A couple of weeks ago I went camping. I haven’t camped in over 2 decades, so I needed a tent. After checking a couple of placed on line, I decided to go with the Mountain Equipment Co-op Wanderer 4. The tent was thoughtfully constructed with a full fly and lots of useful features. But it wasn’t until the last night of the camping experience when a deluge struck that I realized just how important quality was to me. Despite being stuck in a tent during an extremely heavy rainstorm, we were dry. The tent outperformed my expectations. Looking back, the other cheaper tents I saw wouldn’t have performed under those conditions.
Cheney Window and Door is another example of quality and service. When it came time to replace the windows and doors in our home, we were thrilled with the quality of their product, but more important was the service we received. The installer was second to none; he took a great deal of care and added some extra touches along the way. The owner also offered some great renovation advice, and pointed us in the direction of our next successful venture, soffit and facia.
Now this provider was a long-time installer who was preparing to retire, but because Cheney gave us the recommendation, he took our job. Again, we delighted with the entire experience.
The final exterior improvement on our list was paint. I knew that it would be tough to find someone who met my standards, having done my share of painting. A friend had recently had some work done by a painter who came highly recommended to her, so I took a chance. His work was amazing.
Pricing for Quality
Could I have paid less for these services? Yes. But I opted for quality, and in the end with a job well done, I was further ahead. Will I shout these companies’ praises from the rooftops? You bet!
In a world where all too often we are disappointed by the quality of the goods and services we purchase, it is nice to know that excellence still exists. This fact provides an opportunity for businesses: customers are willing to pay for quality and great service. But make sure that you deliver, because bad news travels fast. My neighbours thought they were buying and paying for quality and service but instead received a nightmare. I won’t be contacting that company for their services any time soon.
Remember the days of Atari and Coleco? You’d buy a game cartridge or a hand held game like Pac Man and play it, no more complicated than that. Since those days Sony among others has taken the next step in creating a new gaming experience for the user, in return for added revenue opportunities.
The internet and onboard memory offer an opportunity to further capitalize on gaming enthusiasts’ desire to answer the question “what if”. Through its PlayStation Store, Sony offers additional outfits for characters; additional cars for your favourite racing game; and if you don’t have the time, skill, or interest in mastering each level of a game it’s no problem because for just $5.99 you can unlock those challenges and play your way through the game.
One popular PS3 game, “Little Big Planet”, which features a character known as “Sackboy” has 106 add-ons available; only a handful of which are free. These add-ons are mostly costumes which your Sackboy can wear and virtual stickers which you can collect. These range from $0.99 – $2.99. The more costly add-ons such as level packs at around $5.99 add extra levels to the game.
Cross promotion of games is pervasive throughout the PlayStation online store. The day ModNation Racers was released, the store offered a $1.99 ModNation Racers costume and stickers add-on pack for Little Big Planet!
Coming from a generation where buying the game cartridge meant that you owned the whole game, I can’t help but feel that this new generation is getting ripped off. But in a way, it’s like being able to find out what happened next after a movie ends and perhaps even write the next chapter.
Sony’s PlayStation systems are an example of what additional revenues can be achieved when you view a product not as an end result, as the beginning of a longer term relationship with its user.
When the Ontario government hands them lemons, Loblaw will make lemonade.
Loblaw has crunched the numbers and anticipates that they can still come out on top despite the low margins on generic prescription sales resulting from government reforms.
A new strategy
Loblaw announced on May 4th that they will extending their hours and services at most of their 500 in-store pharmacies, and more than double the number of onsite medical clinics to capture customers who are shopping around for a provider that offers the service they seek.
This is thanks to the droves of customers they predict will come their way from smaller non-diversified pharmacies who can no longer make a go of it, and larger players such as Shoppers Drug Mart, who have driven their customers away by cutting their hours and service.
Their strategy assumes that the customer will drop off their prescription at the Loblaw pharmacy and then browse the rest of the store, picking up higher margin items such as health and beauty products, or other grocery items. They are betting that these sales will more than make up for any losses on the prescription side. To minimize costs, Loblaw will be instituting automatic pill counting machines.
At what cost?
This development raises broader questions. If Loblaw is correct it points to a fundamental change in how we as consumers will be able to purchase prescription drugs. We are shifting from a market of many players of different sizes with varying levels of service to a few large players who control the dispensing of drugs in Ontario.
Will oligopolistic behaviour ensue? Will these larger players raise their dispensing fees to increase their margins, and if so will private insurance companies react? Or will they exercise their market power towards the generic drug manufacturers, to get a better price in return for exclusivity?
Health Minister Deb Matthews is reportedly pleased with Loblaw’s plans, but is the Ontario government sacrificing service in the name of cost? What will become of small pharmacies? Or underserviced areas where there is no Shoppers or Loblaw?
Pharmacies of all sizes are fighting back with an aggressive campaign against Liberal MPPs including radio ads, mailings and a website portraying the elimination of professional allowances as “cuts to frontline healthcare”. It will be interesting to see what the public and government response is to such an overtly negative campaign.
One thing is for sure, we will see some innovative pricing strategies resulting from the reforms.
For more background on this issue, see my post “Generic drug manufacturers are the key to solving pharmacy woes”.
By now we’ve all heard about the Ontario Government’s plan to lower prescription drug prices by banning professional allowances paid by generic drug manufacturers to pharmacies.
Drug companies provide these allowances or discounts to pharmacies in return for exclusively stocking their brand of generic drugs. It is subsequently built into the price that is passed on to the consumer.
A significant portion of a pharmacy’s revenue comes from these allowances. This is particularly so for smaller independents then larger corporate chains who depend less on their prescription related revenue.
What is not being said however is that the generic drug companies also stand to lose as a result of the reforms. Without the professional allowance arrangement they will lose their exclusivity with pharmacies. Therefore the drug companies have a strong incentive to find a solution to the pharmacies’ perceived loss as a result of the Ontario Government’s reforms.
How will the generic drug manufacturers address this issue? They might consider borrowing a trick or two from their name-brand cousins.
Brand name drug companies already deal with a similar situation vis a vis physicians, who are subject to OHIP regulations and the Canada Health Act. In return for prescribing their name-brand drugs, physicians receive incentives including free samples, conferences and trips, and research funding.
I think in the months to come we will see the generic drug companies using some innovative pricing strategies to once again secure pharmacies’ allegiance.
One final though. What is the Ontario Government doing to lower the price of name-brand drugs?
Recently I picked up a small box of Godiva truffles to share with my spouse. What a disappointment. They were hard and the flavour was inferior. At a price of $3.33 per truffle I felt I had been ripped off. You see, truffles from Eitelbach at $1.50 per truffle are heaven in a box. Their truffles are fresh and they offer a nice variety of flavours. Soma offers its truffles at $2.00 per and are also excellent.
With other better quality truffles available, how can Godiva sell theirs at premium prices?
Godiva is held by a Turkish confectioner Ülker Bisküvi Sanayi, who purchased the company in 2008 from Campbell Soup which previously held it for 40 years. Eitelbach Baumkuchen Pastries Ltd. is a small Toronto based privately held company opened in 1989 and has two retail locations and an on-line store shipping to Canada and the US. Soma Chocolatemaker is owned by David Castellan, a former executive pastry chef at Oliver Bonacini restaurants. It opened in 2003 and has one retail location in Toronto’s Distillery District and online ordering shipping in Canada only.
How does Godiva do it?
The majority of chocolate consumers do not eat fine chocolate on a regular basis, if at all. So when it comes to special occasions or communicating thoughts of affection, Godiva is seen as a safe bet.
So why did I purchase the Godiva truffles? This was a spur of the moment purchase, with no Soma or an Eitelbach in the vicinity and no time to order from their websites. I relied on my perception of Godiva chocolates, the perceived perception my spouse would have, and the reassurance that the higher price provided that I was buying quality chocolate.
But because I have tasted quality chocolate, I knew instantly on tasting the Godiva truffles that I had been had.
That is the key to successful marketing – having customers believe a desired attribute about your product. We believe that Godiva, Soma, and Eitelbach offer quality truffles. In the latter two cases I believe it to be true because I’ve tasted them and know they are good quality chocolate. In the case of Godiva, I was relying on truth in marketing and appropriate pricing.
I would liken Godiva’s strategy to Starbucks’ (see post “The Starbucks Strategy”) in that 15-20 years ago before relatively good 70% dark chocolate graced the shelves of every grocery and drug store in the land, Godiva was relatively speaking, fine chocolate. However as the years passed and demand for good chocolate increased, Godiva opted to pursue a volume strategy, while getting by on status quo quality.
This brings me to my last point – making the customer believe something that you can’t or won’t deliver on leaves a lasting negative impression. The worst kind of PR a company can have. And while an entity as large as Godiva may be able to withstand a some disappointed customers, many small businesses whose reach is a great deal smaller and depend on repeat business, can’t.
The moral of this tale? Tell an honest story, deliver on your promises, and price appropriately.
Just when you thought books were a dying breed, along comes something to breathe new life into the publishing industry. Digital books are an ideal example of pricing perfection!
A war over words
Since the announcement of the new Apple iPad, publishers have pitting Amazon, maker of the Kindle digital book reader against Apple. Publishing companies such as Macmillan and Harper Collins have threatened Amazon with joining the Apple store, saying that Apple is offering them more pricing flexibility. (See blog post by Ed Sutherland for more on this story.)
The Amazon Kindle’s competitors include:
Adobe Digital Editions digital book reader application which allows you to download digital books to your computer.
The margin is where it’s at
Note the differences in margin that the various formats offer. For example, the teen sensation “New Moon” is available as follows according to the Amazon site:
Amazon offers the Kindle digital edition and paperback with only a 34 cent price differential, despite the additional shipping and handling costs incurred for online paperback book sales. The cost of the same book at Barnes and Noble stores is $7.99, just $1.74 over the digital price to cover the sales staff and brick & mortar.
So given that a digital book is simply a small file uploaded by the publisher to the vendor’s web site and downloaded by customers, what do you think the profit margin will be for the publisher and the vendor? Comparatively speaking, digital vs. paperback, whether purchased in the store or online are quite significant. Cutting out the cost of postage is huge for the vendor, and the cost of printing a boon for the publisher. For the customer downloadable digital books mean instant gratification, although some miss the act of turning the pages of “a real page turner”.
Another revenue opportunity is gained from the lack of transferability. You can always share your paperback with a friend, or sell it in a book sale or to a used bookstore. Not so much with the digital version. Yet another win for the vendor and publisher.
These tantalizing profits are a good reason why Amazon wants to keep publishers away from the Apple store as much as possible, and why Amazon caved to publisher demands for pricing flexibility.
In summary, digital books provide an excellent example of how innovative marketing can lead to improved customer service and drastically higher margins and volumes for your product.
You know the term “selling ice to an Eskimo?” I think it could be an important lesson in the value of a tight marketing plan paired with a complementary pricing strategy. But let’s sell snow to the affluent instead.
The other day I saw the most beautiful scene outside my window. Large puffy white flakes of snow fell gently down. What a blessing! In the colder parts of the world snow is supplied in varied amounts completely independent of demand. As the winter drags on and the snow accumulates, budding entrepreneurs may be wishing for a way to get rid of the white stuff, and make a buck or two in the process.
The Product
What form will this new product take? Snow in its native form would be difficult to transport to markets where there is demand without significant refrigeration and packaging. As such it would need a higher price tag just to cover costs. Perhaps it could be marketed as the basis for a new natural snow beverage: maybe an icy complement to premium Canadian vodka, the target market being the wealthy in countries without snow.
The Cost
Having a clear sense of the cost of providing the product to customers is important to not losing one’s shirt. What costs should be considered? The broad categories would include:
Marketing
Our market research shows that no one else is offering this product. The closest comparator is blended ice, which bears no novelty factor. The product is easily replicable, so building brand recognition and reputation quickly are key. It is recommended that the product be tightly marketed to the highest margin buyers possible, including high-end bars in the world’s top hotels, showcasing it as a taste of the Canadian north.
Pricing
Product pricing should match the marketing strategy. Imagine sitting in a 7 star hotel in Dubai, 50 degrees Celsius outside and sipping the Canadian Arctic? It is the fresh, all natural Canadian snow that makes the drink, and with careful communication of this the marketing of 2 oz servings of the snow in spectacular packaging that makes a $1000-$1500 exclusive drink could net the snow vendor significant compensation.
While the snow accumulates to the degree that there is no place left to put it, Canadians may feel incented to sell their snow to those without. This exercise demonstrates that with a little imagination and a solid marketing plan and pricing strategy, even a public good like snow can be turned into a premium product.
2
Back to top