Pricing College Podcast

In today's episode of Pricing College - we discuss how brands can help a business segment their customer base by value drivers and ability to pay.

We look at brands in the hotel industry and also in the car industry.

In today's episode, we want to cover how different brands can help you segment your market.

Have you ever thought maybe that you've got some brands that I'm thinking now of like hotel brands? And how they can help position a business in the market. But they also can help position your pricing in the market by having the existence of three or four different brands. So like I'm thinking about Accor brands. You've got Sofitel, you've got Novotel to make your brand under that business. They really help to define the pricing, and also price positioning, the tiering system, and customer segmentation.

Yes, In theory, what we're doing is we're segmenting our customer base and our customer base are people who want to stay in a hotel in this instance and there are other examples we can give also. But in this instance, there are people who want to stay in a hotel. That is the main item they're purchasing. But their drivers will be very different. Some will want a romantic weekend away, or this will be a family holiday. Other people might be workers in a city for a couple of days and just want somewhere where they can prepare their meals, etc. So there are slight nuances to the drivers that are making people choose that hotel and location. But I suppose in America they're probably the most advanced in that you have a huge number of very micro niche brands even under the same larger brand. Whereas under the Accor brand common in Australia we have Sofitel, the top five stars going the whole way down to a Formula One which is a one star. I think America is probably the most advanced in that. And have done even more market research on the customer base to tailor in.

I was thinking about that. They've done a lot of segmentation. A lot of customer and market research to define those customer groups and price groups. But they're almost like micro-segmentation, and they're far more developed than in the US. They seem to know each of their customer groups. Then they market to these various hotel brands according to what they want to hear based on the customer experience, their online experience. They want their customer value drivers to direct them to the right offer. Then from there, they provide promotional offers that are tailored to that individual. It is a very personalised offer. So you can see this almost like a layered approach. You've got your price and your customer segmentation aligned to brands. Then from there, you move on to personalise promotion to sell more. To ensure capacity utilisation, and to drive up yield based on customer demand.

From a pricing perspective, what are the real reasons why companies do this? I suppose if you take an example wherein a world that this didn't occur. Where one hotel company just has one hotel brand. Basically what they'll be doing is they'll be charging the mid-market price. It'll be too much for some people and not enough for others. There will be enough luxury and value-added there. So really what you're doing is you're segmenting the offer. You're tailoring the exact offer that you're giving to customers to maximise that willingness to pay. And meet that willingness to pay in those different categories. So you're providing a basic service to people who just need that. A stock up for the night somewhere to rest, maybe they're making an early morning flight. And then if the whole way up the Echelon to people who are willing to pay. The once in a lifetime trip to a real luxury hotel. It could be fancy restaurants that go with it, and you're maximising that willingness to pay. There's a threshold where you can't have an infinite number of hotel brands. But it's certainly in the American method they'll tailor it. They'll be of little value. You can pay extra for certain things like wine etc or maybe use the hotel spa and these sorts of things. So it is tailoring the offer into the value drivers to have maximised the willingness to pay that people have.

I suppose this is really a wider business strategy in terms of consolidating. Buying up relevant brands and businesses that complement your business strategy. Aligned to your pricing strategy. There's no point for instance buying brands that don't fit your pricing strategy. Or, could be at odds with a pricing strategy. Because it's very hard to then capitalise and monetise your business strategy you can end up almost sort of diluting your price point. So, here you see two very important things, the impact of pricing on your business strategy and how the wider business strategy in terms of acquisitions and mergers is linked to your pricing strategy as well.

You see this in many different areas not as advanced as in the hotel industry. But the classic example of airlines in Australia is Qantas. Which is at one point in time was the dominant player in the market and is still. To a large extent, they then launched a lower-priced version of Jetstar. You'll also see it even in the car companies. Hyundai, the Korean company they are moving up developing from being a bargain car to sort of a modern mid-market car. Then launch a lower price entering into the market also in Kia. The American market is very large, with 300 million people with a lot more similarities across the different states that you might have than across European countries. You can have more brands under the same company. An example again will be General Motors were obviously through a long history of 100 years or more of acquisitions etc buying up different brands. They operate a huge number of branded cars tailored to certain niche segments. They take advantage of what people want from a vehicle. Whether its history, the brand and logo, comfort, status, sports appeal, all these different things. Knowing the customer, knowing what drives them, and then providing a product with barriers against the lower-cost competition. So you can maximise the profitability in that sector by potentially selling something at a cheaper price to somebody else.

This is a great example of strategic acquisitions where the strategy team is thinking commercially about future acquisitions. How are they going to expand the brand and product portfolio? Then working with the pricing to monetise that. And then the pricing team needs those different firms to then help position the brand using, I think we've discussed this before frame and anchoring techniques. So that they know that tiering system is correct. And then they can adjust the price bandwidth and price tiers according to Business Intelligence that flows through the business through the pricing team. Then they can optimise their prices, their promotions on an ongoing basis.

On this podcast, we often talk about a value culture and understanding the value that you offer. I think in this example of different brands tailored to different segments, this is of paramount importance. The only reason to have the different brands and hotel industry is because of the value it offers. There's no other reason to do it. If you've got an understanding through market research or whatever else of the value that you offer matching a consumer demand. That is the entire business model. I suppose it's a good way for people to remember when you're thinking about a value culture just think of these hotel brands, why they exist? and the fact that they purely exist to meet that pricing requirement.

Remember this very much applies to B2B because they too are going through a lot of consolidation. They're thinking about buying up various brands either as a competitive tactic or strategy and even to expand their product portfolio. But it's remembering very much about positioning, tiering. How you're going to structure your pricing to ensure that you do make money out of the brands. And they don't end up biting you and leading to margin loss over time.

In this podcast episode of Pricing College - we ask would you actually pay more for fewer movie options on your streaming service - or would even paying a nominal fee let you enjoy the movie more?

We've been talking a lot about movies, the movie industry. The differences in pricing between Netflix and potentially Foxtel and also cinemas. We're thinking greatly about how pricing now determines a lot about the way we consume movies. Netflix is a great example of our new habits as movie watchers. It offers us infinite variety at a low price. We like cheap and it's offering like pretty much infinite movies, documentaries, the whole lot in a way for free. Many generations like the younger generations now have been brought up on this new way of consuming movies. Now there's a real difference between the sort of the older generation who used to a more event-based cinema-going movie experience. And younger generations who are used to just like consuming middle of the road stuff at the drop perhaps there's no experience behind it. So we're interested today to talk a bit more about the consumption of movies. And the changing of those types of patterns over the years.

My personal view is that Netflix, obviously is very successful. It's always gain a huge number of customers, a huge number of paying customers. One of the things or issues about it, I do think that they could push the perceived value by slightly changing the pricing mechanism. Let's say you currently pay 15 bucks a month, whether you watch a movie or 1000 movies it's the same fee. Too many ways of looking at it, you always see your TV bill as a utility. Think about it when you're watching the movie so you do perceive the movies as being free. In the world of pricing, there's the old saying… " that if you sell something for one cent versus for free". The demand for that product will drop infinitely or hugely. If you think about it in your area. If a restaurant gives free smoothies, free burgers, or free sandwiches as one day as a promotion. There'll be a queue around the block. Even if the people will queue for half an hour to get a free sandwich if it even a cost of $5. They wouldn't do work for $5 for that half-hour. So the demand for free, seemingly free things go through the roof. But with that, there is the side effect that people don't appreciate what they have. It's almost as if it's worthless because the price tag makes us seem psychologically worthless to them. And one of the big complaints here by people on Netflix is they can't focus. They can't choose a movie and stick with a movie. Or, they'll spend half an hour flipping through movies trying to pick one. Then end up not picking any. So I believe that is a factor of not having to pay. Not psychologically having to give a fee in your mind for making that choice.

I suppose when people do have too much choice. The value and the enjoyment of watching that movie do decrease. That higher price point makes people pay attention. Makes their brain switch and think okay, what am I actually watching? why am I watching them? And make them ask those questions. Then having that sort of lazy movie-watching experience. It's uninquiring and you sort of laying back popcorn not thinking about it. It's more like background noise and moving colours. I honestly think that's what a lot of people want. They're just relaxing, they're switching off, and Netflix sort of does the job. But there's another segment of the population that has got an inquiring mind. They want a little bit more curation with their movies. They want to know, what's good? and why it's good? Like the old fashioned movie critics, Barry Norman I don't know if anyone can remember them. He might not have been the best critic. But he was there at the time of critiquing different movies for a reason to cater to people. That had an actual interest in the films and that has just gone.

I do believe that it has gone. I think there's no real, like you look at Netflix. There are categories etc but there aren't the top 100 movies recommended by this critic or that critic. Or, there are very limited aspects of that. There's not even periods or seminars where you have the great directors, there are movies and you can go through them. It's sold as a popcorn consumer and easy consumption mechanism. But I do believe people if you ask them, do they want infinite for free? They'll always say yes, people will say yes indeed. I always say, imagine you're on a cruise ship. Hopefully when this whole COVID crisis ends and cruise ships are back running or even an example of a Las Vegas casino. In the buffet, first few days everyone's eating as much as they can get their hands on. They're consuming way more than they would usually do. Give it another week or give it a couple of weeks, people will probably revert the normal consumption habits. Probably they could choose infinite amounts. But they probably just have an egg on toast, or who you know a bowl of cornflakes. That's what life is about and to a large extent people initially or for holidays want infinite. But in reality, if you give them too much, they don't appreciate it. There's that saying with children if you give them too much early on you'll spoil them, young sports stars are a very similar concept. Again this is a value judgment, getting away from pricing but it overlaps into pricing. When people have to work for something and put their money down to get something. It's sort of signifies that they've made a choice, and when they made a choice that means they're committed to it. When you commit to something you have a natural willingness not to back away from it. So you start the movie, you've paid for that movie. Even if it's just $1 you pay for that movie, and you're much more likely to see it through. And watch the whole movie than you would if you had nothing.

But the interesting thing here is generations are now being brought up with just Netflix. That's all they know, that's where their minds are at. They don't know that there was anything better. I think we were discussing this before and they probably don't even know, who Tom Cruise is? Their knowledge of actual movies is very limited. So they won't ask those questions. They won't be prepared to pay that money because they don't have an alternative. They don't have something to compare it with. When I think about the Netflix pricing model, their criteria is based on the quality of the picture. That's what their audience wants. It was a high definition of quality picture and fast download speed on multiple devices. That sounds to me like it is appealing to young people. There's no value fence based on what they're watching. I suppose even how they consuming it. They've already got that for free so it doesn't matter. So they're not thinking about that, so they can get whatever they want. It's just a quality that's the younger generation wants. They want lots of it, they don't care what they're watching, and they want it to be on multiple devices. I think that Netflix has encapsulated that. If I compare their pricing model with something like Foxtel. The Foxtel is appealing more to that old fashioned sort of movie as an event. People who like watching movies or have an interest in something such as sports, such as movies, documentaries. Their pricing structure is based on bundles and add ons based on somebody's interest. The thing is if you have no interest in anything. Will that pricing model that is Foxtel using over time become obsolete? Because at the moment people are just content with watching the middle of the road nothingness. Over time if they're not exposed to anything else. That's all they'll know and that they'll be satisfied with that.

I think that's true. To some extent, the production companies like the Warner Brothers, 20 Century Fox they're almost cannibalising their offer. What their golden goose is the long term value of the big business, the star system. I think a large amount of these have been just ground down. There's been a huge investment in television series over the last number of years. I even remember, it shows how old I am when George Clooney was cast as Batman. Which was quite out of character I think he'd come from the TV series ER. At that time and people asked him, did you see any difference being in the movies? He said it was a whole step up because people viewed TV stars as a lower level than movie stars. That might have changed nowadays. But I think a lot of young people almost view YouTubers. The YouTubers who self produce using their telephones and put stuff up on YouTube for free consumption. They're seen as big stars by many kids and teenagers, etc, or young adults as traditional movie stars are. You can even argue that the Hollywood star system is almost broken down. There haven't been big movie stars created in the last 10 years. To the extent that there would have been in the 80s and early 90s. It's almost as if that conveyor belt of stars has stopped. And, is that because people don't appreciate, they're not investing their own money into the product, perhaps?

I know we argued before that Netflix is a dominant player but maybe not so for long. Because we've got Amazon Prime coming into the picture and they may dominate. But interestingly, it'd be something like YouTube completely free access content from anyone and from anywhere. That is the market disrupter here. Because younger people are even thinking about Netflix is old hat now. And they are just watching YouTube and Tik Tokers and that's what they want to consume. When you think of what Tik Tok is, it's pretty very short like up to six seconds, up to a couple of minutes of individuals doing various odd things here and there. But that's the attention span. That's consumption the people want to watch six minutes of something nothing too high brow. But at the same time, it's still specialising. Because that person can choose areas that they're interested in like dance, comedy whatever it is, and there'll be something available. Saying that even Amazon Prime might be old hat in a few years. And that YouTube and Tik Tok are the things that they should be watching out for.

I think that's it for me. It's an interesting sector and I think everybody has fundamentally some interest in movies and cinema, and entertainment. Whether you're prepared to pay for it or not or whether you're prepared to go to the movies or not is a different question. But, whether it's the gossip magazines, or watching the movie itself. So yeah I think it's an interesting topic and we'll probably revisit it in a future episode.

In this episode - we discuss whether the business model and pricing strategy of Netflix will let it prosper in the long term.

We look at the penetration pricing strategy currently in use - and ask if it is best for the long haul?

So we were talking a bit before about the cinema and movie industry. And it sort of made us think about the prevalent, the dominant player in the market now Netflix. The value offers to the consumers and we're thinking, What value does it offer? Is it sustainable? Will it be long term? Will we value Netflix as much as we do today? Or, Is the lifecycle with Netflix?

I suppose people say I've got Netflix, I have a subscription to Netflix. What is the value that Netflix provides? I'm one of those people who even remembers its original incarnation before it was a tech business where they email you CDs or DVDs or, through the post. You had to select the ones you wanted to watch. And in that context, the appeal was the obscure movies, the foreign movies, the war archives movies, that was the actual appeal of the business. In a weird way, it's gone completely the opposite. Now it's more generic, popcorn style movies, some the 80s classics and that sort of thing. That you can just consume whatever you want and you pay a flat fee depending on the territory you're in. Something like 15 to 20 bucks a month and you can watch the movies. What are they providing is the question? Are they providing you access to movies that you wouldn't otherwise have? Or, why even the studio's use Netflix? Because it's a market to some extent there are two sides to it. The consumer should watch the movie and the studios who choose to distribute through them. So we're going to dig into that a little bit in this podcast.

When they are launched and still today one of the major value drivers have been the price they've been competing in the market based on price. I think they offer a tiered pricing model, it's very simple, it's very cheap, and it's easy to understand. I think it starts at like 9.99 it goes up to 13.99 and max 15 something like that. So, they have gone with a strategy of low price and looking at the pricing model, it's low price. Whatever you can watch on on their platform and sort of like good quality. So, there's those sort of segment price segment based on the quality of the actual movie. High Definition via streaming and that sort of thing. They've thought about the customers, what do they want? Customers want lots of sort of average stuff to consume in an instant. But they want it in high quality, high definition, so they want to watch it without interruption, even if they're streaming it. That seems to be a major value proposition that Netflix offers us today.

I can understand if we look at their pricing strategy which has been you can argue a penetration pricing strategy to get people to try it. I suppose there is a question though, Is it a penetration pricing strategy with the expectation of increasing prices later? We covered this in a previous podcast. I personally don't believe that there's that large an opportunity to increase prices. I believe a couple of years ago they did increase prices. And saw a large drop off in their customer base, which we'll probably cover in a future episode. But one of the big things I'll say about Netflix is, there's a classic example of the British railway network. In many instances, there's a first-mover advantage but there's also a first-mover disadvantage. With Netflix, they have shown the way and they've built a streaming model which was very market-leading. But one of the big issues is in my view is there are very few buyers to enter into it. It doesn't build an ecosystem such as the iTunes and App Store. You're not built into an ecosystem surrounded by Netflix. In theory, there's nothing is locking you in. You can consume movies elsewhere, whether through YouTube, Stan in Australia. Or, different streaming platforms or directly with the studios which we're seeing increasingly. To some extent, it's almost as if his business has shown the way. But not locked in any network effects that would stop people shopping around.

They're probably a bit feeling vulnerable about their position in the market too. Because they're more than willing to partner with people like Foxtel for instance. I suppose they're keen to keep customers like Disney. Because they literally give them the content even though they do produce their stuff. But I do feel now more than ever that they are more vulnerable to that feeling. And they're trying to create a more reliable ecosystem. Because they know the one that they have got is quite frail. It's very flexible and gives people options. But at the same time doesn't lock you in as much as they probably hoped.

In 2020 Disney is going direct so they're withdrawing a lot of their content from these distribution platforms. In my mind, I don't understand why any major studio where there are movies that you want. It's not any easier typing something into Netflix and it is typing into Google. If you can just buy it or get it from this from the studio directly, why would you pick it from Netflix? I can understand speaking of ecosystems a lot of modern smart TVs would have Netflix built-in. But we're a year or two away from where you'll just have whatever you want to build into them. If Netflix has built-in, Google is also on YouTube with different things. So I don't think Netflix will exist in its current format in 5 to 10 years. I just don't think that they have value-added. Fundamentally, the people who can produce the content are the Masters in this genre. They're distributing it all over the same mechanism which will be online. It'll be the cinemas or online. And they said the online mechanism will be like we might want to direct, why would you pay a margin or give it to a middleman? It doesn't to me make any sense at all. One other point I'd make is that Netflix has been trying to add a bit of AI and give you suggestions and these sorts of things. But basically to my mind all it does is suggest the same stuff that you watch previously, popcorn style movie and it's just good to kind of suggest another one to you. Over time, if we still believe cinema is an art form we're going to be looking more deeply for the content that we spend our time watching.

I think it started as a value proposition to have as much content as possible that it would be a platform that would enable the user to take control of the TV watching experience as opposed to being told what to watch or have any sort of guidance around that. They said, "oh for the first time, we'll put you in charge of that". And I think that's some people like that other people don't. As you get more and more content that sort of pretty much the same sort of thing. You kind of actually does need more guidance about what to watch. Netflix on another issue has been a great test case for movie producers like Disney. To see how well people would respond to watching films and content at home versus the cinema versus Foxtel sky and the whole bit. It's been a great test case almost like an agile sort of test. And learn for these bigger movie producers to see how their content, how people respond to and consume movies than ever before. In a way, it's helped people understand the entertainment industry. And think about micro-segmentation than ever before.

In the previous podcast, we talk about the current blandness and sameness and stuff like that. We were talking about the Golden Age of Hollywood which was a bit more artistic. Movies were original and based on the director's vision. Then from the 80s, 90s onward has moved into a focus group. You produce something and you tailor the ending to what people want. It does become bland. It's like the rule of politics that the middle person is what decides the election. So people tend towards the middle but in entertainment, I'm not sure if that's the right way. Because when it tends towards the middle and the sameness and everything's the same. And you've seen this before, you lose interest. When you lose interest then you stop going to the movies. Your willingness to pay and differentiate decreases. Then basically convenience seems to be the only value driver that you have. That's what Netflix focuses on, convenience and lack of barriers. When we talk about barriers to entry, you want to watch a movie today, there is no barrier to entry. You sit on your sofa and click a button and infinite movies will come up. So yeah I think in 5 to 10 years Netflix will not exist in its current format. I think it would be something along the lines of a Yahoo or AOL, a business that's still big still. A lot of money capital but will be decreasing from its current height.

I think so too, look it pivoted before from its older business model when it was a mail DVD and mail in the post business. Then it transitioned to this more platform business and has done very well. I'm sure that they're thinking about it now building their ecosystems which indicates that they're probably thinking about business model adaption, reinventing, innovating, something in the next 5 to 10 years. There does seem to be a need to do that and things aren't moving quickly but it's shown us some great possibilities in the entertainment industry as well as some gaps in the market as well.

It's showing the way but it's also created some big powerful enemies or competitors. When you look at amazon on who has infinite money from funding and also profitable who are also entering Amazon Prime. In a direct competitive system with Netflix, the real differentiator that Netflix has is likely to decrease. I can also imagine, you will see national champions designed around promoting national products will start coming on board. I think sometimes in a market when you do show the way all you're gonna do is breed competitors. So you have to make the money in the short term. It was a very brief penetration strategy. It will probably still grow as they get towards complete market dominance in many geographies but my guess is it's going to be just one of a number of competitors that people will consider in the future.

In this episode of Pricing College - we discuss how Hollywood studios used to discriminate based on willingness to pay and use different distributions methods such as cinema release, video stores, pay tv and finally free to air tv.

This has of course changed due to technology - but is the new system any better?

In today's episode, we want to talk about movies. I think everyone's probably sick of staying at home and watching movies over the last six months. But it's made us think about the changing business model. And potentially the pricing model of Hollywood and global cinema from the 1980s to today.

Remember back in the day you'd be so keen and excited to look forward to the new movie release. That you'd be prepared to queue around the cinema block just to watch the latest blockbuster movie. But we wanted to look at this as a sense of excitement, willingness to pay, prepared to wait for something exclusivity as a way of customer and price segmentation today. And, how effective it has been for the movie industry.

I think a lot of people talk about the Golden Age of Hollywood, they're often referring to the 1930s until the 1950s. For me, the Golden Age of Hollywood is when I was a kid that runs from probably the mid-1980s to the late 1990s. Interestingly, some people argue 1998 was the last great year of Hollywood but I would say that getting old. But if you look at how Hollywood movies were distributed in that period. Let's say the mid-1990s was a classic example of using the technology at that time to segment the market based on customer willingness to pay. So basically providing the same services or media, which was the movie. Some were shown on a big screen, some are shown through videos etc, but the content was the same. But what they did was they had very strict. A very regimented system of delaying release on those movies on different platforms to take out every possible dollar from the customer, based on their willingness to pay. It would start from the cinema so, you'd open in the cinemas. Once that was exhausted it would then move to the video store, to Blockbuster etc, which we covered in a previous episode. After that was exhausted, they would move on to Pamper television, satellite or cable. And once that exhausted, it would eventually drop down into normal TV. Or, free to air TV for the people who weren't willing to pay for it. But there were still a few more dollars to be picked out of the product.

And if you can recall there are much more like restrictions on the movie IP because of the sense of exclusivity in a way. There be lots of anti pirating laws. There be lots of rules and regulations prior to the movie starting both in the cinema and also on the video. You'd see those big quack signs going whatever you do just don't copy this film. That was all because they had that very strict guideline as Aidan was talking about release dates, about protecting IP. Making it a very special event for people. But also you've got to consider making the movie itself is a very high cost. They've got to think about covering their costs and making money on top. So this type of segmentation strategy based on time and exclusivity enabled the cinema industry and movie industry to do it at that point in time. They didn't have the customer insights and analytics to then really drive further into the price and customer segmentation which they're doing now. But at that point, this is what they did leverage.

I think on the protection of the IP and the building barriers around the product. If we said the cinema, they did hammer home that Intellectual property theft. All those things were pushed. There used to always be stories about people videoing using camcorders in the cinema to capture that. And trying to sell bootleg copies of the movie. There are a lot more strict controls in place. I can't remember the last time I saw one of those trailers before a movie whether in the cinema or on Netflix. I don't think I've seen one in a number of years and to be honest that has changed. I suppose the whole system with digitalisation did change, with Napster, downloading, pirate bay and these sort of websites. I can't remember what they were doing but they were sharing files from the early 2000s. This all started began to change with the demise of the traditional video store. The blockbuster collapse and the introduction of Netflix and more streaming services over the last 10 or so years. That model has changed. My question is, has the industry got to a new level or a new platform that it's used to that is profitable in the longer term? And I'll be honest, I don't think they are segmenting by the customer willingness to pay, as well as the way that traditional or older model.

I think about that older model I suppose it's very one-sided it does protect the interests of the movie industry. As Aidan was saying, people are trying to go outside of that system and trying to watch the movie before the official release date. That showed that the model itself was inflexible and it wasn't appealing to the audience. The audience wanted to consume that movie beforehand. But the movie industry wanted to regulate everything. It just shows that sometimes business model has to adapt in a way that does not think about your audience. And what they want and keeping it from them can be detrimental in the long term. Even though it's profitable for the business in the shorter term.

I think this is going to be one of the few times where I disagree with Joanna on this one. I think there's a famous concept that scarcity leads to people wanting things more. I do think in the movies where it's seen as a luxury thing and night out. It's a Glamorous Night at the movies and that's promoted with red carpet, premieres and these sort of things. Where the celebrities get to go in before you do, even before the cinematic they get to go first. Those sort of concepts lead to it as being glamorous or a big night out. An acceptable way to spend your Friday or Saturday evening, whether like a date night or whatever with a family, etc. But I think it's that scarcity leads to the hot new movie to see. The new Tom Cruise movie or whatever, again I'm showing my age about the early 90s. I do think that glamour about the movies even led to the next when it went down to the video store. You went to the blockbuster. Say you went in on a Friday night and you're hoping to get the copy of the limited number of VHS copies of that hot new movie. And even then people were still clamouring over to get those movies. Personally, I think in this aspect is to create a sense of anticipation on scarcity leads people to almost want to watch it more.

I'm not disagreeing with you. I just think in terms of scarcity what we're talking about is segmentation here of experience. Through having that older inflexible model what they found is some of their audience wanted to consume that movie. And they didn't want all the glamour glitz and sort of red velvet rope experience. They just wanted almost like a Netflix experience or lazy experience or just wanted to watch it, and then move on. There was nothing particularly special for them they just wanted to consume it. So even with the experience what I'm trying to say is that the older model did appeal to people that were interested in the movies that couldn't wait to see it. I loved the anticipation that in itself is a segmentation of a particular customer group. But there's another type of group that just wanted to consume. And disregarded any of the Hollywood glitz and glamour that you were talking about. In a way, they're sort of the more in my mind Netflix people. They would like to love movies and consume them. But they wouldn't bother going to the cinema. Don't like that sort of Hollywood experience and can do without it. For that reason, we have got all these different types of businesses.

I think that's true. I think you could almost argue. Does life follow art? or does art follow life? Certainly, at the moment we're in more of a kind of disposable culture and the movies we watch people surf on Netflix to find the one to watch. They don't commit a large dollar amount to it and watch the movie. I don't think they were excited about it in advance. They weren't seeking out that movie. So my argument is that the movie industry has almost worked itself into a scenario where a willingness to pay is very different difficult for the companies to eke out or to maximise willingness to pay. It's very difficult for them to delay and put the barriers around the different methods of showing the movie. The runs in cinemas now are shorter than they used to be in the older days as there's a rush to move things as digital will become available quicker and quicker. And obviously, the world is now a global market. And so even keeping slowly releases from one tab to another has decreased which used to be very common. So, my personal view is it has flattened the market, and it probably has flattened the market and are willing to pay is quite low. With a willingness to pay to being low, does it feedback and through the feedback, mechanism into to be honest, not very good movies. That's again something this podcast doesn't cover but as a movie fan myself, I would argue it does. And with that lack of willingness to pay from consumers the quality of movies has become much blander and popcorn-esque.

That's why Netflix is becoming more popular when you think about what it offers. The type of films, general interest, documentary as a whole but it's all very middle of the road sort of stuff we're not appealing to the extremes anymore. Maybe cinema 20 years ago, as Aidan was saying that does more highbrow even though it was still appealing to everyman. But over time the fact is people are just interested in consuming films. It's more disposable it's very much like I can see trends with films and diet and how eating it's all coming to that very sort of almost lowest common denominator. And we are missing out on sort of introductions to better thoughts better idea as a result.

I think that's it for me. I think we're going to do a couple more podcasts around the entertainment industry and movie industry. So I think we'll leave some of the other concepts to them.

In this episode of Pricing College - we talk about what to do when someone just has to have a discount.

We love not discounting - but sometimes you have to recognise that their are dedicates hagglers out there - the type who enjoys getting 1% off on shopping at the local market.

You know the type!

In today's episode we want to cover, what do you do when you're selling to somebody, a person who just insists on getting a discount? Who will not sign on the dotted line if they are not given a discount or less price?

According to Cialdini in the psychology of selling, he says that people feel better when they get some kind of compensation discount after a negotiation. So there's rule of thumb he's saying whenever anyone does price negotiation at the back of their mind. What's going to make them feel better physiologically, emotionally, and intellectually is if the seller offers them a discount. It doesn't have to be a huge discount. But people want to feel that they've got something in this negotiation that they haven't been had in some way. So that's an important concept. Now, the question we want to pose is, should we factor that into the price? And how can we do that?

I've enrolled in the past, I've met people, and it's just who they are, it's their self-identity. In the same way, there are people who self identify as salespeople. And there are people who self identify as bargain hunters and negotiators. They will haggle for anything. They'll go to the local market and they'll haggle over 1 or 2 cents. It's almost the fun for them is in the haggling. To be honest, at pricing college were also the view that you should try not to give discounts. And shouldn't discount a list price. Because really what you're doing is you're destroying your margin. But there has to be a time when you recognise certain people will not buy from you if they won't get that discount. And I suppose in this context really what you want to do is segment the market. Don't give that discount to everybody. Make a decision that if you're willing to offer a slight discount or whatever discount is required. I'd also say in this context, a small discount can often be as good as a big discount to people. It's just the fact that they get a discount is all that matters. Because often what they're seeking is not the monetary value but just the psychological win. They can put that flag up and say they achieve victory in this negotiation. So, how do you set about segmenting that customer from 99% of all the people who don't? And, how much discount to give?

Because often the prices are optimising the price and looking at segmentation willingness to pay. But often the discount mechanisms and bonds are a little bit like an afterthought. Almost based on just literally volume and quantity. It's not based on that emotional response. People have to price negotiation and that rule needs some kind of compensation and discount like they're driven to do it. There's like psychological or biological dopamine hit when they get that discount. And as Aidan says, it doesn't have to be big. So, from a pricing perspective, we spend a lot of time looking at that price point but not factoring in that need for a discount. And often just putting a sort of a very crude three-level discount. Often starting from that 10% and then quite harsh restrictions thereafter. What we find even is that salespeople on the ground who've sold to customers know that people ask for discounts quite a lot. And maybe they don't know why that person psychologically wants that discount but they know that they do it on a behavioural level. So they instantly, rather than just give like 5% off they go to the max and they give that 10% off. That's not a good practice. So I think what I'm trying to say here is that there has to be some greater awareness on the need for a discount on the consumer and customer perspective because it happens in B2B as well. People just need that discount and also what we're going to do is prices about it, and the guidance and the floors and fences around those discounts. So sales know what they're going to do in response.

Traditionally, this is one of the big issues or cruxes or problems between the pricing departments and sales departments. The sales departments are having that conversation, they're speaking to the purchaser or the customer. It could be an individual, it could be a company and it could be a procurement person. And oftentimes pricing is sitting behind a desk or in head office or somewhere else. There's that view that maybe pricing doesn't get that human interaction. There could be a personal relationship over years between the seller and the buyer. It could be a long term account management aspect. If you're a B2B salesperson or any salesperson and you're driving out to their location if this person's haggler they're going to want to haggle all day. Let's be simple about it. If you're selling a car and you know the person you're going to sell it to want to haggle. If you want to sell a car for 1000 bucks. Maybe it's not silly to quote an initial price above 1000 bucks to give you that haggle room we'll call it. To give the person the price that they are willing to pay. And also the little victory that they want.

I think it's important to factor all of this in the price waterfall. Often you don't see it's just like as a discount. But there's no explanation for it, it's just all promotional discounts whatever. But that extra insight into that price waterfall helped. Because, ultimately, if you don't acknowledge the fact that people want a discount. It's going to come out of your margin anyway, the pocket price. So, I think it's important to factor in. So textbook wise like I can hear prices saying, never give discounts. If you're going to reduce the price. Let's look at negotiating the value trading, value price and all of that stuff for sure that's textbook. You shouldn't necessarily resort to giving a discount. But have we addressed the real problem or issue here is that people like discounts. Why wouldn't we want to please our customers by providing some kind of discount? If we had more control of our discounts based on more research into how people respond to them. And why they required them. Then, I think we can optimise our discounts and drive more revenue as well.

Here at pricing college and Taylor Wells, we always talk about is not just the product, it's the periphery. It's the other stuff that goes with it like the customer services, the experiences, the shop, the after-sales care. To some extent, the actual selling process is one of those things too. If you're friendly with a salesperson that can be of value to it as well. If you know a person over the years, that'd be an experience. Like a lot of people like going to traditional markets. They're like going for the bows, the colours, the experience, the haggle. That aspect is very different to the modern sanitised supermarket experience. People put a value on different things. What you want to be doing is understanding why and segmenting your market. So that you're only giving discounts to people where it's necessary. And understanding how much of a discount is being given. Have some guidance. Trust your sales team a bit and don't dictate to them what to do. Have that guidance that they know there's a little bit of wiggle room when required but only in those instances. I think, otherwise as long as the discount is not huge. And if it gets you across the line. Ask yourself the question… "are you happy to get that sale in at a slightly lower price?" And if you are then there's no negative from it. The other thing is this applies in any aspect of life. If you are saying no to people, it's a monumental final no. There's no room for negotiation, no wiggle room and if you do that it'll quite often people backs up. It could ruin a relationship slightly. And from trying to argue and maintain that 1% of margin could end up getting no sales at all.

I completely agree. I think you've kept it off well. I think saying no is very final and people remember that "no". They won't remember all the services that you provided before at reasonable prices. Or the discounts you offered in the past, they'll just remember the last thing. That's the way human minds work. They remember the beginning and the end not so much the journey. So yeah, just bear in mind the realities of how people like to buy. It's not always as sanitised as we liked to think. Applying a lot of logic to pricing is critical. But we've got to address how people respond to price and that's often not always irrational. People do buy emotionally as well as cognitively and both can be easily distorted. But having that more discipline around discounts and more flexibility around your pricing structure. If you know your ranges and you know your price bands you can do more creative discounting without necessarily giving all your offer away for free. So it's a win-win for everyone.

Many companies and people talk about the personalised service that we know our customers. If you know them, show them that you know it and put it into play. At the end of the day, it's an asset to you. This should not be a downside for you or negative this should be an asset. If you have customers you know well, who you understand. You're much more likely to sell to them on an ongoing basis. The lifetime value of that customer is likely much higher. And you might even enjoy your job a bit more. Let machines do what machines do well, let people do what people do well. Empower your sales staff with good guidance and good structures. So that they know they're doing the right thing and they know where they can go and what they can do.

In this episode of Pricing College - we ask are there new magic numbers out there and if so - what are they?

Are people so used to 99c that it has stopped working?

Is 37 the new 99? So many questions!

In today's episode, we want to ask, is the price of 99 cents and magic pricing is that all hot? Has it expired? Has as it passed? Has it been used by date? Is the world of pricing when you're doing a pricing optimisation, does it simply mean adding 99 cents down the list of all your SKUs? Or, Is that how we move beyond that?

To a large extent, people are much more aware of magic numbers, especially that odd 99. It's appealing to our cognition. It is trying to bypass our human brains to trick us in some way to think that numbers are smaller. But over time, when you're more familiar with these sorts of techniques, your brain looks out for them. And when it becomes a matter for your conscious brain you alert your logical brain. Then you're more likely to go off, this is a trick, and not buy. I would say Aidan yeah, I think magic numbers could have adverse effects now on some products. And people's propensity to pay for something.

I'll be honest, I don't think I see 99 cents in many places, maybe I'm just not looking for it. When you go into a shop or cafe you ask for coffee, very rarely will someone say… " oh that's 299". I think that's has expired to some extent. I think it's almost got a bad reputation. It might almost twig people that think they've been to some extent manipulated. Joanna you mentioned previously, there are other numbers. Maybe more modern magic numbers that are not on everyone's radar at the moment still will be used in the pricing profession, but for the same purpose.

I think even prices then have got probably feedback by monitoring the data, that price and volume elasticity is that these magic numbers, 99 cents isn't working as well as it used to. What you may see and what's more common nowadays is to add a new magic number at the end of 37. Or, even like 39 happens to be prime numbers. Prime numbers are in trick the brain to some degree. The principle behind that at 37 is very similar to the 99 principles. It's assuming that the brain is looking from right to left. It's only looking at the left number quickly to get a sense of anchoring of the magnitude of the size. And then quickly attention is drawn to the right and the brain likes to sit there longer. That 37 I supposed to have the same impact on bypassing our cognition as 99. As I said before, isn't going to have the same impacts were used to it. What they're doing in pricing then, by using 37 is mixing it up so it has the same impact and bypassing our cognition.

Personally, for me, I think 37 is almost like the most random number you can think of. It's almost one of those things if you ask a child to think of a number between 1 and 50 and will pick 37. It's seemingly random ones. What it also seems to do for me is that if you said a 4.99 or 5.99 to somebody is very clear to them that that is not a number calculated based on a cost-plus mechanism. And sometimes a number like 37 or a very random number like 4.57 or 4.42. It can almost insinuate that there's been a very complex cost-plus mechanism going into the calculation of the price. It almost tricks the customer into thinking that maybe this is a highly complex calculation that went into this price. And they're not trying to manipulate me. They're not trying to maximise revenue from me. So it's almost a reverse psychological trick, at least sometimes that's what I think.

I think this is a good point you've raised on the topic of an informed buyer that knows somewhat about pricing and psychological pricing. The comparison with that which was in terms of the original psychological research is the uninformed consumer who buys based on their predetermined, pre-wiring their brain and how it's all set up. Because originally psychological pricing was invented to almost compliment the blind spots that we have. And sort of bypass cognition or effective emotional responses or accentuate. That's how psychological pricing influences us. So yes, we can be influenced by our logical brain if the buyer is into cost-plus. And thinks that's a fair way to go about it. Then having that dissonant 37 at the end of the price point will be useful to bypass their logic-brain. Or, make them think more logically and think it's right. Unlike the consumer who would be thinking or won't be thinking that at all because they're uninformed. But just be thinking that by putting that 37 at the end, the price seems smaller and I like that.

Another thing I often think about is some of these prices 95, 98, and 99. If you're increasing prices it gives you a real nice little opportunity just to round them up. If you're at 19.98 round them up to 90 or to $1 I don't think anyone's going to notice. I don't think any customer was going to complain too much. We often talk about them psychologically rounding down to some extent maybe they've already psychologically rounded up. But if you increase prices from 98 up to $1 flat, that's a small 2% increase, isn't it? My mathematics is poor but it's just over a 2% increase. And so 2% increases often quite a lot if that's what you're aiming for in the price rise. There are upsides to everything as well and when people round it down potentially in their mind somewhere, they've also rounded it up.

If they've rounded it up just be careful, this is an individual thing called psychological reference price. Every buyer has that in their mind when they're looking at buying a price in mind that they're willing to pay. Above that, they're unlikely to pay but below that, they start thinking the price is too cheap. So, if you round it up you might be going into the buyers over that threshold and then they'll just not buy. This is important, even before we get into psychological pricing, why do you need to look at your price ranges? your price bandwidth? This is what prices spend a lot of their time doing because they optimise prices based on ranges. The psychological pricing techniques are the rounding of the end, it's the last consideration of the price point at the end of a process. It's not the beginning of the process so just bear that in mind. When you do all of these things just remember, what products you're trying to sell and use different tactics to suit. Odd works well for so everyday products groceries such like. And that whole numbers sort of worked well for luxury pricing shoes, handbags, jewellery, for instance. But just be mindful of what you're trying to do and the techniques that you should use at certain points in time.

In this episode of Pricing College - we look at the concept of magic numbers and using 99c and even options like 95c or 90c.

Does it really help you sell more than quoting full dollar pricing.

Is the market moving beyond this type of pricing nowadays?

In today's episode, we're going to cover that most fundamental or maybe most famous pricing technique or strategy. The magic number such as 99 cents 90 cents or something like that.

For pricers out there this is an important topic for everyone, not just consumers. Because often you do a lot of work on figuring out price ranges, price bandwidths. Then often, the afterthought of, what is the actual price going to be? What should it look like is an afterthought and often rushed through. So, we think it's an important concept for both consumers and pricing professionals.

That's right. This may be old hot for some of the more expert listeners. But I think for the more general listener, it could be quite interesting. There is a lot of literature probably more literature than any other area in pricing on those 99 cents and magic numbers, do they actually work? We've gone through some of the literature and like anything in academics, there's pros and cons. Fundamentally, what we're talking about is charging either $1 for a product or 99 cents for a product. There are many reasons why this myth has grown. why this habit may have appeared to begin with? Some of what we've read is that initially, it started to stop theft in shops. So when you went in to buy a product for $1 the shopkeeper or the shop attendee could just take $1 and pocket it themselves. If it was 99 cents they have to open the till give you a change or a cent. And it was a much more safe mechanism for the shop. There was a lot more research about whether or not there are psychological aspects for the number.

In terms of the psychological aspects that mean, how do our brains think when we look at numbers? How do we process those numbers? What do we like? And, what our brain doesn't like? And apparently, we like the 99 cents. Why? Well, I think it's because according to research when you put 99 cents there it increases demand. People buy more. But it also has the effect of reducing the size of the number of prices. So, it makes the price seem cheaper and the brain processes the 99 cents quicker. It also reduces rounds down the number at the left, it rounds it down. So, it could be rounded down by 10, it could round it down by $1. But whatever, it reduces the price, even though the price is roughly the same. So for instance, $4.99, the brain would reduce it down to say $4. But if you have it at a price point at $5 the brain goes… "Oh, that's expensive". There's a psychological threshold between the two.

We still see this approach being used, even though the original mechanical version of the sense, the change and all that has expired. But we still see it in iTunes where you can buy songs for 99cents. And Spotify is coming to her back but you can still buy songs for 99 cents. You can see it on Kindle for their specials with 99 cents. So it still has been very prominently used by major tech companies where there's no mechanical reason for it. So, it must be the psychological aspects. I think some of the best literature in the market is from the University of Chicago at MIT, over a period of years, which did look into it. And did show statistical evidence that people did view the putting of 9 at the end could boost sales. As Joanna said, it could make people see the prices lower. There's even some evidence that putting the price of 39 could even sell more than something at 34 because even the number 9 insinuated so more psychologically that it was better valued.

In terms of the price of 4.99, I think it's important to say there's alternative research that shows. Yes, you can have 99 on the right but that's not enough. You've got to think about the digits on the left because the digits on the left can potentially anchor the eye and the customer to buy more or less. It's important to have your whole price position correctly. Especially, when you're comparing the retail price with a discount price. Like for instance, don't just have like 80.49, and then 80.29 it's better to have, 79.99 versus 80 that's what the brain likes. It likes odd and even different so it can contrast. I think there's an important thing here, odds and evens. The brain thinks of odds is sort of in some way it reduces the price. It thinks of it as bit as cheaper. Whereas the whole number, it thinks of it as more expensive. So what you'll find is that sort of more luxury products will have that whole number, it won't round down, it won't go down to like 99 because that insinuates cheap, it insinuates a sale or has been prior sales on the price point. There's some kind of gating process here when you have a whole number that they don't want to be considered as cheap. So they keep at that sort of rounded whole number and that's important for the brain. As a consumer, you think, Okay, this is something good versus something cheap and this is all called price signalling.

I think that is clear. A lot of the academic evidence does suggest that when people see anything within 99, or 98 it insinuates it's has been reduced. There's also evidence as some of this started in American department stores, before pre-World War II. When full price items were sold at $1, a flat dollar, or $5 and then discounted were sold at 98 cents almost as a ticketing system to indicate to the shopkeeper that was discounted. There is academic evidence that people see 99 cents as a discounted price, then psychologically take away that luxury aspect. The other thing I always think is a lot of times when you're shopping specifically for non-essential items you try to justify to yourself that you're getting a better deal. If you weren't supposed to buy something and someone ask how much did cost, rather than saying $5 you might have said 4 if it was 4.99.

7:05 In just little techniques like the size of the actual price, research shows that if it's an expensive price, make the number smaller. If you're discounting off the retail price, make the discount bigger, so you're drawing attention to the discount. Other people argue the reverse. They say if you want to show the extent of the discount the value that somebody is getting from that discount what you should do is increase the size of the original price, and make the actual discounted price smaller. It depends, there's research for both. But the overall size of the price and what you're trying to do is very important. And this comes down to sales and pricing execution. For instance, when you see one of those sale boards put out on the shop front with 50% off. Be very clear with the sizing of that 50% off don't have contrary sort of double offers on one board like and make sure that your call to action is very clear and concise. No longer than seven words. Again research shows that consumers will ignore a long call to action. And will only take action when the action is clear and concise and they know what they need to do. Makes sure that everything on that sale board is in line with the psychological research on pricing magic numbers. And literally, this all comes down to human processing. How do we think about numbers? What do we remember? And, what takes our attention?

In this episode of Pricing College we look at the importance of branding for retail products - and we look at Coca Cola.

Everyone in the world knows Coca Cola and sees it everywhere we go. Does the huge spend on branding produce a customer view on the brand as a premium product?

We argue that the branding positions it strongly as a middle and mass market product.

As we say in the world of podcasting and busses you wait for one bus on three come at once. So today we're doing a third in a series of articles or podcasts about Coca Cola.

Right, we've been discussing coke quite a bit. We're saying like everybody knows coke. We all know the brand. We all know the colour even we don't say Coca Cola we say coke. It got us thinking about the branding behind Coke, its powerful branding and its works. So today we just want to discuss the purpose of branding, how it's working so well for Coke? And potentially, does that brand power give them more pricing power too?

I think branding is one of those things that a lot of marketers and business people don't get. In many instances people will say, small companies cannot focus on branding. Branding is where you have Megabox. You can invest hugely and hit all platforms like TV, radio, billboards, internet, whatever else is new nowadays. With Coke, they are spending huge amounts of money globally and in any geography to get it across in your mind and to imprint in your mind what coca-cola is. One thing about their ads, they never talk about promotions in their ads on television. They never talk about pricing. They never compare their prices to somebody else's. They're selling the lifestyle. They're selling the experience. They're selling the refreshment, the fun, and all those good things. And of course, they've also got niches as well with their branding such as Christmas. There's that story whether it's true or not that Santa Claus wears red and white because of Coca Cola ads. When you think of branding, you think of coke.

Their branding comes out of what they call their trade spend that sort of like a 50/50 split between advertising, pricing, promotions, discounting, and price positioning. That 50% of trade spend on marketing and branding, obviously has been doing a lot. As Aidan says they keep the two very separate. One, I think the branding is there to set the brand positioning in the market, as the number one premium player in coke. That's been a repeated message with Coca Cola over many years that they've got the expertise. They're number one. And, they're the go-to top of mind choice for any consumer. That's what they try to push with their branding.

I think to some extent it's quite old fashioned nearly in all segments from toothpaste to household cleaners to washing-up liquids, and all those sorts of things. Even 10 or 15 years ago there was the market leader that heavily promoted brand whether by Reckitt Benckiser. Or, these sort of people or we would push with a lot of advertising spend. Many of these have been undermined to some extent by discount supermarket chains and your brand competitors. Coca Cola and the world of soft drinks is one of the stranger ones whereby the traditional I suppose the king of that market still is the king. That's what we want to discuss today, why would that be? Why would it be that when I go to a cafe or something I generally don't ask for a cola, you ask for a coke, don't you? I know that's also in our markets such as VHS was before it became extinct. And also Hoover is still a very common word, even though probably people who don't buy by Hoover when they're buying vacuum cleaners. It can be very prominent in other areas but coke seems to be the greatest example of it.

I think it comes down to that repeated messaging over years. That they're the number one premium and that they're the go-to sort of choice for a drink. That gets into the heads of consumers. But at the same time over the past decade or so, has that brand message been diluted to some degree? Potentially it has. Yes, it's still strong we'll still know Coke, but we may go to other types of drinks when we go to the café. We might not just order a Coke. We might choose a smoothie now when 10 years ago would have been Coke or Pepsi the whole bit. Now people's tastes have changed and I think that's changed their brand messaging too. Because before, especially 80s and 90s it was very sort of companies centric. It was all about them. It was all about how great coke was and we had to fit in with the coke lifestyle and ecosystem as consumers. But now I think things have changed. The tables are turned somewhat. Now it's the consumers who have the front foot and coke is always catching up with that. Yes, we would still go to coke and think of it as a premium drink, but now there are other alternatives. So that's an interesting sort of dynamic to this brand positioning and brand power.

I personally think of the coke branding, it protects them on the downside. I think obviously there are alternative drinks. Let's give an example if you're going to somebody's house for dinner or even to a cafe or restaurant when you ask for some food and you ask for Coke or a Cola. If you see them serving their own brand of Cola, which from an own brand, logo and label. Potentially, you wouldn't know the difference if you hadn't seen that logo. Some people would argue differently but we don't know if you would or not depending on how much you like your coke. What I think would happen is if you saw them and you say… " oh they're cutting corners, they're saving a few cents here and there on that drink". Which is in many regards a nondescript drink. What are they doing to the other? to the salad or the meat? What were the cutting corners elsewhere? It almost insinuates that they're just cutting or shaving making those little services here and there. That potentially you'll see down the line. To serve you a more premium soft drink, batch made soft drinks etc, that question doesn't arise but Coke is such a generic product. It protects them and the downside where I think a lot of the competition is certainly in supermarkets. We've seen over the years many alternatives attempt to combat the coke field. Virgin coke and Britain. And there have been more own brands that have not gained acceptance to the point where they're acceptable to serve them in public or certainly at a dinner party.

I agree. I think Coke still dominates within the coke category. However, they are the go-to choice whether it's because of prestige, status, habit, whatever is the key, consumer driver here. But with changes in diet. I do believe that the bigger issue is with healthier alternatives, that's the bigger competition. I don't think the brand messaging around that is clear and as a result, coke is acquiring a lot of healthier brands, waters, fruit drinks, the whole a lot. But the brand positioning around that is less clear than the brand positioning around, Coca Cola. As a consumer, you don't think of the alternatives that they've just acquired, the healthier alternatives you still think of coke. Which demonstrates or indicates that the brand positioning is still confused across their portfolio.

I think we often think branding is promoting the premier or premium sort of concept. I think in this instance now that as time moves on to 2020. I almost think that the branding is to keep stability in that mid-market share to protect it on the downside. To some extent, leave the top end of the market open to batch drinks and very niche sort of product or service. Where people are prepared to pay more to look cool or to look like they're on the cutting edge of stuff with people. Which coke will never make you look at the cutting edge or make you look unusual. So, to some extent, it's a protection from society shooting you down. If you seem to be cutting corners and being cheap with your guests. It's a strange model that would apply to any new company coming up. Probably not, but they have that legacy business as a historical company such a strong brand. And then, the money is there to protect it and keep it in that mass-market area

I think, in the 70s, 80s and 90s, the brand positioning around Coke was really strong people used to drink Coke, much more than they do today. It was competing with one or two alternatives based on superiority, expertise, and brand positioning and it did a really good job. However, the message now is still pretty much the same as it was then. But now the market is saturated with new entrants. It's more fragmented that people want different things and it's much more consumer-led. So I think Aidan said about the prestige value of coke at a party. I think, again, even that is not as much as it would have been. So, probably if you had a new entrant in Coca Cola and it had a new spin on it which was healthy. It was kid-friendly. It was good or kinder for kids' teeth they weren't going to ruin their enamel etc, Moms would be okay with that. They'd be like, what is that new brand? They wouldn't be thinking you didn't give my kids a Coke or drink. I think they'd be like, actually, it's better for the kid thanks for introducing this new brand to me. I think even in terms of status, that's changed too.

I think it is. Kids birthday parties can be a minefield if you think dinner party guests can be problems. Yeah, parents of kids at a birthday party can be even pickier than at a five-star restaurant.

Even so that if you have Coke at the party. Some people will be like… " Oh, she's got coke at a kids party is not that's not very health-conscious".

I think it highlights how branding and the value of a product are determined very much by the time, the place, the niche and all the details you have to dig into it the value drivers of that product. That can be value in one instance, could be negative in the other. Yeah, personally think I've covered coke as much as I want to cover it this week so I'm done.

In this episode of Pricing College - we discuss why Coca Cola did not increase their pricing for almost 75 years.

This goes against the common perception of Coke as a business with great pricing power - that can command higher prices.

We dig into the reasons behind this surprising fact.

In the last podcast, we discussed an interesting case study with Coke and we just wanted to extend that a case study with Coca Cola. Because it's a company that when you think about, it's a huge global brand, it's got amazing pricing power, it shifted so much volume at different price points. But, did you know that in the early days they found it incredibly difficult to increase the price? In fact, they didn't increase the price of coke for about 75 years. So we just wanted to explain some of the challenges they had. We think it's closely aligned with a lot of businesses because people commonly say… " it's difficult to increase prices". Now we just wanted to talk through this Coca Cola case study to show you some of their challenges and how they got through those pricing issues.

I suppose when we talked about a company that doesn't increase prices at all for 75 years. Maybe we can say they didn't get through those pricing challenges. I suppose it's very interesting considering that Warren Buffett, the famous Ambassador always talks about Coca Cola and their pricing power and their pricing moat. But I think from the period of like 1875 to roughly 1950 in the United States, where Coca Cola was pretty much only sold in the United States. And it was growing into the major brand we know today. The price of a serving of Coca Cola was stuck at a nickel which is to my understandings I'm not American roughly is five cents at peace. So at that period of time, you would buy a serving of Coca Cola either from a vending machine. Like a primitive version of what we know today. Or, in a fountain where you fill up a cup within a set amount, and five cents or nickel was the flat price.

In the early days, they're quite conscious of how people consumed that product. They weren't quite sure whether people would take to drinking coke in a bottle though they're used to drinking Coke from a fountain taking as much as they wanted. They weren't sure as well once consumers got used to drinking Coke from a bottle whether they'd be interested in paying more just for having a coke in a bottle. There are lots of issues about how people consumed coke, in what quantity. And still, these very issues are top of mind for Coke and Pepsi and like, how people consume coke, drinks and snacks? what do they eat and drink with coke? These are all very key issues when in regards to bundling, price tiers and the whole lot.

There's a lot of marketing around. And there are a number of reasons why the price didn't change from nickel over that incredibly long period of time. I think we need to point out that in that period in American history inflation was much lower than what it has been in recent years from the 70s. So, price stability was more possible to maintain. There are legal issues around the bottling contract and things like that which we're not covered in this podcast. We'll get more into the mechanics of it. But one of the big things, it was the marketing, of course, promoting your Coke was a nickel. And people use to that, whether you were a kid or you're family buying a drink. When we get into the actual vending machines, we have to bear in mind that at this point in time vending machines were not able to give change. You had to submit the exact amount of coin required to purchase the drink, and that was a nickel. Obviously, if the technology at that time is what is as it is. Coke doesn't have the ability to create a new modern electronic technology that doesn't come on board for you know another 20 or 30 years. Fundamentally, they cannot increase prices unless they double. Because the coins are nickel. The next size up is another nickel. If you want to push to a price rise is you have to double the price of the can.

This is something that companies are experiencing now with vending machines. A lot of people don't carry coins at all and cash around with them. And sales at vending machines have gone down as a consequence. Now what you're seeing is a lot more vending machines having those card swiping devices pushed on them. Just so it's easier for people to buy. Have prices gone up with that? I don't know over time we'll see probably marginally is a purchase cost of improving the vending machines. Similar issues today as coke experience with a vending machine, and changing the currency people were used to paying for it with just a nickel. Coke wasn't sure whether they should change. Because they thought consumers were sensitive to those sorts of things and would stop buying.

I supposed once time started passing and the price comes noticeably at the price that they're selling at inflation. Adjusted terms was becoming quite different. Coca Cola did attempt a couple of methods to try and increase prices, one way or another. And I suppose bear this in mind next time you're a pricing management planning about the difficulty of pushing through a price rise. Just be thankful you're not Coca Cola in the 1940s. The first thing they did was they considered putting in blank or empty bottles in the machine. So every ninth time you bought a Coke, they will come out empty. As you can understand or imagine this wasn't that popular with consumers, especially with kids. When you go to buy a drink and every once in a while you're playing a reverse roulette system where you lose, so that was phased out. And then the next one was they even tried to lobby the US Treasury in Washington to mint new coins. They wanted them to mint, either a six cents or a seven cent 50 coin. The lobbying part of Coca-cola is very powerful. I'm not sure if it was as powerful back then as it would be today, but the Treasury did say no to that. But that was the extent that they were trying to push through this price raising. This thing only adjusted itself when in the 1950s when technology came on board and enabled them to give change.

I suppose from then they're able to sort of track how people bought from vending machines different areas, different regions. Whether they should discontinue the fountain. And just put more money into bottling and the distributors' system. Then from there, you see what we've got today. The ability to increase prices based on location, geography, and product type. There aren't as many constraints as they were after all of those different sorts of fiscal, logistical and operational issues were removed from the equation. That is so interesting that they thought, after thinking about the consumer so much at the beginning. And how they consumed their product that they would take away one in nine bottles. That would, in turn, affect your brand reputation and price positioning in the market. People would inevitably not trust a company that did that. So, no wonder they stopped that strategy, not a good one.

I think this is a real example of the peripheral values of products can be very different to the drink itself. And also the technology and the delivery of a product to get it into your hand can influence things. In this example, we've moved from the mechanical era to more of the information technology era. One of the more interesting things also is, I was watching a video recently about Coca Cola development plans and how they're moving forward. This was before the entire Coronavirus thing and that may influence stuff. But they're big trends we're moving back to fountains. You'll see these on sort of cruise ships again before Corona. And also in theme parks where you get a cup and then you can fill it with the drink you want. You're not buying a can or a bottle but the fountain is filling your drinks. With that, there were a lot more options for flavours, mixing flavours varieties, etc. So you're having non-uniform products. It was making much more tailored products to your individual needs. This is obviously something that people back in the 1940s and I couldn't even imagine.

Interesting that they're going back to fountains when we discussed the issue of shrink inflation. And diet becoming an issue for consumers today and a key factor in purchase decisions. The fountain concept is pushing bigger sizes. And drinking more in volume in a world that is going to smaller sizes and thinking about health well being.

That's it for me. It is getting warm so I'm pretty sure I'll be consuming more Coca Cola in the next few days. And yeah, I've made sure I've got the change in my pocket or the card. Exactly.

In this episode of Pricing College - we discuss the suggestion that Coca Cola considered altering prices depending on the temperature.

We discuss whether this approach would work for a business and what things should be considered.

We also ask would there be negatives to business reputation.

Today we're gonna talk about quite an unusual case study involving Coca Cola. And apparent allegations of Coca Cola increasing prices when the weather gets hot.

So at the moment today in Sydney is the first day of spring 2020. We're very thankful that the weather finally heating up. But there is, whether it's an urban myth or a story that there's not much evidence of both. But in the late 1980s, Coca Cola attempted to increase pricing. Or, at least test the increase in pricing for their products based on the temperature on that day. It's a form of dynamic pricing based on ambient temperature. I supposed in this podcast, we want to discuss, could that have worked? Wouldn't work? And, what should have been considered?

Let's think about it. Would you pay more for cans of Coke when it gets hot? Potentially, let's think about it in terms of where you are. For instance, are you in the theme park? Are you with your kids? Are they demanding some Coca Cola? Maybe those are the instances where you go… "you know what, I would pay a bit more for an ice-cold can of Coke. It'll keep everyone happy, we're thirsty it gets the job done".

I suppose in practical terms, obviously, there's the operational aspect of this. And it really could only have worked in a theme park or a vending machine system outside. The machine must have had a temperature gauge. And also given Coca Cola corporation itself complete control over the pricing. The ability to set the pricing in convenience stores and supermarkets couldn't have worked. So, on paper, it does seem to be sensible. When you think about it, at least a first Inspection when the temperature increases, you're walking around a lot. You're probably thinking… " I'm getting dehydrated, I could do with a nice refreshing soft drink". That is the initial impression. There's a lot more complexity to it, that we really would need to dig through.

So, evidence, price elasticity modelling and connecting that data on price and volume increases based on the weather would be quite difficult to track and monitor. So they'd be that sort of data-driven elasticity modelling occurring. But they'd also need information and consumer surveys directly from people at that time. And connecting the two would be quite difficult. And getting that sort of price point based on that evidence. I'm not sure how possible that would be.

My personal view is that if they did do this exam or this testing, it didn't work. Because obviously, we don't see this in operation, currently, in 2020. Almost 30 years after this was supposed to have been experimented on. The only thing I would say is potentially when we think, yes, we will drink more when it's a hot day versus a cooler day. But the reality of it is you don't go to Disney World in the middle of a Siberian winter. You go to Disney World in Florida or I can't remember which is Disney World and which is Disneyland. But you go to these locations when it's nice weather. It's sunny and it's quite warm. So you're already there on a good weather day. So the temperature differentiator will be small. I can potentially believe that you will consume more soft drinks. And you're getting more dehydrated quickly when there's a temperature difference of 20 degrees. When there's a temperature difference of 3 degrees or 4 degrees, etc. It probably isn't statistically valid that you would drink that much more soft drinks. And so that aspect of driving demand for the soft drinks I think is quite limited. The other thing I say is, let's be honest, the average person visiting Disneyland does not have to be encouraged to consume. They're generally quite famous for consuming a lot of soft drinks and fast food and those sort of things. I don't think there's ever been a major problem at the theme parks, and not getting people to eat enough or drink enough sugary products.

At theme parks, I think there's like a price premium added just as you go and walk through the theme park gates. And you know that you're gonna pay a price premium for every single thing that you buy up throughout the day. People are sort of almost not willing to pay those prices but they acknowledge that will be the case. And then adding yet another premium on that just because it's hot. Maybe they did get some elasticity data from that and just saw the volume drop off. And that's why they don't do it anymore, who knows? There is a certain point that you can't go over and maybe the people responded badly to that. But at the same time, as Aidan said, I'm not sure that is something that probably worked well for Coke can also. Let's think about it, in the theme parks, they tend to only sponsor maybe one or two products. For instance, one theme park would go for Pepsi, the other would go for Coke. So putting a premium on that when there's no alternative may not be a good idea either.

I personally don't think you're going to be swapping between different brands like increasing the price. I don't think that the elasticity of demand would be hugely different. Or, I don't think there will be a great slope based on temperature. And certainly when it's a certain bandwidth. I personally think people will consume roughly the same amount of beverages. And I think if you try to increase that price too much, you will probably decrease the demand for the drinks. People might go and just get one instead of two may share one with the kids, etc. So my personal view is that it's probably isn't something that would have worked. On initial inspection, it sounds good. But I think what you're doing almost you're taxing people for a driver of why you're purchasing the drink. It's been sold as a refreshing product when you're thirsty. It's almost like you're penalising people for the value add. I would almost say it is a marketing negative. And certainly, people became aware of it. I think there could be bad marketing and reputational impacts from that. One of my favourite aspects of Coca Cola is they're often credited with being these marketing geniuses. And for anyone interested in that there's a famous conspiracy theory about the New Coke conspiracy. We'll not be touching that, this podcast is not a conspiracy theory podcast. But it's a very interesting one from a marketing perspective. And we'd be interested to know if people believe it's true or not. So that's all for me today on the coke and temperatures.