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EDITORIAL
Pricing Decisions: Valuable Lessons
By Ira Smolowitz, Ph.D.
__________________________________________________________________________
The
price an organization charges for its product/service is of critical
importance. The wrong pricing decision can adversely impact on revenue,
current/future customer base, product image, and competitor response.
Given the importance of the pricing decision, two cases of pricing
missteps will first be discussed. Cynics might argue that a sample
of only two organizations is only anecdotal evidence. In my opinion,
given the prominence of the associated companies, valuable pricing
lessons have now surfaced.
Case #1 – Macy’s Department Stores
The New York Times describes the Macy’s chain takeover of 410 department
stores around the country and renaming them all Macy’s, “vowing
to lure shoppers with innovations like price scanners in the aisles
and exclusive fashions from the likes of Oscar de le Renta” as “the
boldest stroke in American retailing in decades.”
For years, the department stores that Macy’s acquired,
like Marshall Field’s and Filene’s, had relied on 15- and 20-percent
off coupons to alert people, like a Pavlovian bell, that it was
time to shop. As part of its reinvention, Macy’s tried to wean
shoppers off them.
But the tactic backfired. With fewer coupons to clip, thousands
of people from Washington to Los Angeles turned their backs on
Macy’s.
Now the company’s chief executive, Terry J. Lundgren, one of the
brightest stars in American retailing, is pleading mea culpa –
and backtracking Macy’s pledges to issue plenty of coupons for
the holiday shopping season.
It’s a lesson that other companies have also learned the hard
way. Since the first coupon was issued for the Coca-Cola Company
in 1894, companies have occasionally tried to take them away –
and suffered. Cuts by the Ruby Tuesday chain in 2004 hurt sales.
Procter & Gamble’s effort in 1996 led to boycotts. Even in this
era of Internet shopping, it seems, Americans are wedded to a
low-tech form of marketing: the dotted-line clip out coupon.1
Associated Lesson
Consumers tend to be habitual in their buying decisions. “Why do
consumers buy groceries at supermarket A vs. competitor supermarket
B? Price differentials are not the only factor. The consumer has
shopped at supermarket A for decades. She/he is familiar with the
store-layout, store employees, etc. In a 24/7 work-mentality why
switch to supermarket B for an insignificant price differential?
Therefore, a firm should think long and hard before implementing
a marketing strategy that is at variance to established consumer
behavior.
Case #2 – Apple, Inc.
Apple recently launched its iPhone, and sold a million of the gadgets
in the first 75 days. So why did it risk alienating its hard-core
fans by cutting the price by $200 at the time of this article? The
move smacks of an attempt to “beat the number.”
The pace of iPhone sales probably got a shot in the arm when Apple
slashed the price. That could lead to some jaw-dropping quarter-end
figures, in line with Steve Jobs’s habit of under-promising and
over-delivering.
Does cutting the price make any business sense, other than as a
means to trounce expectations? Higher volumes and Apple’s revenue-sharing
agreement with AT&T means its margins mightn’t be hurt much. But
Apple has always catered to a fanatical fan base. Many of these
customers now feel silly for buying the phone at the initial price,
even after Apple’s $100 gift-certificate peace offering. It may
have broken a cardinal rule of business: Don’t make repeat customers
feel like chumps.2
Associated Lesson
A successful corporation has customers that will buy its product/service
without hesitation. In other words, customers should not be fans
but “fanatics.” An erratic price system that erodes customer loyalty
is most troublesome.
The pricing decision has been aptly described by Greg Cudahy, managing
partner of Accenture’s pricing and profit optimization practice,
as “pricing is the last bastion of gut feel.”
According to Cudahy, companies
that take a strategic approach to pricing throughout their business
and monitor their success with hard numbers can raise revenue
by between 1% and 8%. “That’s a huge shift in pure revenue improvement.”
For example, New York drugstore chain Duane Reade increased baby
product revenues by 27% after using pricing software to examine
sales data, according to an article titled, “The Price Is Right…Isn’t
It?” that appeared in the January 2007 edition of Accenture’s
business publication Outlook. In the article, Cudahy and George
L. Coleman, a leader of Accenture’s retail pricing group, describe
how the data showed that parents of newborns are not as price-sensitive
as parents of toddlers. In response, the company cut prices on
toddler diapers to remain competitive with other stores and raised
prices on diapers for infants.3
The New York Times has reported that…“in the 13 consecutive years
that the Yankees have played post season games, 1995 through 2007,
they have spent just short of $1.6 billion on their payrolls –$1,5889,672,681
to be more precise.” 4
Although other sports franchises may not have comparable expenditures
the fact remains, in my opinion, that a bad pricing decision has
emerged. To build future good-will and future fans, children have
to be present at the arena to see their team in action. Kids want
to scramble for a baseball hit into the seats, see their favorite
player in person, etc. A telecast, watched at home, can’t replicate
the above excitement from seeing the game at the arena. Now prices,
once again, become a critical marketing issue. For a family of four,
to buy tickets to a major-league baseball event, food from the concession
stand, costs of transportation, etc. is easily $400. How often can
the typical family incur the above expenditure? Answer: most infrequently.
As a consequence, price will serve to discourage attendance at the
baseball game. With the associated discouragement, future fan loyalty
is not at its highest potential level.
The price charged for an organization’s product/service conveys
initial information to the consumer. The wrong pricing decision
will serve to engender negative early information.
As such, corporations must diligently strive to understand how the
price of a product/service is mentally processed by current and
future customers. Simply matching a competitor’s price is, in my
opinion, poor marketing. Allowing the competition to dictate your
price is to assure that the competition knows most about the customer.
This assumption has to be evaluated and not taken as a given.
References
1. Barbaro, Michael “Given Fewer Coupons to Clip, Bargain Hunters
Snub Macy’s,” New York Times, September 29, 2007, p. A1.
2. Cyran, Robert and Beales, Robert, “Did Apple Snub Its Core?,”
The Wall Street Journal, September 11, 2007, p. C12.
3. “The Price Is Right, but Maybe It’s Not, and How Do You Know?,”
published October 3, 2007 in Knowledge @ Wharton, downloaded 10/4/07,
p. 1 from: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1813.
4. Chass, Murray, “While Steinbrenner Spends, Yankees Can’t Buy
a Win,” The New York Times, October 7, 2007, p. SP3.
_________________________________________________________________________________
Articles printed with the permission of Dr. Ira Smolowitz,
Professor of Finance and Dean, Bureau of Business Research and Program
Development at American International College, Springfield, MA.
_________________________________________________________________________________
Page updated: October 31, 2007 9:37 AM |
All
contents © 2007. All rights reserved.