Bundling is all around us. The cable companies do it, Walmart does it, Prudential Insurance does it, even your local hardware store does it.

So why do they bundle? Why not sell the parts of the bundle separately? There can be many reasons, but more often than not, the main motivation is to generate incremental sales volume even at the expense of margin. To do bundling right is difficult.

In our many years of advising clients, we have probably seen every conceivable bundling mistake possible. Here are some of the most common:

• Over-bundling – This refers to putting too many elements into a bundle, many of which customers don’t even want. It usually starts with competitive pressure in the market place and well-meaning marketing managers wanting to “add value” to justify a price point. More often than not the value-adding elements are value-subtracting as customers don’t want those elements. A good example of this is cable TV where more and more channels (that nobody wants) are added to justify high monthly subscription fees.
• Bundling weak selling products with strong ones – The motivation for this approach is often to “get rid of inventory.” This may actually work, but usually only when the price of the bundle is so low, that the weak product is essentially being given away for free.
• “Forcing” trial via bundling – This is a favorite tactic used by consumer packaged goods companies in wholesale clubs, where they want to promote trial of new flavors by bundling together the new flavored items with the established ones. This may work on occasion, but most consumers want to buy value-packs of their preferred flavor, not variety packs. As a result, the variety packs are usually heavily discounted to “compensate” consumers for talking the risk of buying flavors they may not like and end up throwing away.

What all of these examples have in common is that they try to sell things that people don’t want. And people hate to pay for things that they don’t want. The result is that these “bad” bundles only sell if they are deeply discounted, to a point where the manufacturer is virtually giving away the components that are unwanted.

There is a better way to construct bundles. We have a proven, proprietary methodology that analyzes usage and/or purchase data to scientifically construct effective bundles. Our methodology is based on the fact that all structured bundles have a taxonomy (Figure 1) with a core (main reason why customers consider the bundle in the first place) and add-ons which can have more, less or even negative value.

Figure 1 – Bundle Taxonomy

The goal for effective bundling is to identify the core of the bundle, and to determine which potential elements are “worthy” add-ons versus those that are not.

The process entails running correlation analyses to quantify the strengths of the relationships between these elements, and, based on the results, determine which ones belong together and which do not. The strength of the relationships also informs the value of each element as part of the bundle. The outcome is a bundle that will be effective and profitable by attracting incremental purchases.

To learn more about how to build better bundles please go to Resources/Pricing Tools or contact us at 203.514.0515

For a monthly fee of just $7.99 Netflix customers have access to a wide variety of TV shows, movies and other original content. More often than not, users share accounts between family members and friends due to the company’s relaxed policies. Netflix doesn’t restrict the number of devices or users per account, but does limit each account to two simultaneous video streams.

Recently, Netflix has come under pressure from industry analysts who claimed that as many as 10 million people are accessing the service without paying, which is hurting Netflix’s revenue.

What to do? Netflix’s options included limiting the number of users and/or devices per subscription or charging for additional ones. Netflix chose the latter. It announced a new family plan for $11.99/month to be launched later this year. Industry experts felt this was not enough. The pricing model lacks a crucial ingredient: scaling.

Scaling – charging more for more users, is one of the most effective pricing levers, especially as media platforms migrate: from books to online; online to multiple social media/mobile platforms; or, as with Netflix, from DVD to streaming video.

In the B2B world, scaling is equally important. In the initial move from print to digital, some pioneering content companies saw their business models collapse as sales of hundreds of print copies were replaced by the purchase of a single DVD that was shared across networks. As the industry matured, different pricing models reflecting the value of additional users and/or access emerged:

• Initially, the concurrent user model was popular – taken from the software pricing model. But for many content vendors this didn’t work well. Simultaneous use cross-company was not common enough to drive revenue through up-tiering.
• Next came “per seat” or “bands of users” pricing. Some companies with “must have” content and broad usage, such as Bloomberg, were very successful with this model. But many other vendors did not have pricing power and were forced to discount by giving away seats or user bands. Also, many saw their customers ration usage, therefore limiting revenue growth.
• Increasingly, content providers move to enterprise licenses, giving access to an unlimited number of users within a client organization. The price for this open license is determined by a formula that may include several factors, such as size of company (as a proxy for potential users), industry type, industry profitability, etc. – metrics vary by market and product. This model provides a win-win for both vendor and client as they can be tailored to the particular customer type. Seeking to get the greatest value for their fixed investment, clients typically increase usage making the service more indispensable, and driving growth and ROI for the vendor.

For more information on how scaling can work for your company, contact us at 203.514.0515

Bloomberg Business Week recently featured an article on the business of price matching by major retailers . The gist of the discussion was how difficult price matching can be in practice, if not in concept. Let’s explore in depth the upside and downside of price matching.

Price matching can be used as defensive approach to maintain share, or as a promotion tactic to reinforce a low price image. Fear of losing traffic to competitors often drives retailers to match a competitor’s low prices – think of how closely matched gasoline prices are at stations on the same street corner! Other businesses can face the same competitive pricing threats as commodity outlets like gasoline stations but should be wary of the dangers of price matching.

Consider the example of a consumer electronics retailer. With so many SKUs, both consumers and store managers can become easily confused about what constitutes the same item. Quite often, customers demand a lower price on items that are comparable, but not exact matches. This leaves the store manager with a conundrum: lower the price on an item that may have a justifiably higher price, or risk offending the customer.

Retailers who don’t have a clear-cut policy on price matching can waste a lot of time, energy and customer loyalty by dithering. Do cashiers make the decision? Store managers? How are cashiers trained? What incentives do they have to make the right decision? You can see how chaotic and costly price matching can become.

Price matching also impacts brands by positioning the company as a follower, rather than a leader. Few business strategies yield higher returns by simply mimicking the competition. If price matching were the key to market share, then Amazon.com would not be the leading online retailer. Amazon’s prices are low, but not always the lowest. Amazon makes this quite explicit on their website:

“With the exception of televisions, Amazon.com doesn’t price-match with other retailers (including those who sell their items on our website).”

Amazon’s value proposition transcends low price; it is a blend of low price and an array of services that provide consumers with post purchase confidence and satisfaction. Amazon offers easy return policies, deep user generated content, delivery choices and other services that differentiate the overall shopping experience which, taken together create buyer loyalty and build market share.

Like Amazon, we at Abbey Road Associates, eschew the simple-minded price matching approach for retailers and beyond. The old adage in managing commodities is to customize the product with services and other attributes to raise total value. We use the decision matrix below as a starting point for discussion:

The key point is to avoid having to resort to price matching which erodes brand image, confuses employees and customers, and leaves a company with few options other than cutting costs and possibly quality to sustain profitability.

Developing a coherent price strategy is a difficult exercise, but well worth the effort that can build differentiating expertise and brand power. Rarely should you find your company facing a forced choice of either price matching or losing business. If this is a frequent occurrence, it’s time to review your pricing and positioning strategy.
Abbey Road Associates can help you think through pricing, packaging and branding options to yield higher returns and a more sustainable competitive position.

Summer has officially arrived and frozen yogurt is on our minds – pricing of frozen yogurt, that is.
We have noticed a flurry of new frozen yogurt store openings recently and thought it would be a timely topic to investigate. Besides being low in calories, the main attraction seems to be the do-it-yourself nature of the business model. If you have not been to one, here is how it works:

1. You take a really large (one-size-fits-all) cup from the dispenser and fill it with your choice of various soft serve frozen yogurt flavors from a self-serve dispensing machine – you control how much you dispense.
2. Then you go to the toppings bar and choose from a wide variety of toppings, including fruits, syrups, M&M’s sprinkles, etc.
3. When you are all done, you go the check-out counter (usually staffed with cheerful high school kids) and your custom creation is weighed to calculate the total, priced at around $0.59 per ounce.

So what does all this have to do with strategic pricing, you may ask.  Plenty, and here is why:

Innovative price structure:

• Unit of measure: Unlike traditional frozen yogurt shops, which sell by size tiers, i.e. small, medium, large, these new fro-yo places charge by the ounce, a much finer, granular unit of measure.
• Tiered Fixed vs. variable: While the traditional stores charge fixed prices at three different size tiers, e.g. $2.95 for small, $3.95 for medium and $4.95 for large, these new stores charge on a fully variable basis by weight..

Pricing psychology:

• I am in control: This very much appeals to kids of all ages and provides the ability to personalize the product, a trend we have observed in many other industries such as sneakers and tee shirts.
• I am getting a deal (not): We have been trained that do-it-yourself businesses usually charge less than full service businesses. So you expect to pay less here than at traditional stores. Not so, on a per ounce basis traditional stores are usually cheaper ($0.29-0.39 per ounce). But because it is very hard to make that comparison, consumers default to what they have learned: self-serve is cheaper than full-serve.
• The eyes are bigger than the stomach (and wallet): Providing only really large cups leads customers to “over-buy.” It is really hard to not fill the entire cup – believe me, I have tried. And, last but not least, you have no idea how much it will cost you until it is too late, i.e. at checkout!

Price execution

The checkout counters are equipped with high tech scales that weigh, calculate the price and are tied into the cash register. It seems obvious, but without this equipment the pricing model would not work. An example of the importance of price execution.

Price structure adjustment due to market forces

Recently, our local outlet started to advertise “have your cone and eat it too.” While it had been cup-only, now they were offering frozen yogurt in a cone. I can only assume that this was in response to those consumers who wanted their frozen yogurt in a cone (like me).  But how does that work with the variable pay-by-weight price structure? It does not – it is really hard to weigh a cone, it will mostly likely fall over and make a big mess. So management made the logical decision to change its price structure for cones and charge a fixed amount per cone: $3.99 regardless of how much you fit in it. The price point it well chosen, as it is really difficult to put more than 6 ounces in a cone, so selling a cone is actually more profitable than selling the same amount in a cup (6 x $0.59 = $3.54) . This is an excellent example of how market realities and an inability to execute (i.e. weighing cones) demanded an alternate pricing structure.

We hope this has whetted your appetite for frozen yogurt and better pricing.  If so, call us.  We’d love to share our expertise with you in the latter while savoring the former.

In this blog, we focus on the importance of price negotiation.

Final pricing is often a result of negotiation that follows the arduous work of developing your pricing strategies to optimize both price structure and price level. If you’re a pricing or a sales professional, being a good negotiator can yield even greater returns from a well developed pricing strategy. Conversely, failure at the bargaining table can undermine your pricing strategy and damage your brand image.

Negotiation is a large subject area, and can’t be fully addressed in a short newsletter. But it is worth highlighting some tactics of tough negotiators so you can try some yourself or be ready to parry your counterparty’s negotiation thrusts. Our list of common buyer negotiation tactics below is NOT exhaustive, but should give you some extra ammunition in a negotiation and raise your awareness of possible risks.

• “This is what I have to spend”. This tactic is a very clever attempt to abort negotiation before it starts. One way of turning this around is to redefine what you offer in return for the price ceiling (redefine the offer), understand the reasons of the limits, and/or seek a higher authority.
• “You need to match the competitor”. Also clever as it puts the seller in a defensive position. The counter is to drill deeply into the competitive offer, asking for detail. This often reveals how the competitor price is not truly apples-to-apples, and can shift the negotiation momentum.
• “Take it or leave it”. Attempts to put the seller at a disadvantage. Counter: sympathize with the buyer; understand the sources of the limits. Offer to work together to find ways to redefine the price structure, product definition or other combinations in an attempt to let the buyer save face, even at a higher price.
• “Deadlines”. Often very effective – deadlines force closure one way or the other, and most often flush out the party with the weaker hand. Note that time deadlines are often not a ploy, but set to address broader organizational needs. For example, public companies often have end-of-quarter quotas. You can sometimes know by when a prospect needs to spend his/her budget based on their fiscal calendar. The party that is willing to go without a deal usually wins in these situations. Counter: Stay firm with your offering price. Suggest creative strategies to meet the buyer’s deadlines so that prices can be fully realized by offering only part of the solution within the time frame.
• “Not in Charge”. How often have you been in a position when you’re told by a buyer “this is all I’m authorized to do”? The scheme here is to wring concessions at each escalating level of buying authority. Counter: understand the buyer’s organization and get to the decision maker when this tactics is used, or be prepared for a series of escalating price reductions.
• “Good and Bad Cop“. You’ve seen this before. The buyer is the good guy, and the CFO is beating him up. Counter: work against the bad guy by appearing to be supporting the “good” guy. Out the tactic; it deflates it quickly. Be prepared to see the “good cop” separately so you can “help out” with things.
• “Create Confusion”. Here a buyer throws out both relevant and irrelevant facts and figures with abandon in an attempt to hurt the morale of the seller by appearing more knowledgeable. Counter: slow things down and ask for more information. This quickly dulls the edge of this approach.

One last thought: always keep a realistic and positive view of your own power. Too many negotiators assume they are in the weaker position. Don’t assume this! Think about the other party’s pressures, and you may surprise yourself and realize higher prices.
Abbey Road Associates helps support negotiations following pricing strategy redesigns as part of our core service. Feel free to connect with us to see how we can help.