Pricing prophet: Priceless lessons from 2012
Wednesday, December 19, 2012/
Many marketers consider pricing a cure for insomnia. After all, it involves numbers and nasty formulas such as “price elasticity”.
They say you can’t control pricing; you can only charge what the competition is charging, or “what the market will bear”.
I’m here to say pricing is the coalface of marketing, and it’s sexier than you think. Pricing is where the buyer exchanges money for the benefits received, which makes it the only “P” in the four Ps of marketing – product, place, price and promotion – that generates revenue. The other Ps generate costs.
Getting it right can mean the difference between profit and loss – and that is what most CEOs call sexy.
Pricing will be the “P” that rises to the top in 2013 (in my first column of 2013 I will reveal everything you need to know to get your pricing right next year).
To understand my reasons, let’s reprise some major pricing milestones over past year. Three American companies epitomised the world of business-to-consumer (B2C) pricing in 2012: Netflix, JCPenney and Apple.
Netflix’s pricing bounce
In the (northern) summer of 2011, Netflix tried to separate its DVD rental and video streaming business in two (a subscription to which cost $9.99) in an attempt to levy a separate $7.99 subscription charge for each.
In the world of social media, customers don’t tell you they dislike your prices anymore; they tell everyone they know instead, and vote with their feet. Within days, Netflix received 82,000 hostile comments on its Facebook page, lost 3% (800,000) of its subscriber base and its share price fell from a July 2011 peak of $299 to $130 on September 25. Seriously unsexy.
But Netflix held its ground, and by early 2012, the picture was not as bad as it first appeared. True, the share price did not recoup all its losses, but it turned out that half the 800,000 subscribers lost were free subscribers, reducing the damage.
More importantly, revenue per subscriber was up 11.9%, quarterly revenue was up 10% and profit contribution had risen 15.4%. Some commentators started calling Netflix CEO Reed Hastings a hero rather than a villain, pointing out that the price changes need to be evaluated over the long term, not the short term.
For this reason, it may yet be too early to evaluate what is shaping up to be the world’s biggest price change in 2012, initiated by the former Apple executive, Ron Johnson, now at American department store, JCPenney.
Johnson decided that “fair and square everyday pricing” would be rolled out across JCPenney’s 1,100 stores. At the time, the stores had wafer-thin margins, thanks to 75% of stock being sold at an average of 50% off. The initiative also involved the elimination of coupons as well as the 590 “sales” that were held in 2011.
“Fair and square everyday pricing” meant three types of prices: “everyday prices” which are typically 40% off; “monthly values”, for events like back-to-school and Valentine’s Day; and “best prices” for clearance items.
Early signs are not looking good (although the jury is still out in the long-term). JCPenney’s shares fell 18% after it announced its first quarterly results following the price change: same-store sales had fallen by around 18%, and footfall fell by 10% because customers reportedly miss the thrill of finding a bargain.
No bite out of Apple
Meanwhile, the share price of Johnson’s former employer, Apple, went into the stratosphere in 2012 (it has since come back to earth a bit), as demand for consumer technology products – especially theirs – shows no sign of slowing down.
There is no doubt that this is the result of innovative, beautifully-designed and functional products sold but it also because of their finely-tuned and well-executed pricing strategy. After all, when was the last time you saw an Apple product discounted?
The lessons for Australian companies are these: social media can kill you (Netflix); understand and listen to customers (JCPenney); and sensitise customers to value, quality and innovation, rather than price (Apple).
Australian companies have also had their own unique pricing challenges in 2012. The carbon tax arrived, and the competition regulator, the ACCC, monitored dozens of carbon tax-based price increases, the most infamous of which cost the CEO of a bakery his job.
Retailers are under siege on many fronts. Pricewise, it’s the GST tax-free threshold for online shoppers buying from overseas, the strength of the Australian dollar, and the rapid growth of online shopping to name a few.