Mine Your Own Business

A Super Sunday

Looking for something to do this weekend?  Market Watch reports that prime tickets for this Sunday's Super Bowl are going for as much as $50,000.00.  Of course, you're not just going to see a football game.  The price includes performances by Alicia Keys, Jordin Sparks, Paula Abdul, and Tom Petty and the Heartbreakers.

Of course, 50 grand doesn't include getting to Phoenix, hotel accommodations or other expenses.  For example, two nights at the Hampton Inn in Glendale, AZ will set you back $449.10 per night, according to Expedia.com.  Come back next weekend and the same room will cost you $134.10.

Need a car?  An economy model from Hertz this weekend is going for $67.99 per day.  Next weekend?  $38.99.  Opportunistic pricing?  No, supply and demand.  If we're in the widget business and we don't sell all our widgets today, we can always sell more tomorrow.  But Super Sunday only comes once each year.  Even at 1/3 the price, that Hampton Inn probably won't be full next weekend.

Want another example?  30 second commercials during the game are going for a mere $2.7 million.  That may seem like an outrageous amount of money, but consider the brands who come back year after year, many for multiple spots.  It must be worth it.

Here's the thing.  Whether it's a football ticket, a hotel room, a rental car, or a vacuum cleaner, people spend their money to get value.  If there's somebody out there willing to pay $50,000 for two tickets to a football game, then it's a fair price. It's all in the customer's perception of value.  If they think your product is worth more than their money, you've got a sale. The selling price has nothing to do with the seller's cost.

In retail it's called "value pricing" and it's the best way to beat your competition.  Cost plus may work for
Sam's and Costco, but the rest of us have to be a little more creative.  How well does it work?  The National Hockey League has one game scheduled for Sunday and it's in Canada.  The NBA has two games, both Sunday afternoon.  How great would it be to have your biggest event of the year and have your competitors not even try to compete?

Most of us will never know.

E-Gouging

If you've been following MYOB for a while then you know that one of this blogger's pet peeves is over-priced hotels that charge big connection fees to use the Internet.  Considering that the $49.99 places almost always offer free high-speed, either via cable or wireless, I think it's outrageous that the high-priced places think it's ok to add another ten bucks to the cost of doing business from one of their rooms.

The irony is that your intrepid correspondent is attending the Excellence in Missouri Conference at the Tan-Tar-A Resort at the Lake of the Ozarks.  Keep in mind that it's mid-November and a room at the Lake is about as desirable as an Alaskan cruise this time of year.  If it weren't for conventions like this one, the place would be empty.  But it isn't.  It's full of business people attending our conference or one of the other meetings that are going on.

Perception equals reality.  Had the hotel increased their rates by $10.00 per night and included the WiFi for no charge, no one would be the wiser or particularly care.  But the add-on price makes it look like they're gouging Internet users and leaves a bad taste in most people's mouths.

This may just sound like a tight-wad complaining about spending ten bucks, but I really want you to consider your own business.  Do you charge "extra" for anything that would be  better included in the price?  Can you bundle any accessories along with major items to make the total package look more attractive?  Are you charging for anything that might generate additional sales if you provided it free of charge?

Think about it.  Look at your business through your customers' eyes.  You just might find a way to improve the perceived value of your offering without really giving up any revenue. 

Please comment if you have any good (or bad) examples to share.

They CAN Afford It

The always insightful Seth Godin suggests that when the customer says "I can't afford it", they really mean is "It's not worth it."  He writes, "As in, it's not worth reprioritizing my life, not worth the risk, not worth what I'll have to give up to get this, not worth being in debt for."

A lot of us try to overcome the "can't afford it" objection by lowering the price when, in fact, the fault isn't with the price at all.  The fault is our inability to sell the value of our product to the customer.  A sales trainer once told me that there are two reasons why a person does something.  One is the reason that "sounds good".  The other is the real reason.  Sometimes the two reasons are the same.  Most of the time they're not.

We can drive ourselves crazy trying to close a sale by overcoming the wrong objection.  Our job as salespeople is to dig deeply enough to find the real reason why the customer won't buy and then dealing with that objection, not just at the close, but throughout the presentation.  In a retail situation, the price of an item should be right there on the sign or tag, visible to the customer from the outset of the conversation.  Confirming the fact that the item is something the customer can afford should be done as early as possible, eliminating the "can't afford" objection long before the close.

Radiohead

To quote Monty Python, "And now for something completely different."  A British band called Radiohead has released a new album called "In Rainbows".  I personally don't know the first thing about the band, or their music.  But here's the interesting part.  According to the Toronto Globe and Mail, since they have no contract with a record label, they've released "In Rainbows" themselves.  It's only available on their web site.  You can't buy it at Wal*Mart, or even at Amazon.com.  The twist is that YOU decide what you're going to pay for it.

That's right.  You can give them a dollar, or twenty dollars.  It's up to you.    According to some sources, the band may have made as much as $10 million on the first day the download was available.  When you consider that the band gets virtually all the money, compared to the percentage they would receive from the record label under the normal agreement, it looks like the band made a pretty good move.  Radiohead is known for its innovative music, so it's not out of character for them to come up with an innovative marketing model.

No one's suggesting that this would be a good model for any other business.  The band has very little cost in their product.  Once they pay any backup musicians, pay for studio time, and pay a staff to handle the distribution, their cost is nearly zero.  They don't even have to pay for a blank CD.  We should all be so lucky.

But it does show that we're living in a different age.  Outside-the-box thinking is definitely in order when it comes to doing business in the twenty-first century. Cost plus pricing isn't really a viable option anymore.  Those days are over.  But what's going to take it's place?  The key to setting the right price is figuring out what value the customer places on a product or service.  Maybe asking them isn't such a bad idea.  What do you think?

The Price is Right?

Thanks to Larry Engemann of Phil's Sewing Machines in Washington, MO for pointing out this article from Forbes.com on one of MYOB's favorite topics; pricing.  If you've been following the news recently, you know that after only two months on the market, Apple dropped the price of its iPhone by 33% creating a firestorm among the first adopters who had stood in long lines to buy the device at full price when it first came out.  The criticism was so bad that Steve Jobs issued an apology and offered customers a partial rebate.

As we've pointed out here many times before, pricing is a complicated issue.  The days of marking up everything in the store by the same percentage are over.  Besides, cost-plus pricing is seldom the best way to maximize your profit. (See our earlier post on Variable Pricing.)

The Forbes article goes into some detail on "Temporal Price Discrimination", a terrible name for a business practice if ever I heard one.  It means pricing a product or service based on the customer's ability or desire to pay.  I prefer "variable pricing".  For example, those first iPhone buyers knew that there would be price reductions sooner or later.  Apple's mistake was taking too big a cut, too soon. 

Variable pricing can also be applied across seasons, geography, or by adding or taking away features.  After-Christmas sales are an example of seasonal pricing.  A Christmas tree is certainly worth less to the consumer on December 26 than it is on November 26.  A dealer would be leaving money on the table discounting seasonal items too early.

A good example of geographical pricing might be a hot dog at the ball game.   That 99 cent hot dog at 7-Eleven probably sells for $3.50 or more at the ball park.   Gasoline will usually be more expensive at tourist destinations than it is at home.

Variable pricing according to features can be an interesting one.  I had breakfast at Denny's while I was out of town last week.  They offer a special "Senior's Menu" for those 55 and over.  Their "Senior Omelet" costs quite a bit less than their "Ultimate Omelet".  But if you read the menu descriptions, the old follks version uses one less egg, and the accessories aren't the same.  Either omelet is a good value. They're just different and priced accordingly.  The same is true of their other "Senior" items.  (BTW, I'm over 55 but I bought the regular omelet.)

The author makes several other good points, but I'll leave it to you to check them out. BI will mention that he (or she) talks about products that carry an emotional attachment or that become a symbol of the owner's sense of self.  Kobe beef anyone?

If pricing is a problem for you, click on the "Pricing" Category link in the right column of this blog to see some of our earlier posts on the subject.  If pricing isn't a problem, please use the comment link below to tell us how you do it.

Things I Learned on Vacation

There's nothing like a trip to a place that's heavily into tourism to validate the law of supply and demand.  For example, the price of a gallon of unleaded gasoline in Branson, MO is as much as 40 cents/gallon more than it is just 30 miles north in Ozark, MO. 

When people go on vacation, they seem to lose all consciousness about what things are supposed to cost.  Or maybe they just don't care.  It's only once a year and they'll worry about the bills when they get home.  When was the last time you bought one of your kids a pop-gun or a hill-billy hat?  Under normal circumstances the answer is probably "never".  For that matter, most kids wouldn't normally be caught dead in a hill-billy hat.  Yet you see kids and even some adults proudly sporting a pointy felt hat with a corn cob pipe sticking out of the side all over town when you're on vacation.  You just know that hat will never again see the light of day once the wearer gets home.   The same  can be said about coon-skin caps, cowboy hats, and baseball caps with all kinds of odd sayings on them.  And, don't forget the T-shirts.

If some band you've never heard of shows up in your town and charges $50 a ticket to see them, most normal folks will pass.  But the tourists line up to get those same $50 tickets to see that same unknown band and are happy to get in.  Don't get me wrong.  There are some very good entertainers in Branson, people you have heard of and would gladly pay top dollar to see wherever they are.  But there are also some no-names who seem to do quite well.

Nobody in their right mind would pay $8.00 for a beer or $7.00 for a soda......unless they were at a Major League Baseball game.  Then, the sky's the limit. 

The point is that value, like beauty, is in the eye of the beholder.  The retail value of anything is exactly what the customer is willing to pay, no more--no less.  And sometimes, price is no object, like when you're on vacation.  But, it's not just vacationers who make these decisions.  Every consumer does it every day.  Our job is to determine what that value is and price our merchandise accordingly.  Cost-plus pricing was fine in our grandparents, maybe even our parents, day.  But if you use it today you're losing sales some of the time and leaving money on the table other times.

Some time back we did a series of posts on pricing.  If you missed them, or if you'd just like a refresher course, look for the "Categories" section in the right-hand column of this page and click on "Pricing".  If you have any suggestions or additions, please let us know.

By the way, is anyone interested in a slightly-used hillbilly hat or a pop gun?  If so, let me know.

More on Generation Y

In a recent post we discussed the members of Generation Y.  These are the sons and daughters of the Baby Boom generation, born between 1982 and 2000.  In an article called Gen Y sits on top of the food chain in today's issue of USA Today, writer Jayne O'Donnell gives us more insight into this powerful demographic.

Online marketing expert Kelly Moony has researched this group and found some interesting things.  One is that they're turned off by slow web sites, dismissive sales staff, and free shipping that's too slow.  That's probably true for most of us.  The difference is that these young people will express their unhappiness on their MySpace page, in Instant Messages, and on their blogs.  If you turn one of them off, you run the risk of alienating an entire generation.  She finds that they want merchandise that's either cheap or elite, something that we've discussed here previously, too. 

Moony says that Y's are more savvy than they're given credit for and "in some instances they think they know more than the person selling them something."  I'd have to disagree slightly.  In some cases they do know more than the person selling them something.

Consumer psychologist Kit Yarrow is quoted as saying that these young consumers have an "equal vote in the look and style of the family."  No argument there.  My two "Y's" definitely influenced my recent car purchase.  (My daughter has better taste than I do and my son knows more about cars.)

The bottom line is that this group of young people has money to spend now and will have a lot more to spend in years to come.  They know what they want and they know how to get information.  We'd better pay attention to them.

A $3,000 coffee maker?

Have you ever seen a coffee maker that would set you back three grand?  Well, you have now.  That's it on the left.  The Dacor CM24P built in coffee system.  According to the manufacturer's web site,

" Only from Dacor will you find a plumbed coffee system allowing for the consistent brewing of coffee without needing to refill a water tank."

The unit's built into the wall and brews "the perfect cup", one cup at a time.  It has an adjustable height dispenser allowing for taller travel mugs.  It has a digital display and customized brewing software.  It works with either ground coffee or with beans.

If a plain cup of coffee isn't your cup of tea, "it Not only is it the perfect choice for coffee, the versatile unit dispenses espresso, cappuccino as well as water for hot tea or chocolate all from the touch of a button."

It has an "integrated frothing system" and built-in cup and saucer storage.

Don't ever be afraid to offer your customers the top-of-the-line product.  Afraid they'll have sticker shock?  Think about this.  The low-end Mr. Coffee sells for around $20.00.  At $2,900 the Dacor unit is 1,450 % higher.  But, don't forget, it has a built-in frother.

Seriously, if you're a coffee drinker, wouldn't you really like to have one of these things?  I know I would.

 

Hunting for Treasure

In a recent series of posts on pricing, we discussed three types of consumers and the pricing strategies that appeal to each group.  In a new book, "Treasure Hunt: Inside the Mind of the New Consumer", Michael Silverstein, sr. vp of the Boston Consulting Group, discusses the growth of the low end and high end price categories, and the decline of the middle. 

According to Silverstein, where the US economy has traditionally been pictured as an egg shape, with a small top and bottom and a large middle, today the consumer economy is becoming more of an hour glass, with a large top and bottom and a shrinking center.  Interestingly, he says that the same customer is shopping at both ends of the scale.  The customer "in the middle" no longer buys everything in the middle.  Instead, they "trade down" on certain items so that they can afford to "trade up" on others.  He cites the example of a couple who might buy their groceries at a warehouse club and use the savings to buy a BMW.

In the post, "Your Business Strategy",  we discussed this principle briefly, but according to Silverstein, it's more prevalent than we thought. 

So, what's the bottom line?  What does it mean to our business?  It means that unless we want to dwell in the low margin, low price end of things, we must make our high end offerings attractive to this new "treasure hunter".  Silverstein cites the statistic that 75% of discretionary spending in the United States is controlled by women.  If we want Ms. Treasure Hunter to  "trade down" to warehouse club grocery shopping and lunch at McDonald's so she can afford our latest and greatest, then  we'd better give her a good reason.

As suppliers, we must continue to provide you with innovative products at good price points and you, as retailers, must provide an attractive shopping environment, knowledgeable sales people, convenient shopping hours, and world-class service. 

Michael Silverstein writes a weekly consumer column that you can find here.

Coupons

Seth Godin has an interesting post on his blog today that fits nicely into our discussion on pricing.  The subject is coupons.  He points out three benefits of coupons and two warnings.  First the benefits.

Number one, a coupon allows you to offer different prices to different customers. Maybe you'd like to offer a greater discount to customers who travel a greater distance.  Zip code mailing lists would be one way to do that.  Zoned advertising would be another. 

Number two is that "they provide the shopper with a totem." Some customers view a coupon almost like a check.  They have to cash it.  If they don't buy, they lose something, the value of the coupon.

Number three, coupons create a feeling of urgency.  If I want to save (or not lose) the value of the coupon, I have to buy before it expires. 

I would add two more benefits.  Coupons level the playing field.  You don't have to be a giant retailer to offer a coupon.  If you use email or the Internet to distribute them, you have virtually no cost until they're redeemed.  Even if you use other media, the cost of the discount is only incurred when the coupon is redeemed.  Occasionally you'll give a discount on a sale you would have gotten anyway, but most coupon sales will be incremental business that you wouldn't have gotten otherwise.

Finally, when a shopper walks into your store with a coupon you immediately know two things.  One, she's serious about buying.  She wouldn't have gone to the trouble to bring in the coupon if she wasn't considering a purchase.  Two, you know that price is important to her and can tailor you presentation accordingly.

Godin's two caveats?  Don't do a coupon if you can't execute it properly.  In particular, don't use coupons for high-end products. If you're selling to the luxury buyer, a coupon sends the entirely wrong message.  Even the value shopper may be put off if the coupon isn't presented properly.  Finally, "if you make the use of the coupon a hassle, you've blown it."  If there are exceptions, state them clearly.  If there's an expiration date (which there almost always should be), make it very clear.  Spending money to bring a customer into your store and then making them mad is not a good use of advertising/marketing dollars.