"Blue Stove" Pricing

Bob's Note: My wife posted a great piece on pricing today on her blog - and I thought it was so good that I've re-printed it here in it's entirety. For those of you who don't know her - Brenda has an MBA and has been doing marketing and consulting for years. This article was originally posted on Marketing FlyTraps just this morning:

How do you price things -- and keep your profit margins as plump as possible in a recession? I like to call my concept "Blue Stove" pricing.

Allow me to explain. Nordstorms - that upper crust store, aimed at selling shoes (and other stuff) to women, is smart enough to know that they need to feed us women while we shop. In the past, they have offered an excellent cafe or bistro within their stores - keeping us with in the store to eat, so we can shop again. It was convenient, had excellent food -- and while not as cheap as going outside the store -- it wasn't Soooo expensive that you were willing to drive somewhere else.

But now comes ... *dum - dum - dum* (cue the recession...) and women are watching their pennies (we want money to spend on shoes...not food).

So recently, Nordstroms introduced a "pairing" restaurant. Its called "Blue Stove". The restaurant literally has a blue stove. The "pairing" menu means they offer "little plates" of delicious food -- priced very reasonably (most are about $5* Actually, they are priced at the .95 cent mark -- this is called psychological price breaks...I'll write about that in my next blog...) and are meant to be shared. For example, a little plate of chopped veggie salad. A small platter of chicken wings - seasoned and cooked to perfection. They can be "paired" with a glass of wine - from very reasonable price ($6/glass) to more expensive($20/split of champagne).

So what, you are asking, does this have to do with pricing my software or my consulting services? Well -- in a recession, we ALL become nervous about our income. Our cash in the bank. We want a bargain, and we want to be conservative.

Your customers do too.

RIGHT NOW, you need to re-think your pricing. You need to do the following:

1. Figure out what are the top 3 or 4 things your customers buy the most often.
   
   
2. Assess how can you make the price as small as possible. (Chop out stuff, re-plate your offerings into "Tapas" or small plates!)
   
   
3. Determine how you can you make it appear as "value" oriented as possible.
   
   
4. Figure out what other things can you pair it with (e.g. - have the sales guys suggest the "chef" (the expert) says to get 2 or 3 plates and share, wine, dessert -- all these items also re-priced to recession "small bite" pricing...)

Nordstroms NEVER gives the impression that their new Blue Stove restaurant is "cheap" - but they DO reposition themselves (very elegantly, staying within their realm) as giving the customer quality, value, choice -- with the option to spend a "tiny" bit more (on the wine) or a dessert or one extra "small plate".

I bet every lady is spending (almost) the same amount on lunch -- but, boy. Do we feel smug -- having ordered lunch at only $4.95 (well... times 2, plus a small glass of wine, plus a dessert -- that we shared...). Actually, I bet we all spend exactly the same - but we don't feel as jittery about it.

Recession Pricing

Let's face it - times are getting tougher. If we're not in a full-blown recession now - we're on the brink of another nuclear winter - much like the dot com meltdown of 2000.

With credit being tight - and billions in market cap being wiped out by the minute - everyone immediately turns to the place where they perceive they can make the "easiest" cut - their prices. But this is a lazy, knee-jerk reaction at best - and at worst it could kill your business.

A couple of weeks ago Brenda Duncan wrote an interesting article about Pricing In A Recession. She makes my point exactly:

Pricing theory (and in real life!) states that the price of a good or service sends a message to the consumer - about the quality or value or a product. Think about it - do you want to be a “cheap date” or a good date?

Personally, I'd rather be a good date, than a cheap one - and I think my customers would, too (ok, so SOME of them may prefer a cheap date - but that's a subject for another posting). The key to pricing in a recession (or depression - depending on your bullsh*t meter) is the same as it is in good times - those that provide VALUE to the customer will get their business and their dollars. Those that don't, won't.

It's really not rocket science - but it IS a critical issue to every business owner (and consumer) out there. How you handle your pricing and the demonstration of the value that you provide are critical in times like these.

Now is not the time to be shy. If you have success stories (and you should), articles in the press (and you should), customer quotes (and you should) - now is the time to put them front and center in your marketing materials, email signatures and website.

You want to remind people of the value that you're providing - and the fact that your pricing justifies the value you provide. Then you have people who are also verifying that - and you have a much better case when it comes to the "...I love your product (or service) now if we could only do something about the price..." portion of the sales process.

Do yourself and your business a favor - and take a look at your pricing model(s) - and just verify that you're offering the best possible value for the money. If you are - you have a much better chance of survival. If you just keep going on a "business as usual" track - you may not be around to make adjustments later.

Value For Money

Given the... ehem... "interesting developments" in the stock market yesterday - I was thinking about one of my favorite movies "Trading Places" starring Eddie Murphy, Dan Aykroyd and (a very young) Jamie Lee Curtis. If you've never seen this 1983 classic - it's well worth the rental.

I'm not going to totally bore you with the details - but the basic plot is that Dan Aykroyd (a successful commodities broker) is set up by the two elderly owners of the brokerage house to see what happens if he loses all his money. At the same time - they take "common scum" (Eddie Murphy) and teach him to become a successful broker - all for a $1 bet.

At the end - Dan Aykroyd and Eddie Murphy meet each other and figure out that their lives were turned upside down for a bet and they set out a plan for revenge (full plot details here).

When they're trying to figure out how to best "solve" the situation they come upon a universal truth:

Murphy: [watches Louis clean his shotgun] You know, you can't just go around and shoot people in the kneecaps with a double-barreled shotgun 'cause you pissed at 'em.

Aykroyd: Why not?

Murphy: 'Cause it's called assault with a deadly weapon, you get 20 years for that sh*t.

Aykroyd: Listen, do you have any better ideas?

Murphy: Yeah. You know, it occurs to me that the best way you hurt rich people is by turning them into poor people.

So they decide that the best way to get back at them is to wipe them out... by means of insider trading. Oops. Well, the whole insider trading scandals of the late 80's hadn't become public knowledge yet - so it was actually before it's time.

They basically "went short" on FOCJ (Frozen Concentrated Orange Juice) contracts. They started selling future contracts at market opening price ($40) and that lead to a frantic "buy" reaction by the other traders - which drove the price up to $145.

Then the commissioner came on TV to announce that the orange crop estimates would not be affected by the recent storms.

That lead to panic selling. So, the guys started buying shares (to cover the shares they had already sold) as people were unloading them and ever lower ad lower prices - eventually winding up at $26. So, they basically made the spread between what they sold it at ($40-145) and what they paid for it ($130-$26). And, they got rich.

The thing that struck me - was that the markets behave in a "herd" mentality. They just follow the next guy who follows the next guy, and so on. Consumers do the same thing - they hear "doom and gloom" and they respond. And then it just spirals from there.

It can really affect your business ("Gee - really, Bob - thanks for THAT great insight!"). What I mean is that when times are perceived as "tough" - business people start to panic as well. They start cutting prices and giving away services that they never would in a frenzied race to "get the sale" - no matter what.

This just leads them to be more overworked, and now UNDER PAID as well. This benefits no one. Pricing is another thing that goes to hell in a recession. Everyone has a "sale" or "special" or "one-time-only deals."

Instead, business folks should try harder than ever to reach out to both existing customers and new customers and make sure that their product or service is really filling the needs of their customers. I mean, who does that?

No one has called me up and said - "Hey, I know you may be feeling the pinch - how about if we re-structure your payments into a monthly rather than a quarterly basis to help you plan your cash flow better." OR "Are you guys doing OK now that credit is tighter? Is there any way we can help?"

Think about pricing your products and services like a restaurant. Bundle services and software into a "pick 2" menu of stuff they can buy - and then customize to what they want - much like a before dinner drink and a "complimentary" dessert.

It's easy to make sales in an 'up' economy, and if your organization is one that can reach out to customers when times are hard - and keep up and even enhance your value proposition to them (save them time, save them money, help them to get tangible results) - you'll have a customer for life.

iTunes Dynamic Pricing - It's a Good Thing

There's been some speculation about whether or not Apple will make some video content available on iTunes on a dynamic pricing model or not. Personally, I think it's a good idea.

Now I know what you're thinking - "Hey Bob, WTF - doesn't that mean we'll be paying more for all that gooey video goodness?" Yes and no.

Think about it for a second - if everything was $1.99 per download - then the studios would say "it's not enough" and would limit the content. On the flip side, if the studios thought $4.99 was a better price, say, for an episode of The Sopranos then people could vote with their feet and just not buy it. Once the numbers trailed off - the studio could then lower the price back to $2.99 and see what happens.

Sure, there will be some pissed off people who bought the $4.99 episode when the price goes down to $2.99 - but if it was worth $4.99 when you downloaded it - it's probably actually worth $4.99 to you now.

Just have a look at the iPhone. It came out at a higher price, and then they lowered the price (much to the chagrin of those early adopters) to boost demand. And - it WORKED.

So you may not be enough of a fan of a show to fork over $2.99 for an episode, but what if they dropped the price (for a limited time - or for a couple of pilot episodes) to $0.49? Would you be interested then? Maybe.

And that's good for everyone. You get a "deal" on a show that you've never seen - or one that sounds interesting that you would have never really watched - and the studios then have to "earn" your viewership of future episodes by keeping the quality of the show high.

I'll admit - there is still something sort of FUD factor when an episode of 24 goes for $1.99 one day, then $2.14 the next and $1.61 the next. But the point is - as a series becomes more popular, then the studios have a bigger upside and they can test market prices - or aggressively try to stimulate demand for a new series or movie - by playing with the prices.

In the end, that whole market-driven thing is good for everyone.