it difficult for consumers to compare products if different competitors bundle similar, but different, products together at different price points. Some also complain that businesses are not being totally transparent about their pricing when bundling products together. There is also the fact that some customers may feel unhappy if they think they’re paying for parts of a bundle that they’re never going to use.

    However, remember the key rules if you do decide to bundle:

    1. Ensure you establish the value of the individual products before you set the bundle price.
    2. If you can, avoid mixing basic and premium products. As a bundle is a whole it can be difficult to highlight the individual components and could result in sending a confused message.
    3. Finally, decide if you are going to bundle or use a bonus item (think of games consoles again, which often throw in free games).

    So, now you know what product bundling is, do you think there’s an opportunity for it in your business?

    Microsoft’s tablet pricing strategy.

    This is a counter argument to an article written by Tony Rizzo of techzone360.com. You can read it here.

    Tony Rizzo of techzone360.com has written a piece concerning Microsoft’s failed attempt at making a dent in the tablet market.

    Rizzo argues that a core problem with Microsoft’s strategy was pricing. In particular the fact that Microsoft didn’t meet the price points as established by Amazon and Google and that thus its tablet pricing strategy was way off. Rizzo says that had Microsoft met some of those price points then it would have been possible for them to shift more units and thus drive the adoption of its new operating system.

    However, there is a counter argument to this: the race to the bottom. By pricing at these extremely low price points Microsoft would have become stuck in a race to the bottom that would have left it struggling to breakeven, let alone make a profit.

    To support this argument there is a key point to consider: how competitors make a profit in the low priced tablet market.

    Amazon deliberately prices below cost or at breakeven to shift units. It then aims to drive profit through sales of digital content that customers consume on the device.

    Google does the same by pricing its Nexus device near breakeven. However, its strategy is to make Android even more ubiquitous and by doing so nudge people into using Google services that it can then sell ads off the back of.

    Microsoft doesn’t have either of these two strategies to fall back on.

    Apple doesn’t even compete at these price points. (The iPad mini is £70 more expensive than the Google Nexus 7.)

    What Microsoft did instead was deploy a value pricing strategy: that is pricing a product on the merits of its attributes. The bad news for Microsoft is that those attributes simply weren’t (still aren’t) good enough. Not enough consumers thought the value reflected the price they would be paying.

    This isn’t necessarily a pricing problem. It’s a product problem. If Microsoft wants to succeed in the tablet market it needs to build a more compelling product and communicate it’s value better to consumers.

    This may be the same for your business. Playing in a game for the race to the bottom is only going to end in disaster unless you have a strategy like Amazon and Google. It’s much better to have a value-based pricing strategy to maximise your product. However, just make sure you have a truly compelling product. Good luck!

    Using pricing segmentation to drive sales and profits.

    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.

    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.

    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.