Pricing

I previously blogged about pricing here regarding behaviors and pricing, and academic studies providing insights to develop strategies from.  Recently from McKinsey Quarterly on "Building a Better Pricing Structure" here, average review though:

"A pricing infrastructure can be difficult and costly to create. It requires investing appropriately, empowering the right people, articulating clear targets and goals, and managing risk. Yet the benefits of realizing true pricing excellence are worthwhile: a one-percentage-point improvement in average price of goods and services leads to an 8.7 percent increase in operating profits for the typical Global 1200 company.1 Since a well-executed pricing-improvement program often yields price increases of two to four percentage points or more, sustaining a long-term price advantage may represent roughly 15 to 25 percent of a typical company’s total profits."

Publishing and Piracy

From the Financial Times article "Publishers fear threat of digital piracy as sales of e-books grow" here:

"Tom Weldon, deputy chief executive of Penguin (part of Pearson, which owns the Financial Times), said: “The only way to fight piracy is to publish digital content across as many formats as possible, through as many channels, at a fair price. If we go for exclusive or proprietary formats, we’re completely screwed.”

At the same event, Shriti Vadera, who helped negotiate the UK government’s last anti-piracy deal with record companies and internet service providers, said the book industry was way ahead of the record companies, which “didn’t see [the piracy threat] because they weren’t listening to their consumer”."

Consumer Behavior and Pricing

I was first educated on the art of pricing by a good friend Mr. Dennis J. Crane of the Business Navigation Group, details here.  Thanks Dennis!

A recent and an excellent report from UK's Office of Fair Trading, "The impact of price frames on consumer decision making" here, defines the various pricing strategies of retailers into price frames.  These are:

"A baseline treatment in which consumers see straight per-unit prices.

Drip pricing where the consumers see only part of the full price up front and price increments are dripped through the buying process.

Sales in which a sale price is given and a pre-sale price is also given as a reference to the consumer, 'was £2 is now £1' (actual pricesare identical to the baseline treatment).

Complex pricing where the unit price requires some computations, '3 for the price of 2'.

Baiting in which sellers may promote a special price but there is only a limited number of goods actually available at that price.

Time limited offers where the special price is only available for a pre-defined short period of time."

The report is extensive in its details on the process used.  Tabular formats break down the complexity of the analysis and the results.  Couple of key conclusions from the report are:

"The evidence from the controlled experiment shows that, in contrast to the predictions of standard economic theory, price frames do matter for consumer decision making and welfare. Consumers make more mistakes and achieve lower consumer welfare under the price frames we investigate as compared to straight unit pricing (the baseline)."

"The ranking of the price frames, starting with the worst – that which causes the greatest welfare loss - is as follows:
(1) drip pricing
(2) time limited offers
(3) baiting
(4) sales, and
(5) complex pricing."

If you are interested in a quick review of the report, please see the Economist article "You've been framed" here.  The Economist concludes that:

"Although consumers clearly lost out there were no corresponding overall gains for retailers. Sales volumes were virtually the same whichever way prices were presented. The main effect was on the distribution of sales. The first shop to lure shoppers sold many more goods, as consumers grabbed at poor deals. That made some firms better off but others (which would have offered better deals) were worse off. Most price frames made for lousy matches between shoppers and retailers, a bad result all around."

Do the manufacturers become the winners in the end?  Should manufacturers remain with the business they know?  Is a combination of an organization that is a manufacturer and a retailer work best?  That is, WalMart, Tesco, etc. with private labels or P&G with its eStore.  Questions abound, experiments continue...

Introspection on "Pain of Paying" by Dr. Dan Ariely

Dr. Dan Ariely provides introspection on daily consumer products like razors (specifically Gillette).  And of course, if this interests you then Dan's book "Predictably Irrational" provides deep insights on consumer behavior and associated economics.

Trend In-Motion: Future of Transportation

Excellent articles in the Financial Times today on high-speed rail. In "China on track to be world's biggest network" here, the newspaper writes about the future being bleak for the Chinese airline industry while China continues to spend on building new and redo existing airports. Yet, the thing the Chinese airline industry has to focus on is the consumer aspects and why they would choose rail over air:

"Flights in China are almost always delayed and passengers must arrive early so that they can pass through rigorous security checks.

Once on the aircraft, the service is perfunctory, the toilets often filthy and the food barely edible.

In contrast, China's shiny new high-speed trains are clean, fast, smooth and almost always on time. There are no excess baggage fees for heavy luggage, security checks are perfunctory and passengers can use their mobile phones."

I believe, if the US ends up being serious about high-speed rail, it will face the same concern as above.

America's consumer goes from "Be Like" to "I Am"

"There is no such thing as "the American consumer"".

States an article in AdAge - "No more Joe consumer in America", here.  One key to this shift has been the American consumer's ability to voice a choice, ability to create and join communities of choice, and the choice being the brand that fulfills a need.  Did the Internet help enable this?

This democratization of the American demographic is discussed in a white paper (for you to purchase) here by Mr. Francese, demographic trends analyst at WPP's Ogilvy & Mather and founder of American Demographic magazine.  He states that:

"The iconic American family - married couple with children - will account for a mere 22% of households."

The changes represent the continued growth of digital communication mediums, while emphasizing the need to engage directly and pervasively with the consumer.

US Gov.'s Consumer - The Citizen - Insight

The Economist discusses "Americans have grown slightly more receptive to the idea of an activist government."  Read complete article here.

The US citizen is the consumer of the US government.  From the consumer insight perspective, I found this graph of value.

Changes in Consumer Decision Making

The McKinsey Quarterly publishes a thought provoking look at the "consumer decision journey" here.  The article developed the new approach to the decision journey:

"... by examining the purchase decisions of almost 20,000 consumers across five industries and three continents. Our research showed that the proliferation of media and products requires marketers to find new ways to get their brands included in the initial-consideration set that consumers develop as they begin their decision journey. We also found that because of the shift away from one-way communication—from marketers to consumers—toward a two-way conversation, marketers need a more systematic way to satisfy customer demands and manage word-of-mouth. In addition, the research identified two different types of customer loyalty, challenging companies to reinvigorate their loyalty programs and the way they manage the customer experience."

There is a link to a good interactive animation titled "The consumer decision journey" with audio that discusses the changes today's consumer has incorporated vs. the traditional funnel used by marketers to define touch points for their messaging.