pricinglessons

5000% price increase: is this value capture or patient blackmailing?

An entrepreneur in the US has come under fire for raising the price of a life-saving drug by 5,000% overnight. Martin Shkreli raised the price of the drug daraprim, which treats toxoplasmosis, from $13.50 to $750.

Click on this link to watch the video Channel 4 News

The 10 Most Common Myths About Adobe’s Creative Cloud (CC)

 

Download The 10 Most Common Myths About Adobe’s Creative Cloud (CC) _ ProDesignTools

Supplement to a case study on Adobe Creative Cloud

HBR article and interview on Value Capture: Innovation is not worth much if you cannot charge for it

Both kinds of innovation—one in value creation, the other in value capture—are important. But most companies focus only on the first. Sometimes a business can get away with failing to think about value capture if it sells plenty of its new offerings through existing approaches. But when value capture goes unexamined, money is usually left on the table—and sometimes the only thing that can save a business is finding a way to capture value. 

Please read the full HBR article here

10 minute interview with Julia Kirby here

Blog post on fencing here

When Customers Will (Willingly) Pay More for Less

Gardiner Morse
FEBRUARY 24, 2015

https://hbr.org/2015/02/when-customers-will-willingly-pay-more-for-less

 

Last week, AT&T launched its GigaPower internet service in and around Kansas City with a curious type of tiered pricing: $70 a month if you let the company track your web browsing — and $99 if you don’t. In effect, AT&T is taking its baseline product – internet service with tracking – and, for an additional $29 a month, removing something.

This is an interesting twist on a standard product marketing strategy known as “versioning.” With versioning, a marketer takes a base product – say a DVD player – and offers the plain vanilla unit for one price, one with bells and whistles for a higher amount, and a stripped down version at a discount. What marketers don’t normally do is strip a product down and raise the price. You can imagine that this could backfire badly if consumers feel they’re being taken for a ride. But done thoughtfully, charging a premium for a product that lacks certain components can deliver value to companies and customers alike. Simply identify an aspect of your base offering that some segment of customers will willingly (“willingly” is key) pay to avoid, and remove it. Let’s call it a “product-minus” strategy.

Decaffeinated coffee is a case in point. The base offering has caffeine — and it’s a key feature for many coffee drinkers. Although it’s not expensive to decaffeinate coffee beans, it does add to the product’s cost. Subtract the caffeine and raise the price enough to preserve your margin but not so much that you piss off customers. Starbucks, for example, sells Pike Place roast whole bean for $11.95 a pound but charges a dollar more for the same product, minus the caffeine.

It’s not hard to think of cases where companies already have a product-minus offering but don’t charge more for it. Fragrance-free versions of “regular” products come to mind. Mennen Speed Stick antiperspirants and deodorants, for example, come in a profusion of scents – Regular, Musk, Irish Spring, Ocean Surf, Icy Blast and more – but the difficult-to-find unscented version is available at the same price as the “regular” and other scented versions.

Likewise, Amtrak, provides a “Quiet Car” on many of its corridor trains. The quiet car offers a library-like haven from the loud conversations, cell-phone calls, and other distractions found on the train’s regular cars. It’s a base offering (standard cars) minus an aspect of that offering – noise. Although Amtrak provides a product-minus service that a subset of passengers clearly values, quiet car seats are priced the same as seats on the other cars.

Removing components of a base offering and upping the price is a model similar to “reverse positioning” described by Harvard Business School’s Youngme Moon. But unlike that model, the product-minus approach  does not introduce new features – it simply subtracts existing ones and leaves it at that. Mennen and Amtrak could probably charge a higher price for their product-minus offerings. The key is to make the value exchange explicit. Consumers will launch a scorched-earth social media attack on any company they think is exploiting them, or they’ll simply defect (remember Netflix’s Qwikster debacle?). A product-minus strategy has to clear a high bar for value because it can so easily look (and actually be) exploitative. Tim Wu, writing in the New Yorker, describes the airlines’ strategy of making the base offering so degraded that customers will pay a fee to escape it. “In order for fees to work,” he writes “there needs be something worth paying to avoid.” The soul-crushing fight for overhead space (now a standard aspect of the base offering) can be removed — for a price. Just check your luggage. But airline customers don’t feel that they’re getting value in this deal. They feel they’re being bilked.

On the flip side, customers will willingly pay for a product-minus offering that they feel is fair and delivers real value. A really good cup of decaf coffee will be worth a few cents more to some customers – particularly if the supplier emphasizes the care and costs that go into the process. Making scarce scent-free Speed Stick easier to find, and highlighting the absence of potentially irritating additives, could justify a premium. And a quiet car whose norms are vigorously enforced by the train crew is surely worth a few bucks. Allow customers to reserve quiet-car seats and the value would climb further.

How AT&T customers respond to its pricey tracking opt-out policy is an experiment in progress. Since the company rolled out a similar plan in Austin a year ago most people choose the cheaper service says a company spokesperson, giving up privacy in order to save money. If consumers feel that’s a fair deal, it could work. But if they come to feel that AT&T shouldn’t be spying on them in the first place, and resent paying extra for their privacy, the company stands to lose more than a little revenue.

A #pricing sign you will never see.

Value-Based Pricing (better) vs Cost-Based Pricing (the norm)

Obstactles of Implementing Value-based Pricing

 

In theory, value‐based pricing is superior to cost‐based and competition‐based pricing. In
practice however, cost‐based pricing remains dominant. This article offers an overview of
the special costs and difficulties associated with implementing value‐based pricing, with a
goal of helping managers weigh the costs and benefits, and anticipate the difficulties, of
their own implementations of value‐based pricing.

Download Michel 2013 PfM Obstacles to Implementing Value-based Pricing

 

 

Pricing at its best [Humor]

Pricing Research Review

By Michaela Mora, 6. October 2010

http://www.relevantinsights.com/pricing-research

David Lyon, principal at Aurora Market Modeling did a great review of past and current price research methods in his tutorial “Research for Solid Price Decisions” at the 2010 Sawtooth Software Conference in Newport Beach, CA. The recurring theme across his presentation was the need to take into account respondent psychology and infuse realism in how we ask pricing questions in order to get unbiased results. The price research methods reviewed include: DIRECT QUESTIONNING Willingness-To-Pay Questions: These can get you a ballpark price for radically new products when the price range is unknown. Given their inherent bias, since these questions clearly focus on price and invite respondents to “lowball” and bargain, they should be used only for exploration and followed-up with other price research techniques. Buy-Response in Monadic Designs: This approach can work if done right, which means asking about purchase intent in the context of a product description without calling respondent’s attention to the price and thus avoiding the bias found in willingness-to-pay questions. However, in order to measure price sensitivity we need at least two different monadic cells where different price points are asked. This is a simple and unbiased approach, but its precision depends on sample size for each cell, which may be a problem for tight budgets since large samples are recommended and many cells/price points may need to be tested. Sequential Proto-Monadic: This approach which tests several price points in a sequential way within the same respondent doesn’t allow to disguise the focus on price and usually results in over-estimation of price sensitivity. David’s advice: Don’t bother using it. Van Westendorp Price Sensitivity Meter: With this approach, we look for a “normal” and “acceptable” price ranges between price points considered too cheap or too expensive based on the idea that price acts a proxy for quality. A big issue with PSM is that respondents tend to be inconsistent in how they answer the 4 questions included in the approach: At what price it is too cheap? At what price it is a good value? At what price it is getting expensive? At what price is too expensive? This method can be used for early exploration on small samples, but results should be taken with skepticism as we can expect “lowballing.” The other problem with this approach is that it doesn’t measure purchase intent. However, even the improvement suggested by Newton-Miller-Smith in 1993 by adding purchase intent questions after the “good value” and the “getting expensive” questions, has the problem that we really don’t know the actual purchase probability unless we have market data to calibrate the results. TRADE-OFF METHODS Rating-Base Full Profile Conjoint: This method, where a full profile is presented with variations across all attributes, was widely used a few years back. The major problem with this approach is that it tends to understate price sensitivity. A hypothesis as to why, is that price is taken as an indicator of overall quality resulting in “reversed” price utilities (preference increases with price) or flattened utilities (not much change as price increase) for many respondents. David believes this is due to lack of realism in the task, particularly when hypothetical products are presented, and respondents don’t have anything knowledge or experience to based their choice on, so they use price to evaluate quality (if it is expensive it must be good Discrete Choice Modeling or Choice-Based Conjoint (CBC): This includes different types of designs: Price-only Choice Models: In this method, respondents have to make a choice among the brand/price options shown, which a natural and easier task for respondents. Here, price is treated as a separate attribute for each brand. It is a good general-purpose approach when concrete, realistic products are tested, although it doesn’t allow simulating the effects of adding or deleting products included in the original set (they are fixed and only prices vary). Choices between hypothetical products: These are described by combinations of price and non-price attributes and levels. In order to be efficient, we need to focus on things respondents care about and model them accordingly. In order to get good results, we need to avoid impossible and illogical scenarios. In the end, the key is to take into account respondent psychology in price research. As David says “give them realistic, natural questions and you’ll get less-biased answers.”

Pricing in the Container Shipping Industry [Accenture]

This presentation illustrates how Accenture addresses the pricing challenges in the shipping industry.

Download here.