Strategic Movements: January 2017


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

Published January 3, 2017

FedEx Got the Message

In response to Christmas rush orders and higher volumes, FedEx pressed some customers for higher prices.  Some accepted.  Others left.  CEO Fred Smith responded with: “You can get a lot of volume that is completely non-compensatory, and just not make any money.”  Well done.  Businesses exist to foster profitably from their customers. If a customer isn’t profitable, it isn’t a customer— they’re just a leach sucking the lifeblood out of the company.

Economic Tradeoffs between Trains and Planes

From NYC to Boston, one can fly or take the train. Amtrak Acela trains take three hours and 40 minutes for $200 one-way walk-up fare. Planes take approximately one hour and 30 minutes, plus up to two hours in security for $159 one-way walk-up fare on Jet Blue. Given these economics, it is surprising that Amtrak has a 56% market share for air-rail passengers between New York and Boston.  People must really hate going through airport security or the failure of New York City to provide mass transit to its airports. The subway to Grand Central Station works fine.

Unbundling Pushes Forward in Air Travel

Norwegian Air (NWARF) Shuttle no longer includes food and drink on transatlantic flights. They charge $31.50 for two hot meals and alcoholic beverages on its London-New York flight.  Not unforeseeable. When people rank flights by price alone, airlines have an incentive to remove costs from the core offerings and then make it up in add-ons. Add-on pricing makes sense when customer demands are highly heterogeneous, but not when they are homogeneous.  Since eating and drinking on seven-hour flights is somewhat a homogeneous desire among all air passengers, I suspect this is currently the result of search engine power over flight choices more than strategic pricing and customer-friendly offering.  For now, this is likely to remain at the fringes of the offering array rather than a core and new offering standard.  But tastes change with time. Maybe in 2030 all flights will be booked this way, and we will even pre-choose chicken or pasta.

Will Netflix Lose to Local Naspers in Africa?

Price difference is nominal: Naspers ShowMax @ $7.10 / mn and Netflix at $7.99 / mn in South Africa.  So why is ShowMax doing so well across much of Africa? ShowMax allows customers to pay by M-Pesa, a mobile phone payment service common across much of Africa.  ShowMax offers more localized content like “Auntie Boss” and “Real Househelps of Kawangware.”   ShowMax allows downloads on all content, important in countries with poor bandwidth and internet infrastructure.  Netflix doesn’t hit these issues well.  Africa is not the US nor Europe.  Customs and technology is different.  When going to another country, marketers and CEOs must still think of the impacts of variations in the 6 exogenous marketing environments:  Economic, Competition, Social/Cultural, Demographics, Technological, Legal/Political.  Netflix has failed on at least two of these fronts where ShowMax has succeeded.  This is marketing and competitive strategy 101 stuff, not rocket science.  Failure to pay attention to details leads to… well… failure.  Oh well, Volkswagen still has challenges adopting to the peculiarities of the US driver, and they globally dominate unit sales.

JetSmarter Bubble or Opportunity?

JetSmarter attracted USD 105 million in investment from rap mogul Jay Z, and Venture Capital / Private Equity outfits, including KZ Capital (an Abu Dhabi firm), a Qatar firm and Jet Edge International. Their offering: seat sharing on private jets. Competitors include Rise Air, JetSuite and Surf Air.  Recent loser includes BlackJet. Is this a bubble investment in the sharing economy for the ultra-rich—a segment for which the sharing economy was almost designed for? Perhaps not: customer lock-in, route networks, and growing demand for alternatives to standard commercial flying are structural and trend issues that aren’t going to go away anytime soon.  Expect success in this relatively niche market—for at least some of these competitors, but the ride isn’t over and losses are common in the sometimes-vanity industry of commercial flying.

Amazon Price War Challenges TeleBrands

StarShower of TeleBrands Corp is the current subject of online price wars. Standard retail price is $49.99; wholesale price at $30.00 while Wal-Mart hit $33.98 and Amazon hit $33.99. These are irritating brick-and-mortar stores who find their lawn-and-garden sales and customer-traffic impinged. only constitutes 2% of Telebrands Corp.’s sales. Will CEO Ajit Khubani irritate 98% of his sales to please 2%? Every consumer goods firm needs to consider MAP policies and channel strategies or they may shoot themselves in the foot.  Every brick-and mortar store needs a strategy beyond “lowest price” in the age of e-tailing.  For example: Crayola, Lego, and Sur La Table are pushing into experiences—trying to retain customers through hands-on engagement with their product.  I wonder what that would look like at Lowes or Home Depot?

CBS Disintermediates Cable

As low as $5.99, CBS All Access (CBS) is being sold direct to consumers who have cut their cable cord.  1.2 million and counting have signed on to stream. When asked if CBS should pursue more deals with cable and satellite operators or pursue more direct-to-consumer, CEO Leslie Moonves quipped, “we keep 100% of the dollars [with CBS All Access Sales]. So the more subscribers I get there, the better.”  This is a strategic bet that cable and telecom operators will be relegated into data utilities as opposed to entertainment intermediaries.  Seems appropriate but timing may be early and push-back could be strong.

Fiat 500: Lower Prices or Small Target Market?

Fiat Chrysler  (FCA) is dropping prices by as much as $3,900 on its Fiat 500 in the US due to poor sales.  Prices now near that of GM’s Spark and Ford’s Fiesta.  Yet, the Fiat 500 is way cooler in my mind than either of those competitors and the average US car buyer loves SUVs and Trucks.  It seems the market just isn’t there regardless of the price, unless we were talking about pricing to become a highly unprofitable car.  The market segment attracted to the Fiat 500 may not be elastic enough to make a big dent even at this extremely low price:  If its key market segment is urban folks needing a second car, that is at most 3% of the US population. Suspect the price concession was the wrong way to go.  Focus on your key market segment with targeted brand positioning communication, leave the raiding zone to emergencies.  Marchionne: I hope you have facts that I don’t have to back up your hypothesis or else you are burning human and financial resources.

Gap is Caught in the Middle of a Needed Transition

Art Peck appears to be trying to transform Gap from old-world creative executive led annual purchases to new world data-driven fast-fashion.  Gap (GPS) can do it, perhaps it must do it, but it seems to be a long road. Peck:  think like “GM’s Sloan” or “ATT’s Vail”.  Design structure and policy to drive culture and behavioral change.  You can make it work with the right vision and team buy-in.  Shareholders and Employees:  expect a volatile ride.

Starbucks Reserve Revives Proven Market Strategy

Schultz to step down from CEO, but to remain chairman, to launch a new brand / store format of Starbucks Reserve. The goal is to sell “Premium” coffee and brews as “better” in a market space, which is becoming crowded by the likes of Intelligentsia, Metropolis, amongst other brands.  After tasting some high-end Sparrow and La Colombe brews in Chicago, I know there is space here to compete. The strategy matches that of Mondavi Wines as they pushed American tastes from jugged to bottled wine, then to premium Opus One brand. P&G (PG) did that with Gain and Tide, then Tide Pods.  It is a proven price and benefits positioning strategy.  When the bottom is valueless and the middle is cramped, launch a premium. Always push the envelope.

Market Research + Listening

Mary Barra is preparing GM to release the Chevy Bolt, after tax incentive price of $30,000. Price may be high for a small car, but it breaks the electric-car range anxiety—238 miles on a single charge, in the range of the far more expensive Tesla’s (TSLA) range of 302 miles. Customers tend to pay for benefits, and more for the reduction in perceived risk. Market research and learning from responses to prior iterations lead to higher probabilities of successful product launches, so Kudos GM.

Channel Conflict and Brand Positioning

“Discounting becomes a drug that is hard to get off, and creates this basis for consumer to not trust regular prices,” Uri Minkoff.

U.S. retail receipts that include promotions increased 69% last quarter over same time last year according to market researcher DynamicAction Inc. But price promotions don’t help high-end labels with strong pull. Michael Kors, Coach, Levi Strauss, Diane Von Furstenberg, Kate Spade, North Face, Louis Vuitton, and Tag Heuer have all reduced promotional spending. Macy’s, Neiman Marcus, Saks, Bloomingdales, and J.C. Penney aren’t too happy about that. Bricks-and-mortar retailers may not like it, but consumer labels that spend on branding and drive pull should not spend on promotions to drive unprofitable sales.  Physical retailers must reinvent their purpose in the onslaught of e-tailers. Leave price promotions for the up-and-coming brands of the discount brands. There is always the possibility of end-of-season clearances.

Dynamic Pricing Strategy

Tesla is to start charging for usage of its Superchargers. It was right then to have it free when Tesla was entering the market (reduce buyer uncertainty with an unfamiliar product category).  It is right now to charge customers for access to Superchargers (buyer familiarity, access is a benefit that customers will pay for).  All pricing is dynamic.

Backlash Against Old Playbook

Mondelez International reduced the amount of chocolate in its Toblerone Bar from 170 g to 150 g by increasing the space between the triangular peaks, while holding its price constant. This being a primarily European product, I suspect someone will accuse them of cheating customers by delivering less by charging the same. Already, we see some outraged fans lashing out against this poorly hidden approach to raising prices. Perhaps they should have just raised the price or delivered one less peak in a visually smaller bar. EU is not U.S.

Short-term Good, Long-term Problematic

Richard Gonzalez of AbbVie (ABBV) continues to take moves to protect Humira’s $14 billion revenue against its expiring patent.75 patents on manufacturing, formulary, and methods of treatment all prop-up revenue protection potentially lengthening its legal protection till 2032, a further 16 years. Sure winner: patent attorneys. Potential short-term winner: AbbVie shareholders and employees. Short-term losers: patients and competitors. Is this an example of the abuse of the patent system that drives Robert Reich and other economists to claim big pharma is ripping us off?  If so, expect a call for an overhaul of the medical patent system to come. Long-term prospects may put AbbVie sharing the same hot seat as Mylan and Valeant.  Competition is good, and lack of competition is bad. Don’t be too greedy in shutting out competition. People don’t like bullies.

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.