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."

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...

Consumer Long-Haul Airline Travel

How fundamental a shift is to occur in long haul airline consumer travel, the Economist describes the growth of Emirates, Qatar Airlines and Etihad Airlines here.  Interestingly, the Economist dissects the complaints of the European carriers, disqualifies them and only offers that continued success is to follow.

The impact on the "business" of airlines in the West will be fundamental and foundational.  In the Air Transport World article here.  Note that the comments at the end of this article are particularly poignant:

"Pointing to that order, CAPA commented that the eventual size of Emirates will be "significant enough to make irreversible the airline industry's transformation from a heavily regulated, nationalistic anachronism to something approaching a real business. No longer can traditional competitors hope to stave off this threat to the status quo, as they have been hoping in recent years while the airline expanded threateningly. This order marks a genuine turning point in that process of change. It is so large in fact that competitors' business plans will be reshaped by it.""

The Economist's Adam Barns (Gulliver here) provides both business and consumer insights in the audio below:

Global Consumer Data - Telecommunications

From the Economist

Consumer Insight - Razors

Previously, I linked Dan Ariely's take on consumer, shaving and razors here.  Here is a video on an emerging trend from Wall Street Journal in razors and blades.  I agree as I am a part of this trend since one year ago.

Consumer Insight - Behavior of "Addiction"

Excellent insights on human behavior in "Gambling Severity Predicts Midbrain Response to Near-Miss Outcomes" by Henry W. Chase and Luke Clark in The Journal of Neuroscience here.

"During gambling, players experience a range of cognitive distortions that promote an overestimation of the chances of winning. Near-miss outcomes are thought to fuel these distortions."

This applies to all activities that are competitive, yet for the astute, this applies to activities where some sort of fulfillment is desired as well.

If you do not have access to the above article, see a recap here at the Economist - "IT IS not the thrill of winning, but the thrill of almost winning that sets a problem gambler apart from those who just fancy a flutter. A strong reaction in the brain in response to “near misses” is correlated with a greater tendency to compulsive gambling, according to new research."

Culture and Consumer Choices

The article "Cultural research tour reveals who likes what" in the Financial Times discusses the disparities in consumer behavior when it comes to jewelery here.  For the astute, this also provides insights in luxury and aspirational consumer goods and services as well.  In emerging markets of China and South Asia (India, Pakistan, Bangladesh), jewelery provides the deepest insights as it represents social standing as well as continuation to brand loyalty as it can be a significant both monetarily and as an emotive purchase.

"In the US today, the average price of a piece of diamond jewellery is $199, while in China it is $1,000 - David Rudlin, Japan-based global marketing director for De Beers’ Forevermark"

The article did not highlight though whether the jewelery industry is a follower or a predecessor to overall consumer markets trend?  Or does it stay constant?  That would be valuable information.

Few more interesting trends, for example, the difference in American and Japanese consumers overall are highlighted simply:

"In the US, 80 per cent of diamonds sold are for the bridal market. The American market is more ready than the Japanese to sacrifice quality for size... “The Japanese reject anything with even invisible flaws,” says Mr Rudlin."

"The biggest jewellery chain in the world, Chow Tai Fook, has 1,000 stores in China and will have 2000 by 2020. In China, 70 per cent of the market is made up of solitaire wedding rings, which are relatively easy to design and manufacture."

"“India, with its jewellery culture inspired by maharajas, is unlike anywhere else in the world,” says Mr Rudlin. “The demand is skewed to elaborate multi-stone pieces, with a focus on necklaces, earrings, bracelets and bindis and hair jewels.”"

American Express - Consumer Analytics and Insights

A little bit old news, yet for consumer research and even quants in the the consumer research and insights field, this is exceptional news:

"American Express is unleashing a powerful weapon: a new unit that will harness transaction data for its 90 million cardholders to inform both marketing decisions and larger strategic issues."

This is transactional data on committed to using their credit card consumers and American Express has always been brilliant at understanding their consumer.  I believe the value here will be exceptional.

See the cached article off Google cache here or search for it on AdAge here.

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.

1984: PC vs. Apple? PC - 2009: Android (based) vs. iPhone? Who?

In the 1980s IBM diluted Apple to single digit share of the personal computer market place.  I believe if Apple continues in the same vein, the Android powered smart-phones will do the same to it now.

Can Apple change? Will it?

Read more at Wired here.

Consumer Value Shopping Driven Innovation in Retail

Andy Bond, CEO of ASDA talks with the Economist about the changes in consumer behavior and how ASDA continues to innovate and grow its revenue.

Consumer Insight - Alcohol Consumption and its Future Regulation

Dr. Ayesha Haroon sends along an article "Alcohol link to one in 25 deaths" here, discussing a study conducted at the University of Toronto.  Dr. Haroon highlighted that with the release of further details, the surgeon generals of the developed countries will have to reconsider their alcohol regulations while their governments will have to review policy towards alcohol sales and consumption.  Interesting fact about Europe in the article:

"Worldwide, average alcohol consumption is around 12 units a week - but in Europe that soars to 21.5. "

Alcohol in the form of consumer products have provided capitalism with exceptional wealth creation.  Perhaps too much of anything is bound to raise an eyebrow or two!

Food and Farms

""According to our laws and our policy, foreigners or foreign companies are not allowed to rent or buy land to grow rice or any kind of food, including raising any livestock in Thailand," Deputy Commerce Minister Alonkorn Pollabutr told reporters."

Reports Maktoob Business here.  I have written previously about the consumer choices for farm commodities and products in regions where the ability to produce either is minimal or difficult, and the results of it.  Collectively, the GCC states currently lead the world in land acquisition and/or leasing of farms.  Yet the above may be a small set back for now.

The Economist writes an excellent article on the subject here.  The article states:

"It is not just Gulf states that are buying up farms. China secured the right to grow palm oil for biofuel on 2.8m hectares of Congo, which would be the world’s largest palm-oil plantation. It is negotiating to grow biofuels on 2m hectares in Zambia, a country where Chinese farms are said to produce a quarter of the eggs sold in the capital, Lusaka. According to one estimate, 1m Chinese farm labourers will be working in Africa this year, a number one African leader called “catastrophic”."

Below is a revealing data diagram highlighting investment and deal structure from the Economist.

(Click to enlarge)

A bit of hype and herd (crowd) mentality is shown in the following statistics followed by of course pullback - "Between the start of 2007 and the middle of 2008, The Economist index of food prices rose 78%; soyabeans and rice both soared more than 130%. Meanwhile, food stocks slumped. In the five largest grain exporters, the ratio of stocks to consumption-plus-exports fell to 11% in 2009, below its ten-year average of over 15%."

Yet, all this activity is termed as "neocolonialist" as the article states - "The head of the UN’s Food and Agriculture Organisation, Jacques Diouf, dubs some projects “neocolonialist”."

As the need continues to grow for food, the agri-focused economics will gain from it.  Will the results be similar to oil economics?

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.

Asian Airports Delight Their Customers

Six of the top 10 airports in the world are Asian - according to Skytrax's study using 8.6m passengers reviewing 196 airports worldwide. These are 1. Incheon (Seoul) 2. Hong Kong 3. Singapore Changi 4. Zurich 5. Munich 6. Kansai 7. Kuala Lumpur 8. Amsterdam 9. Centrair Nagoya 10. Auckland.

Incheon International Airport, Seoul, South Korea

Comments from a user on the Economist's website discussing the top 10 airports here is particularly good:

"If you look at the airports listed in the top ten and analyze their success, you will find that in most cases they are planned to provide convenience for the travelling public and that making a buck is not their raison d'etre."

See details on here.

See my post on the world's best airlines here.

US Utility Consumer Managing Their Electricity

The utility companies run one of the oldest infrastructures in the USA. A friend working in mesh networks for Smart Grids highlighted the fact that an industry where change may occur once in 20 years is being driven to incorporate and integrate technology whose pace of change is substantially faster. Challenges abound!

The Economist in their recent Technology Quarterly have an excellent article on the subject, "Building the smart grid" here. The article highlights my point above further:

"Even though the demands being placed on national electricity grids are changing rapidly, the grids themselves have changed very little since they were first developed more than a century ago. The first grids were built as one-way streets, consisting of power stations at one end supplying power when needed to customers at the other end. That approach worked well for many years, and helped drive the growth of industrial nations by making electricity ubiquitous, but it is now showing its age."

From speed of growth, lack of transparency on the transmission and distribution side of the grid to the consumer's habits of obliquity to their electricity usage, the opportunities abound. Having lived and traveled overseas extensively, the USA lags in one key aspect that the article touches on some what - the US consumer has never been given an incentive to save electricity. The utility companies must grow their revenue and bringing smartness to the electric grid will cut into their top-lines. The article discusses this aspect:

"One problem is that power companies are understandably reluctant to invest in technologies that will reduce consumption of the product they sell, even if there are other benefits. One way to realign the public interest with that of the utilities is through a process called “decoupling” which breaks the direct relationship between electricity sales and profits, a measure that has been successfully employed in California. Energy use per person has remained largely flat over the past 30 years in California, but it has increased by roughly 50% for the rest of America. But in some instances the business case is straightforward. Enel (utility in Italy)spent around €2.1 billion ($3 billion) installing its 30m smart meters in Italy, but now saves around €500m a year as a result, so its investment paid for itself within five years."

I am reminded of Bill Bryson's article "The Waste Generation" on the US consumers' habits in his book "I am a stranger here myself". The author writes that when he used to live in England, the utility offered an off-peak energy plan resulting in value back to the customers. He used to run his washing machine on a timers at night to receive the benefits using timers.

Is the pain or perhaps the desire to manage utilities strong enough for the consumer to adopt the new changes or are the stimulus funds would be used enforce a new regime for the unwilling customer?

"The American government is spending some $4 billion from its economic-stimulus package on smart-grid initiatives, but providing a smart meter for every American home would cost far more: California’s investor-owned utilities alone are spending about $4.5 billion on deploying smart meters over the next few years. That implies that a nationwide implementation could cost around $50 billion. But PNNL estimates that $450 billion would have to be poured into conventional grid infrastructure to meet America’s expected growth over the next decade anyway. Mr Carlson, who now works for GridPoint, argues that a bit of thought is called for if the aim is to move to a new energy-management model, “as opposed to building more of what we’ve already got.”"

One thing is for certain, once the grid gets tapped, the invention driven entrepreneurial opportunities for revenue generation through fulfillment of user needs will be endless!

Thoughts on Consumer Insights

Below is a quick and nice look at what consumer insights mean from a presentation on SlideShare. What provided me value from it? The author, Giulio Bonini, states that there are four properties of a consumer insights: (1) Deep, (2) Original, (3) Base of your communication, and (4) Specific for your target. Enjoy!

Chinese Consumer - Market Dynamics in Retail

Good friend and colleague who is a global leader in retail innovation, Mr. Tony Tsai, Chief Executive Officer – BHG Retail Innovation Institute & Executive VP Operations – The BJ Hualian Hypermarket Co. forwards an excellent article from Nielsen called "Changing Market Dynamics in China's Retail Industry".

The article states of the consumer product goods while touching on the fast moving consumer goods:

"The government’s retail statistics show a slowdown in retail sales over the last six months from 22 percent growth year on year in Quarter 3 to 19 percent in December and 15 percent in February. This slowdown is certainly reflected in FMCG as well. When looking through Nielsen data, specifically in the Modern Trade channel, there is a significant slowing from a 13 percent growth in Q4 2008 to two percent in Jan/Feb 09."

Mr. Tsai and I had discussed, interestingly sitting in Dubai a few years back while we were conducting an analysis of Gulf retail markets, how retail growth in emerging regions like Gulf begins with super market arena in tier 1 cities is followed by hyper and mini growth. What I was curious about was what happens with tier 2 and then tier 3, where the consumer desires for the experience of the tier 1 cities and the super markets? Inevitably it is consumer economics driven. As tier 1 cities grow larger and harder to navigate, hyper and mini marts start to provide the essentials of daily consumption while the weekend trips are reserved to the super "stores".

In case of China, Mr. Tsai had shared about 6 months ago that the workers who do not have work in the cities are returning to the tier 2 and tier 3 cities and towns. The Nielsen reports the results of this:

"Lower tier cities, where the spend on food and beverages represent roughly 40 percent of household expenditure, are achieving double digit growth, however the growth is potentially being fueled by the fact that more workers are staying in their hometowns as less job opportunities exist due to factory closures in South China. Another factor could also be that consumers are moving from villages to the towns to do their shopping as well as downgrading to lower priced products."

Also, Mr. Tsai back then highlighted that fluctuations in economics of a rapidly growing region like Gulf will impact consumer behavior, such as brand switching. I felt that bargain hunting may start to play a role in the consumers decisions

The nielsen report validates these predictions for the rapidly growing region like China impacted with economic woes:

"Consumers are changing their purchasing behavior ... with the significant increase in promotional activity, are being ‘trained’ to buy more on promotion. This highlights the importance of price right now with 85 percent of Modern Trade shoppers paying more attention to price promotions."

Computer Vision in Consumer Space Grows

The thrust in the computer vision sector has grown to the point that the Association of Computing Machinery (ACM) has launched a new conference Interactive Multimedia for Consumer Electronics, to take place on October 19th, 2009 in Beijing (details here).  Of interest will be papers and workshops on presence and environment sensing, face and hand detection, recognition and tracking, facial expression and emotion / mood recognition, and gesture and activity recognition.

Machines Providing Real-Time Consumer Insights

"...Unilever, an Anglo-Dutch consumer-goods giant, is using expression-analysis software to pinpoint how testers react to foods. Procter & Gamble, an American competitor, is using similar technology to decipher the expressions of focus groups viewing its advertisements."

States the article "Machines that can see" here in The Economist.  Similarly, the ability of sensors driven understanding of environments can enable in-context communication with a perspective consumer.  Further, remembering the consumer and the context allows for touching them in a non-disruptive fashion where the flow of information or marketing is "continued".  For example, as the article states:

"Digital billboards—the large TV screens that display advertisements in public places—already take into account the weather (touting cold drinks when it is hot) and the time of day (promoting wine in the evening). NICTA, a media laboratory funded by the Australian government, has gone a stage further. It has developed a digital sign called TABANAR, which sports an integrated camera. When a passer-by approaches, software determines his sex, approximate age and hair growth. Shoppers can then be enticed with highly targeted advertisements: action figures for little boys, for example, or razors for beardless men. If the person begins to turn away, TABANAR launches a different ad, perhaps with dramatic music. If he comes back later, TABANAR can show yet another advertisement. “You tend to go: ‘Wow, thanks, how did you know I needed that?’,” says Rob Fitzpatrick of NICTA."

At P&G, I led an effort in kiosks that enabled a perspective consumer to conduct virtual beauty care at the shelf for beauty care products.  Such services have existed in South Korea in specific but they may be going main stream across the world in other CPG categories:

"Computer vision has even advanced to the point that it can perform internet searches with an image, rather than key words, as a search term. Later this year Accenture, a consulting firm, will launch a free service, called Accenture Mobile Object-Recognition Platform (AMORP), that will enable people to use images sent from mobile phones to look things up on the web. After sending an image of, say, a Chinese delicacy, a curious foodie might receive information gleaned from AsianFoodGrocer.com, for example. Fredrik Linaker, head of the AMORP project at Accenture’s research centre in Sofia Antipolis, France, likens the project to “physical-world hyperlinking”."

The use of computer vision based applications beyond consumer centric opportunities are tremendous as well.  The article discusses the applicability and examples of use in intelligence and safety sector also.