Beyond Cost Plus Summary: August 2015

Aug 31, 2015

 

Hurdles on pizza, stated vs. revealed preferences, a danger in value billing and different approaches to pricing premium versions of a product.

 

The first post this month looked at how a pizza restaurant uses hurdles as part of a differential pricing strategy. They offer significant discounts on pick-up orders that are placed in person. If you want the discount you can't phone the order in ahead of time - you have to walk in, place the order and wait for it to be prepared.

This approach lets them maximize sales and revenue by selling pizzas at full price to customers that are prepared to pay full price, and also get additional discounted sales to customers are much less likely to have paid full price. The goal is more sales, in the form of less-but-still profitable sales, without cannibalizing full price higher profit sales. How does it work?

Ordering a pizza in person and waiting for it to be prepared is not very convenient, especially considering that one of the great joys of pizza is the convenience – you place a call and a short while later you're eating it. If you are prepared to forego all that convenience and jump the hurdle of placing the order in person and waiting for it to be prepared you have proven that you are serious about saving money and earned your discount.

Another post looked at a problem with value billing – the idea that you can't miss what you never had. This used the real world example of a retailer that switched merchant services providers (the company that did their credit card clearing). The new company saved them a lot of money - their total cost of processing credit card transaction went down dramatically - and charged on a value basis. They charged a percentage of what the customer was saving, and the customer was saving a lot of money.

The problem is that the customer couldn't see the savings, all they could see were the new value billing charges. With the old provider the fees were all hidden, they just got a smaller payout. Now they were getting a bigger payout, paying some small value billing fees, and still saving a lot of money. Unfortunately all they could see were the "new" fees. With the old hidden fees they never really knew how much they were paying, and that ultimately proved more attractive to them, even though it was also more expensive.

Different approaches to pricing standard and premium versions of the same product was covered in two posts. They looked at the pricing for standard and premium versions of rechargeable batteries from both a name brand and a discount "house" brand.

The name brand vendor charged a lot more money (75%) for the much smaller increase in performance (29%) provided by their premium model. The house brand took a very different approach, charging just 21% more money for 26% more performance.

Why so different? The name brand vendor is dealing with customers that are less price sensitive. They also recognize that some of these customers are even less sensitive to price and/or more focussed on performance. The take advantage of this with a product that appeals to those customers, one with a much higher markup that generates much higher profits.

The customer that buys the house brand is more price-sensitive. They are highly unlikely to pay such a huge premium for a modest increase in performance, and that kind of pricing would just be a wasted opportunity.

Instead the house brand uses the premium version as an opportunity to get a little more money and extra profit from each customer by pricing their upgrades very aggressively. They recognize that for these customers extra capacity offers diminishing marginal utility and charge accordingly. It means the extra profit they make on sales of premium batteries are lower than the name brand, but it is profit they would not have made otherwise.

The last post of the month dealt with the differences between stated and revealed preferences.

This is a real problem in the flower business. Some shop owners eschew charm pricing because they think it is tacky. That is their stated preference 



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Beyond Cost Plus is sponsored by FloristWare – the most powerful, affordable and easy-to-use POS software for retail florists – as part of their commitment to the floral industry and desire to see flower shops be more successful.

FloristWare – flower shop software/POS system.

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