The Homa Files

In marketing jargon, it’s called “unbundled pricing” … charging a price for a base product and then charging separately for add-ons.

In concept, price unbundling allows suppliers to flash lower base prices to potential buyers … and enables buyers to only pay for the specific product features that they want.

The downside: unbundling highlights the price of the add-on … which folks may have previously perceived to be free.  Think airlines charging for bags

Another case in point: a family member just got back from Europe …. where he was dismayed that McDonald’s was charging extra for ketchup.

For McDonald’s, it’s a way to to list a lower burger price.

For non-ketchup eater, it’s a way to save money … not paying the ‘hidden price’ for something that they don’t use.

For ketchup users?

Well, it certainly feels like Mickey D is screwing them.

Thanks to SMH for feeding the lead.

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Punch line: Ticketmaster  plans to develop “dynamic pricing” systems that would adjust the cost of sports and concert tickets in response to demand, a strategy airlines and hotels have long used to maximize profits …  TM expects sports teams  to adopt the new system before concert promoters or Broadway producers.

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Excerpted from WSJ, Ticketmaster to Tie Prices to Demand 

Dynamic pricing a key element in Ticketmaster’s strategy to revive sales of concert tickets, which have been stagnant or declining for years.

Last year was brutal for the concert industry, with ticket sales plunging 12% despite a modest decline in average prices. Recent price drops follow more than a decade of steady increases, a trend that helped mask fundamental problems.

“2010 taught us we have real challenges as an industry,” Mr. Hubbard said. “One of them is pricing.”

A frustration throughout the concert industry: the best seats appear to be consistently priced below what fans are willing to pay, leading to a multibillion-dollar “secondary market” in which scalpers can reap profits by reselling tickets above face value.

At the same time, he said, 40% of concert tickets sit unsold industry-wide, meaning that the ostensibly cheap seats for many shows are simply not cheap enough.

Thanks to JD for feeding the lead

Why?

Because you’ll save money.

Researchers have discovered that “shoppers open their wallets wider when moving through a store in a counter-clockwise direction.”

On average, they spend $2 more per visit.

Why??

One theory is that most shoppers are right handed … and like most basketball players, they go to their right better…. so, impulse items stocked to their right along “walls of value” are easier to grab and throw in the cart.

If you are right handed, walk clockwise and the “wall of values” will on your left,  and will be less tempting.

Source: Priceless, William Poundstone, Hill & Wang, 2010, p.149

TakeAway: Companies that sell consumer mainstays are rolling out price increases in a collective test of America’s economic strength and in response to higher raw-material costs.

If consumers are willing to pay more, it could indicate the economy is turning a corner, but also serve as a warning that inflation could spiral.

If consumers balk at higher prices, though, it would represent a setback and could pinch corporate profits. Some companies could be forced to backtrack with discounts if sales falter.

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Excerpted from Wall Street Journal, “Gingerly, Retailers Try to Pass Along Higher Costs” By Liam Pleven,October 2, 2010

The ability of companies to sustain such price increases may sway how the Federal Reserve views the health of the economy, and potentially figure in its decision on whether another big round of stimulus is needed. The country’s low rate of inflation was cited by the Fed last month as a main reason the central bank is considering further steps to juice the economy.

Companies say some labor costs are rising, particularly for overseas manufacturing, and point to rising commodities prices. Commodities typically make up less of a company’s costs, but prices have risen sharply, with cotton up 38% this year, coffee up 33% and rubber up 17%.

Some firms successfully increased prices earlier in the year, with little or no discernible impact on inflation. The 6% increase that Goodyear began rolling out for consumer tires follows on another 6% rise in June. The firm cited higher raw-material costs.

But many other firms held off on charging more even though the recession technically ended more than a year ago, because they were concerned about a consumer backlash and losing sales to rivals.

Still, some companies are dipping their toes in the water daintily, targeting specific products.

Starbucks, for instance,  is raising prices on “labor-intensive and larger-sized beverages,” but maintaining or lowering the price of a regular cup of coffee in most markets.

Edit by AMW

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Full Article:
http://online.wsj.com/article/SB10001424052748704029304575526331692863238.html?mod=WSJ_hpp_sections_business

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For years, I’ve agreed that sports teams were pricing themselves out-of-reach for the average family. 

“Face value” on tickets staggers me.  Dealing with scalpers males me nervous.

Now, those worlds are starting to coincide: teams getting higher prices by acting like scalpers.

Play ball.

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Excerpted from Bloomberg Business Week:Pricing Baseball Tickets Like Airline Seats, May 20, 2010

Software helps the S.F. Giants price baseball games in much the same way airlines manage seat prices to keep planes full.

The software crunches numbers on dozens of variables (e.g. the weather, the pitchers, the teams’ records, the rivalry, day of week, time if day, StubHub market price) to determine prices that will get fans into the stands and generate the highest revenue. 

Ticket prices used to be fixed before spring training; now, they’re adjusted almost daily.

The Giants say that revenues are up 12% this season and attendance has jumped 7%, even as the league has seen a slight decline.

Expect the entire league to adopt market-based pricing … and watch it spread to other sports and entertainment. 

“There’s big money out there in lost revenue from mispricing.”

Full article:
http://www.businessweek.com/magazine/content/10_22/b4180039348750.htm

Takeaway: Traditionally, grocers ascribed one of two categories to their food – fresh or stale – and any inventory in the latter category was discarded.

However, some retailers have recently discovered that their customers see residual value in older food and online grocers are selling these items to consumers with a lower willingness to pay than the average shopper.

As marketers maximize profits by finding new markets for these perishables, one must wonder who’s hanging out at the far end of the demand curve.
 
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Excerpt from FastCompany, “Questionable Trend of the Week: Expired Grocery Food Trading” by Ariel Schwartz, January 22, 2010.

Fresh groceries are just so expensive. Perhaps that’s why sites that sell out-of-date items have become so popular. One British site reported a whopping 500% increase in sales from December 2008 to the same time in 2009. Most of the goods sold on these discount sites are past their “best-before dates” but not the “use-by” dates, and have been bought at knocked-down prices from wholesalers, suppliers and supermarkets.

Once consumers get past the “ick” factor, they’ll discover that expired Hershey’s chocolate or canned tuna tastes the same as the fresh stuff. Expired food is cheap, too — some analysts estimate that customers save 75% compared to average retail prices.

So far, it seems like the trend is limited to the U.K., but the U.S. has the same problem with expired-but-good food being tossed into the trash on a daily basis. Would you turn down a slightly expired cart of groceries if it would save much-needed cash?
Edit by BHC
 
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Full Article:
http://www.fastcompany.com/blog/ariel-schwartz/sustainability/questionable-trend-week-out-date-grocery-food-trading
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Key Takeaway: There are many ways to drive profitability for your brand. While line extensions, increased unit sales, and cost reductions may increase the ever-important bottom line, pricing strategies may be the most overlooked options.

A sound pricing strategy has the potential to improve profitability more than other tactics, as any change in price will inevitably trickle all the way down to the organization’s overall profits.

By knowing your market, establishing target prices, and giving consumers options at different price points, you will have the potential to improve profits for your existing brand or line your new business up for success.

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Excerpted from Businessweek, “Effective Pricing Strategies to Improve Profits” by Tapan Bhatt, April 19, 2010

Current turmoil in the financial markets, highly competitive markets, and downward pressure on product prices strain the profits of companies both large and small. Now more than ever, companies must turn to the most influential, yet overlooked driver of profits: active price management.

Improve price responsiveness. To prevent margin erosion, companies should continuously fine-tune pricing across products and services so that it aligns with prevailing market conditions. Communicating prices across the network of sales reps, partners, and distributors also arms teams with the pricing data they need to compete effectively.

Address low-margin business. Companies can accurately identify low-margin business and associated root causes to make informed decisions as to whether certain deals make strategic sense despite low profitability. This way corrective action can be taken if needed.

Tighten cost-to-serve recovery. Tough economic times demand tighter cost-to-serve policies. Companies can classify customers into categories such as “strategic” and “opportunistic” to ensure appropriate cost-to-serve recovery for opportunistic customers while serving the needs of strategic customers.

Set granular pricing. Rather than using an ad hoc approach, companies should set prices and negotiation guidance according to different customer segments. Segment-specific pricing considers factors such as customer perception of product value, prevailing market conditions, and position vs. competitors.

Control “maverick” selling. The absence of guidelines on pricing negotiation, or the ability to enforce them, creates substantial variability in negotiation outcomes. Companies can increase negotiation consistency and improve margins by establishing target prices, approval levels, and floors.

Edit by JMZ

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Full Article:
http://www.businessweek.com/smallbiz/tips/archives/2010/04/effective_prici.html

TakeAway:  If it’s possible to lower price, Wal-mart usually leads the way. 

And it has done it, again.  Wal-Mart, seeking to firmly establish itself as a price leader, has cut prices. 

The move serves two purposes – block competition from other discount retailers and retain middle-class consumers, who are now feeling more financially stable and may consider upgrading to Kohl’s or Target.

Of course, Wal-Mart plans to preserve its margins by simply passing the cost of lower prices onto its suppliers.

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Excerpted from WSJ, “Wal-Mart Bets On Reduction In Prices,” By Miguel Bustillo and Timothy Martin, April 9,2010

Wal-Mart is cutting prices on thousands of products in an aggressive campaign to reinforce its reputation as a discount leader, as the company seeks to reverse months of slowing U.S. sales.

The world’s largest retailer was a rare beneficiary of the economic slump, as bargain-hungry Americans … flocked to its supercenters from supermarkets and specialty clothing stores.

But Wal-Mart’s sales from U.S. stores open a year or more have edged lower recently, while other retailers have started to see an uptick in consumers’ discretionary spending. That suggests to some analysts that Wal-Mart is having trouble hanging on to middle-class shoppers.

Wal-Mart says that it isn’t so. Its executives attribute the chain’s slowing sales to a general decline in food and electronics prices …

The company says it believes that, despite growing consumer optimism, many Americans will continue to struggle in the months ahead. So, it is cutting prices this week on roughly 10,000 items, mostly food and other staples …

“We felt we needed to increase the intensity and excitement with our customer, especially the feeling that Wal-Mart has great deals.”

Wal-Mart is publicizing its price cuts with a barrage of placards in the aisles of its 3,700 U.S. stores and a media campaign describing how the company’s cost-cutting moves …

Wal-Mart expects to expand its price cuts with help from suppliers. The chain is encouraging them to reduce what they charge Wal-Mart in exchange for having it spotlight their products as part of its price “rollback” …

Retailing experts question how effective the strategy will be in lifting Wal-Mart’s sales, since consumers already regard the chain as a low-price leader.

Though the company may get a modest near-term sales boost, the cuts are more likely to intensify the loyalty of shoppers who came to Wal-Mart during the recession … “This will make customers say, ‘if I go back to Kohl’s and Kroger I may be missing deals at Wal-Mart.’ ”

Despite its sales slowdown, Wal-Mart has continued to post solid profits, in part due to widening margins. Some analysts believe that gives the retailer room to cut prices without sacrificing profit. Getting suppliers to share the costs of the price reductions would also mute the impact on its bottom line …

The price reductions could help Wal-Mart fend off a growing list of no-frills competitors, such as the U.S. branch of Germany’s Aldi discount grocery chain and variety stores such as Dollar General, which are nipping away at Wal-Mart’s less-affluent core customers.

Yet whether Wal-Mart is committed to pushing the envelope on pricing as it did in the days of its late founder or is merely hyping promotions as it pursues a more margin-driven strategy, is the question the industry is asking …

Edit by TJS

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Full Article
http://online.wsj.com/article/SB20001424052702304198004575172271682347064.html#mod=todays_us_marketplace

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Takeaway: 3-D films have drawn customers back into theaters and now film executives are looking to cash in on their captivity.

After deploying the greatest ticket price increases in recent memory, will these executives bring home the gold, or crumble to the critics?
 
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Excerpt from Wall Street Journal, “Higher Prices Make Box-Office Debut” by Lauren A.E. Schuker and Ethan Smith, March 24, 2010

Major U.S. movie-theater chains, seeking to capitalize on the surge in revenues fueled by such 3-D hits as “Avatar” and “Alice in Wonderland,” are imposing some of the steepest increases in ticket prices in at least a decade.
The increases, in one case as much as 26%, vary from theater to theater, but many cinemas are raising prices most—or even solely—for 3-D showings, which accounted for the vast majority of last year’s 10% jump in domestic box-office sales. 3-D movies accounted for 11% of domestic ticket sales in 2009, up from just 2% in 2008.

At an AMC theater in a Boston suburb, 3-D ticket prices are jumping more than 20% to $17.50 from $14.50, while the adult admission price for a conventional film will remain at $10.50. A 3-D Imax movie at New York City’s AMC Loews Kips Bay will cost $19.50, up from $16.50.
 
Their moves come on the heels of a record-setting year at the domestic box office, with revenue surpassing $10 billion for the first time. Movie attendance in the U.S. and Canada grew 5.5% in 2009, to 1.42 billion, the highest level since 2004. Ticket sales so far this year are up nearly 10% from a year earlier.

Movie theaters typically had charged $2 to $3 extra for 3-D tickets. But the brisk demand for those premium-priced tickets led many exhibitors to believe that they were underpriced.

About 83% of the record $2.6 billion in ticket sales for “Avatar” came from 3-D and Imax screens. And Walt Disney Co.’s “Alice in Wonderland” also set records when it hit 3-D screens earlier this month.

While the price increases could boost theater owners’ already buoyant revenues, some industry watchers think the could also spark a consumer backlash. Studios, theater operators and trade groups have long touted films as a bargain, compared with other forms of entertainment, intensifying their pitch during the recession.

“The U.S. economy isn’t in the greatest shape, and there is definitely risk here in pushing price too far in a weak economy,” said a media analyst.

Some movie-studio executives expressed concern that the price increases might be too much too soon. “The risk we run is that we will no longer be the value proposition that we as an industry have prided ourselves on,” said a distribution executive at one major studio, who added that he was worried movies would become “a luxury item.”

Warner Bros. executive said: “Sure, it’s a risky move, but so far charging a $3 or $4 premium has had no effect on consumers whatsoever, so I’m in favor of this experiment to raise prices even more. There may be additional revenue to earn here.”

Studios are also in a bind. While many are wary of appearing to gouge consumers beset by a weak economy, they are also facing higher costs as they produce more movies in the technology-heavy 3-D format. Though ticket prices are set by theater operators, the proceeds are split roughly 50-50 with movie studios.

Five major 3-D films are opening in theaters over the next three months, starting this weekend with DreamWorks Animation’s “How to Train Your Dragon.” That rich selection is one reason theater owners chose to raise 3-D ticket prices now. It may also help set consumers’ expectations for future 3-D films.
 
“This is a truly unique event for the movie industry,” said one industry analyst. “I can’t remember the last time I saw such a major change in ticket pricing.”
  
Edit by BHC
 

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Full Article:
http://online.wsj.com/article/SB10001424052748703312504575142143922186532.html
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TakeAway:  No business owner wants to/should leave money on the table, but when pricing a new product — especially in a down economy — how soon should you test consumers’ limits?  Movie-theater chain owners think ASAP.  

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Excerpted from WSJ, “Higher Prices Make Box-Office Debut, By Lauren Schuker and Ethan Smith, March 24, 2010

Major U.S. movie-theater chains, seeking to capitalize on the surge in revenues fueled by 3-D hits … are imposing some of the steepest increases in ticket prices in at least a decade …

The increases, in one case as much as 26%, vary from theater to theater, but many cinemas are raising prices most—or even solely—for 3-D showings, which accounted for the vast majority of last year’s 10% jump in domestic box-office sales. 3-D movies accounted for 11% of domestic ticket sales in 2009, up from just 2% in 2008 …

The price increases come on the heels of a record-setting year at the domestic box office, with revenue surpassing $10 billion for the first time. Movie attendance in the U.S. and Canada grew 5.5% in 2009, to 1.42 billion, the highest level since 2004. Ticket sales so far this year are up nearly 10% from a year earlier.

Movie theaters typically had charged $2 to $3 extra for 3-D tickets. But the brisk demand for those premium-priced tickets led many exhibitors to believe that they were underpriced …

While the price increases could boost theater owners’ already buoyant revenues, some industry watchers think the could also spark a consumer backlash. Studios, theater operators and trade groups have long touted films as a bargain, compared with other forms of entertainment …

A decade ago, the average ticket at a multiplex was $5.39, but prices have edged up between 2.7% to 6.1% a year since then …

“The U.S. economy isn’t in the greatest shape, and there is definitely risk here in pushing price too far in a weak economy.”

Some movie-studio executives expressed similar concern that the price increases might be too much too soon. “The risk we run is that we will no longer be the value proposition that we as an industry have prided ourselves on.”

Some studio executives … expressed support. “The exhibitors are trying to push the needle on ticket prices and see where it ends up … it’s a risky move, but so far charging a $3 or $4 premium has had no effect on consumers whatsoever, so I’m in favor of this experiment to raise prices even more. There may be additional revenue to earn here.”

Studios are also in a bind. While many are wary of appearing to gouge consumers beset by a weak economy, they are also facing higher costs as they produce more movies in the technology-heavy 3-D format.

Though ticket prices are set by theater operators, the proceeds are split roughly 50-50 with movie studios …

Edit by TJS

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Full Article
http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=114556

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Takeaway: Recent passenger counts demonstrate that consumers are setting sail during the economic recovery. Though the cruise industry is rebounding nicely, it has been able to attract passengers through discount programs enabled by lower labor and fuel costs.

In the coming months, many cruise lines plan to test higher prices. Given the competitiveness of the travel and entertainment category, many marketers may be anxious to learn whether this pricing strategy sinks or swims.
 
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Excerpt from Wall Street Journal, “Can Cruise Industry Catch Pricing Wave” by Kelly Evans, March 23, 2010.

If any industry should have been a relic of the boom, cruise lines, with their tricked-out “floating malls” catering to the whims and indulgences of consumers, were a likely contender.

Yet after a difficult 18 months, the industry is seeing a fairly impressive rebound in demand, a telling sign of the mind-set of U.S. consumers. That is bolstering the top line for operators like Carnival, which analysts expect Tuesday to report that revenue for the three-month period ending in February rose to $3.1 billion, up 8% from a year earlier.

Now comes the hard part, regaining some pricing power. Carnival announced across-the-board price rises of about 5% that took effect Monday. Norwegian said it will raise fares as much as 7% beginning April 2.

Whether these increases stick will speak volumes about how willing consumers are to spend in the absence of deep discounts. It also will show if the cruise industry has found clear sailing, after battling its way through the ravages of the recession.

Carnival, the world’s largest operator with some 82 ships and 10 different brands, is one of several lines that reported record bookings during the winter, historically the busiest time of year for the industry.

While cruise lines have discounted to lure passengers, sharply lower fuel and labor costs have dulled some of the pain. As those costs begin to rebound, and a strengthening U.S. dollar hurts competitiveness, operators like Carnival will become more dependent on higher prices to prop up margins.

And even if consumers are looking more resilient, many still are value-driven and so may be turned off by higher fares.

If that turns out to be the case, Carnival’s stock, which has doubled over the past 16 months, could face rough sailing.

Edit by BHC
 
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Full Article:
http://online.wsj.com/article/SB10001424052748704841304575138161384844590.html?mod=WSJ_hps_MIDDLESecondNews

TakeAway:  Despite significant volume declines and loud protest and cries for help from retailers, the biggest U.S. beer brewers continue to increase prices. 

It could be that the big brewers are trying to capitalize on the fact that consumers seem willing to pay higher prices for beer (evidence:  craft beers, typically the more expensive beers, posted great numbers).  However, the value proposition of craft beers is very different from that of mass market beers, and consumers are willing and able to pay a premium for the added benefits that craft beers offer. 

What benefits have mass market brewers added to their value proposition to close this gap and warrant price increases?

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Excerpted from WSJ, “Slump Has Beer Makers Over a Barrel,” By David Kesmodel. January 21, 2010

U.S. beer sales volumes fell 2.2% last year, the highest rate since the 1950s, with demand worsening late in the year … The decline, the industry’s first since 2003, raises demands for industry leaders Anheuser-Busch InBev and MillerCoors to come up with better advertising and to rethink recent price increases …

But they must tread carefully, balancing price moves against a need to drive profits in the wake of the mergers that created the two.

The two giants increased prices by about 5% last year, fresh off InBev’s acquisition of Anheuser-Busch and the move by SABMiller and Molson Coors Brewing to combine U.S. operations. Those increases, along with a weak job market and lackluster advertising, contributed to the sales drop …

Some retailers are pushing back against the industry’s price increases and calling for a new approach to marketing. “We need cost decreases or we think there will be declines in domestic beer purchases in total,” said a 7-Eleven spokeswoman. 7-Eleven unsuccessfully has sought lower prices from Anheuser and MillerCoors …

Anheuser and MillerCoors, which control nearly 80% of U.S. beer sales, posted strong profit gains in the first nine months of 2009, buoyed by higher prices and cost cuts that followed the 2008 mergers.

But longer-term, they’ll need to restore sales-volume growth because cost cuts and price hikes will be harder to come by …

“When you raise prices that much, there are going to be consequences,” said an analyst with Deutsche Bank. He said brewers failed to come up with a blockbuster new product akin to Anheuser’s 2008 success with Bud Light Lime.

While the U.S. economy showed signs of improvement in the second half of 2009, beer volumes cooled further. SABMiller said Tuesday that unit sales from distributors to retailers fell 3.6% in the fourth quarter, the weakest result since MillerCoors was formed. SABMiller cited a “challenging industry and economic environment.”

Anheuser, the No. 1 player in the U.S. by sales, and MillerCoors, No. 2, have signaled price increases this year in the range of 2% to 3%, said editor of industry newsletter Beer Marketer’s Insights.  Deutsche Bank analyst’s say they expects large retailers to insist that brewers offer more promotions to spur demand, resulting in pricing not “much better than flat.”

Anheuser posted a 2.1% decline in shipments last year, its biggest drop since 1976 … MillerCoors … had a 1.9% drop. Large suppliers specializing in imported beers fared worse, with Crown Imports showing a 5% drop. The small-batch “craft” beer industry continued to represent an industry bright spot, with the biggest among the craft brewers, Boston Beer, showing a 1.7% increase.

Edit by TJS

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Full Article
http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=114556

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Key Takeaway: We all know that a pricing increase, when performed properly, has the potential to exponentially increase profits.

As the economy begins to pick up, it will be important for companies to extract greater value out of their current portfolio, which may be heavily discounted.

The most effective price-increasing strategy may be “Steadily Decreasing Discounting” (SDD), which was found to increase both sales and profitability for the companies using this method. Unlike typical strategies, SDD involves slowly raising prices from the sale price back to the initial level rather than all at once.

This will continually create incentive for a consumer to purchase the product right now, and won’t leave the consumer with a sense of regret if she missed the lowest price.

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Excerpted from NACS Online, “Study: Retailers Can Increase Profits by Changing Pricing Strategy” by The University of Miami School of Business Administration, January 7, 2010

The University of Miami School of Business Administration released results of a study this week that shows retailers can substantially increase sales and profits if they increase the price of a sale item to its original cost in gradual steps rather than in one swift move.

Over a 30-week field study, the school reported a 200 percent increase in sales and a 55 percent increase in profits by using this strategy, which it calls “Steadily Decreasing Discounting” or “SDD.”

“SDD starts like Hi-Lo pricing in that you have a big sale, but the main difference comes after the initial sale when you progressively increase the price back to its regular level versus in one shot,” explained Michael Tsiros, an associate professor and chair of the Marketing Department at the University of Miami School of Business and the study’s lead author. “By doing so, SDD avoids a key problem of the Hi-Lo strategy – the big dive in sales at the end of the promotion that results from people stocking up on the item during the promotion or because they perceive the price to be too high because it was recently much lower.”

“SDD could be particularly effective in the current economic downturn,” Tsiros said. “Many retailers have been offering discounts of 60 percent or even 80 percent, and stores can’t offer those prices forever. But if they bring prices back up in increments, consumers will have time to adjust.”

Edit by JMZ

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Full Article:
http://www.nacsonline.com/NACS/News/Daily/Pages/ND0107107.aspx

Teaching point: It’s always easier to lower a product’s price than to raise it.  That’s called the “ratchet effect”.  So, it often makes sense try launch at a high price to ‘skim’ the market.  If the market resists, cut the price until you hit the sweet spot.

A blizzard of speculation is building over Apple’s as-yet-unconfirmed release of a tablet computer.

Among other things, the tablet is expected to offer e-books and TV programs. Apple has been trying to get TV networks to license their programming for a subscription service planned as part of a revamp of iTunes, presumably with the tablet in mind.

Assuming the talk is correct, it is hard to see the device proving immediately attractive to the mass market given a price expected somewhere between $500 and $900.

The iPhone wasn’t a big seller when it first released at $499 and $599. Apple quickly lowered that to $399.

But it was only when Apple renegotiated its deal with AT&T, cutting the price for the cheapest model to $199, that sales really took off.

The iPhone will remain Apple’s growth engine for the company for a while yet.

WSJ: Apple’s Hard-to-Swallow Tablet, Dec. 30, 2009
http://online.wsj.com/article/SB10001424052748703510304574626213985068436.html?mod=djemMM

Got this provocative email from one one of my son’s friends:

Mr. H – As patriarch of the “First Family” of the $1 menu, I wanted to bring your attention to this article. 

It appears that suspicions may have been correct –   The $1 McDouble cheeseburger is literally a LOSS LEADER. 

Who is right Burger King or their franchisees?  Why charge an unprofitable price?

Below is the article.  Far below is Ken’s Take.

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Excerpted from AP: Food fight: Burger King franchisees sue chain, Nov.13, 2009

Restaurants, especially fast-food chains, have been slashing menu prices because of the poor economy. Executives hope the deeply discounted deals will bring in diners who are spending less when they eat out, or opting to stay home altogether.

But, Burger King franchisees sued the hamburger company this week over its $1 double cheeseburger promotion, saying they’re losing money on the deal and the company can’t set maximum menu prices.

A group that represents more than 80 percent of Burger King’s U.S. franchise owners, said the $1 promotion forces restaurant owners to sell the quarter-pound burger with at least a 10-cent loss.

The $1 double cheeseburger typically costs franchisees at least $1.10 — That includes about 55 cents for the cost of the meat, bun, cheese and toppings.

The remainder typically covers expenses such as rent, royalties and worker wages.

“New math, or old math, the math just doesn’t work.”

When the $1 double cheeseburger was announced this fall, an analyst said it could increase restaurant visits by as much as 20 percent, but that as much as half of the gain recorded from increased traffic could be lost because customers were spending less when they ordered food.

Copyright © 2009 The Associated Press. All rights reserved.
http://www.google.com/hostednews/ap/article/ALeqM5hLeKv3ns6qUW8InI9h7yHYvgzHZwD9BUB0181

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Ken’s Take:

1. So, the franchisees just want to cede the “value” position to Mickey D ?  Not a wise move.
2. Why a loss leader ?  Because it draws traffic — and most customers complement the loss leader with another high margin product — e.g. soda, or fries.
3. Technical note: the franchisee’s should be thinking about the $1 burger in terms of “incremental profitability” — incrementally, they’re still making 45 cents on each burger — the employees are still going to be there, the rent’s still going to be paid, and the lights are still going to being using electricity whether the burger is sold or not … only way the franchisee loses is through “dilution” — if a dude who would have paid 2 bucks for a burger anyway gets one for $1

Bottom line: Franchisees should fire their lawyers and flip some burgers.

TakeAway: Maintaining profitable prices while growing market share requires a delicate balance that many companies struggle to find.

Not HP – through a series of cost savings and operational efficiency initiatives, HP is capturing market share while achieving superior profit margins.

Taking notes, Mr. Dell ?.

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Excerpted from WSJ, “H-P Wields Its Clout to Undercut PC Rivals,” By Justin Scheck, September 25, 2009

Hewlett-Packard is using the dismal technology market to bolster its position as the world’s largest personal-computer maker.

For example: a $298 laptop to be sold at Wal-Mart …

Since the economy slumped last fall, H-P has gained market share by lowering prices of its consumer PCs to undercut rivals … And while the profit margin in H-P’s PC business has fallen, it hasn’t suffered as much as rivals.

H-P has used its enormous sales volume to demand cheaper prices from suppliers and contract manufacturers. It’s also taken advantage of an improved supply chain to quickly design and deliver new, less expensive PCs …

The price cutting has pushed H-P’s PC division operating-profit margins to 4.6% in late July from 5.7% a year ago. But it’s still better than Dell’s estimated 4.3% margin  …

Dell is ceding market share rather than drastically lowering prices to match H-P. “If we don’t think there is going to be profitable growth, there are some situations where we won’t take part,” said a Dell spokesman. H-P’s market share jumped to nearly 20% of global PC shipments in the second quarter, up from 18.5% a year earlier, according to IDC. In the same period, Dell’s share fell by about two percentage points to 13.7% …

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Full Article
http://online.wsj.com/article/SB125374794515235743.html

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Ken’s Take: A nice example of PVP concepts in action: (1) The recurring power of free – charge even a minimal amount and demand falls – a lot.  (2) Differentiated pricing – in this case, by distance.  (3) Morphing from “by the drink” to subscriptions.

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WSJ, In the Air, Wi-Fi Gets a Ho-Hum Reception, Aug. 27, 2009

More than 500 airliners are flying around the U.S. with wireless Internet access up and running, but airlines are finding that the technology that they hope will bring new revenues may be more like in-flight meals: People gobbled up food when it was free, but they find it a lot less appetizing when they have to pay.

Airlines and in-flight Wi-Fi providers say usage has been strong and is growing as more travelers sign up for the service and find it on more flights.

But usage drops off considerably when travelers must pay for the service.

Alaska Airlines even tested charging just $1. The result: a lot fewer laptops, BlackBerrys and iPhones signed on.

Most U.S. airlines with Wi-Fi are using a service called Gogo from Aircell LLC, which built a network of cellular towers across the country.

Aircell is already testing lower prices and rolling out longer service plans. The service is priced now at $12.95 for flights longer than three hours; $9.95 for flights under three hours but more than 90 minutes, and $5.95 for flights shorter than 90 minutes.

Usage is higher on long-haul flights and has steadily increased as more travelers register for the service—making it easier to sign on during subsequent flights without entering credit-card numbers and other information.

Virgin America says about 12% to 15% of passengers across its fleet are using the service. That’s likely higher than industry averages since Virgin America has a high proportion of cross-country flights in its schedule—plus, the airline offers power ports at all seats, making it easier to use Wi-Fi.

On average, 8% to 10% of travelers need to pay for Internet access for the service providers to be profitable within five years. That may be hard to do because a large percentage of U.S. domestic flights are shorter than two hours, when travelers are least likely to pay for Web access in the air.

For many business travelers, staying online will make hours in the air more productive (and rob some road warriors of a respite from electronic leashes).

Aircell, which is adding about 100 planes a month, thinks pricing will move more toward subscriptions, with travelers buying packages of five flights or more and companies directly buying the service for their business travelers.

Full article:
http://online.wsj.com/article/SB10001424052970203706604574374571364228440.html

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Excerpted from WSJ, “State Law Targets ‘Minimum Pricing'” By Joseph Pereira, Apr 28, 2009

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In a move that could lead to lower prices for consumers across the country, Maryland has passed a law that prohibits manufacturers from requiring retailers to charge minimum prices for their goods.

The law, which takes effect Oct. 1, takes aim at agreements that many manufacturers have been forcing on retailers, requiring them to charge minimum prices on certain products. The practice has surged since a controversial 2007 U.S. Supreme Court ruling that no longer makes such agreements automatically illegal under federal antitrust law.

Under the new state law, retailers doing business in Maryland — as well as state officials — can sue manufacturers that impose minimum-pricing agreements. The law also covers transactions in which consumers in Maryland buy goods on the Internet, even when the retailer is based out of state. That could potentially affect manufacturers throughout the country.

Minimum-pricing agreements keep retail profit margins higher, which in turn keeps retailers from pressuring manufacturers to lower the wholesale prices they pay for those goods. Suppliers also think that eliminating pricing competition can help retailers spend more money promoting their products to consumers. But certain retailers — particularly online ones — that attract customers because of low prices say the agreements stifle competition and gouge consumers.

Maryland’s legislation is one of a series of recent initiatives aimed at circumventing the Supreme Court decision … “Today there are an estimated 5,000 companies that have implemented minimum-pricing policies, much of it happening in the wake of the Supreme Court decision.”

One company with a minimum-pricing policy is Kolcraft Enterprises Inc., a supplier of bassinets and strollers sold by Wal-Mart Stores Inc … Kolcraft requires retailers to charge a minimum price of $159.99 for its Contours Classique 3-in-1 Bassinet. Wal-Mart’s price is $169.88. The price dictated by Kolcraft for its Options Tandem Stroller is $219.99; Wal-Mart charges $219.98.

The agreement states that the policy is intended, among other things, “to protect all Kolcraft and Kolcraft-licensed brands from diminution.”

Without such legislation, retailers had little hope of prevailing against a manufacturer who requires minimum pricing. “One must show that a manufacturer basically has greater than a 30% market share … and few manufacturers wield such market power in the U.S.

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Full Article:
http://online.wsj.com/article/SB124087840110661643.html

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Excerpted from WSJ, “Music Labels Push Extras with iTunes Pass” By Ethan Smith, Apr 15, 2009

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Record companies, weary of scraping by on 99-cent song downloads and dwindling CD sales, are trying to dress up and reimagine their most profitable product — the album — to woo music fans on Apple Inc.’s iTunes Store.

On Tuesday, Sony Corp.’s Epic Records plans to release a $17 iTunes “pass” for pop band the Fray. The pass delivers songs, video footage and photos, but spaces out the offering over several weeks in the hope of holding consumers’ attention and justifying the premium price …

Apple plans several more subscription-style passes in the coming weeks.The offer is part of a broader strategy among record labels as they try to adapt to a retail landscape now dominated by the iTunes Store, which has become the world’s largest music retailer.

While iTunes has thrown the music industry a lifeline by getting listeners to pay for a product that many had been getting free via illegal file-sharing, it also has created a new set of problems for record labels. The vast majority of iTunes sales are for single-song downloads, while higher-priced album sales have dwindled. Record companies are desperate to find ways, including re-pricing songs, to hook consumers on bigger-ticket products that deliver higher margins.

The release of the Fray’s iTunes pass comes the same day that song prices on the iTunes Store are set for an overhaul. Instead of the longstanding across-the-board price of 99 cents, songs will be priced on a three-tiered system, with new releases or hits costing $1.29, and older tunes at 69 cents. Those occupying the middle ground will still cost 99 cents.

The four major-label groups have been calling for such a shift so they can make more money on their most sought-after releases. But even so, many in the recorded-music industry view consumers’ gravitation to song-by-song downloads as a major economic problem. Among other things, major labels can’t sustain their global marketing and physical distribution infrastructures with transactions that net them pennies apiece …

Though CD sales still account for around 80% of retail music sales in the U.S., they have fallen 20.3% this year alone … Adding in digitally downloaded albums, sales are down 13.5%, compounding a 45% decline in album sales since 2000 …

One downside to the pass idea: It’s something of a grab bag. Fans don’t know exactly what they’ll get. Still, the price isn’t that much more than the cost of many full albums …

Apple has begun offering fans other incentives to trade up from individual songs to full albums. A feature introduced in 2007 called “complete my album” allows a buyer to apply money spent on individual songs toward the cost of the full album it came from …

Eddy Cue, the Apple VP who oversees iTunes, says that “once [an album] gets out the door, you can’t update it, you can’t refresh it, you can’t do anything to it.” But the add-ons allow music companies to keep it new for a longer period.

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Full Article:
http://online.wsj.com/article/SB123906011712694965.html

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