Strategic Movements February 2022


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published February 11, 2022

The Substitution Resumes

Inflation has hit the grocery aisles and people are changing behavior.  Broadly, the price of groceries increased 6.5% in 2021.  In response, people are switching to lower-cost store brands.  Store-branded products constituted 21% of retail grocery sales, increasing their market share 4.4 points in the last quarter of 2021.  But not all customers are substituting cheaper products for higher-priced branded products.  If you are in CPG and facing shortages, prioritize the production of your brands over the private label and pump up the advertising.  Branded CPG will lose some market share during this inflationary period, but ask yourself if you are in the business to gain market share or make profits?  Market share is much easier to get than profit share, but no business survives on market share alone.

Peloton Tries a Hidden Price Increase

Demand for Peloton (PTON) has been uncertain since the start of its Pandemic-induced boom.  As a first response to demand uncertainty, Peloton lowered its price in April 2021 by 20% to $1,495 for its less expensive bike and by from $2,496 to $1,895 for its more expensive Bike+ machine.  Presumably, this was aimed at regaining its market momentum.  It didn’t work.  Now, in January 2022, it announced it would charge customers $250 for delivery and setup on some of its bikes.  In effect, reversing its pricing prior decision by inserting a less obvious fee which increases the overall price to purchase.  Presumably, Peloton realized the lower price was unsustainable.

Nick Woodman learned and recovered from a similar 2016 mistake at GoPro.  John Foley, CEO of Peloton, appears to have learned as well.  We are all fallible creatures, and we are always learning.

PTON dropped from $31.8 to $24.2 on the day following its announcement.  Revenue for the 12 months ending September 30, 2021, was $4 billion, up 73% from the year prior.  Some might state this justifies its high growth P/E ratio of 170.  Others might question if Peloton is a flash-fad.


Value Menus Shrink

How does a fast-food establishment get customers to buy a higher-priced mix?  One method is to reduce the number of lower-priced offerings.  Burger King, Denny’s, Domino’s Pizza, and others are reducing the number of “value meal” items on their menu and/or reducing the marketing communication emphasis on their “value meal” menu.  Most fast-food franchises have learned that a small price increase spread across the menu is easier to capture than a single large price increase on a single item.  Now they are learning that mix improvements too can improve profitability.  Keep it up.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.