Warby Parker, Wharton, Pricing and Strategy

Warby Parker, as hipsters and others know, is disrupting the “luxury” eyewear market. While “disruption” is a buzzword indiscriminately applied to many things these days, that’s not the case here. 

Coming into an industry that enjoyed near-monopoly concentration of market power (translation: consumers were paying a lot!), Warby Parker is taking on Luxxotica (proprietary brands here + licensed brands here = pretty much a who’s who in this industry) successfully, but still in a small way. 

A very interesting article from Knowledge@Wharton describes various aspects of the Warby Parker story. Students of business will find it especially appealing, because it touches on various elements of marketing, pricing and strategy.

Two excerpts (if you are in a rush) that I really liked from the piece.

1. Before founding the company

Before co-founding Warby Parker, Blumenthal directed VisionSpring, a group that trains women in developing countries to sell affordable glasses in their communities. The job left an impression. “It helped me recognize the power of a pair of glasses to change someone’s life,” he notes. Research conducted by the University of Michigan demonstrated that users of VisionSpring eyeglasses experienced a 35% increase in productivity and a 20% increase in monthly income, Blumenthal points out. “In international development terms, that is a miracle.”

2. Why $95 and not $45

The decision to price glasses at $95 comes with a back story. Wharton marketing professor Jagmohan Raju recalls that when the founders broached their idea to him, they originally planned to sell their glasses at half that price. “I really liked the idea overall … but after examining their analysis, I told them it’s not going to fly. [At $45 a pair], there’s no money [left over] for brand building; there will be no money in it for you and no money for investors.”

In addition to squeezing the business, a price tag of $45 was “too low” to be seen as credible to customers, according to Raju. “It would have put [Warby Parker] in a category I believed they did not want to be in. There are many companies selling cheap eyeglasses. Anyone can go on the Internet and buy two pairs for $99. But there is a perception among customers that the quality is not as good.”

The goal was to create a new price point that was still reasonable, but not low-end.

David Bell, professor of marketing at Wharton, served as an advisor to the founders in an independent study about pricing models and demand analysis. He recalls conversations around the social-psychological reasons for staying under $100. “There was a bit of discussion about what happens [psychologically to the customer] when you get to three digits,” he says. “[At the same time], $99 gets you a little bit of extra margin — $4 — but it doesn’t feel quite as classy. A price tag of $93 sounds more like a Walmart price: There’s too much exactitude there.” 

The price had to be right for another important reason: For every pair of glasses Warby Parker sells, it gives a pair to someone in need. (According to the company, almost one billion people worldwide — 15% of the global population — lack access to glasses.) TOMS, the shoe manufacturer known for its simple cloth espadrilles made with recycled vegan materials, is perhaps the best known company that employs a buy one/give one business model.

Google’s Music Service – Catching Up or Getting Started?

Google unveiled its new music service, Google Play Music All Access, at its I/O conference last week. As Matt Peckham wrote on Time this week (he chose to call it GPMAA, BTW):

…GPMAA represents Google’s attempt to offer a subscription-based music service, streaming “millions” of songs — intermingled with up to 20,000 more, uploadable or song-matched from your personal library — for $10 a month ($8 a month if you sign up by the end of June). Chris Yerga, Google’s engineering director who steered this part of the keynote, explained that GPMAA would include common music streaming features like curated playlists, album recommendations and a build-your-own-radio-station feature.

Since the current streaming music market is dominated by the likes of Pandora and Spotify, both of which offer “freemium” models (free for a certain number of hours/features; beyond that, consumers pay), Google’s move is a bit unusual because its music library is similar to their libraries. Also, no ads. Just a paid subscription, with adaptive streaming sound quality. 

As Matt and several others noted, this doesn’t sound like a differentiated service. In fact, it actually sounds like a narrowly focused offering, targeting those that listen to a lot of music every month. 

So why do it? And what is its long game?
(You can bet a decent amount of money that this seeming head-scratcher of a move fits in with a larger strategy.)

Some thoughts on this topic come to us from James McQuivey, a Forrester analyst, who writes on his blog:

To be clear, music is one of the most powerful tools for engaging digital consumers because they use it every day and connect to it emotionally and socially. If Google failed to make a play for the music business, it would later regret it because its customers would remain forever tied to another digital service that could ultimately open a vulnerability in the company’s relationship with hundreds of millions of Android and Chrome users. The fear of ceding this permanent vulnerability to others explains why Google Play is adding All Access.

In fact, he thinks that Google should have created a first of its kind “media package” consisting of music, movies and video games. 

If only the company had reached beyond simply catching up to existing music players. Google’s PC, phone, and tablet based customer relationship puts it in a unique position to reach for a blended media subscription experience, something that expands the very notion of what media is and how people believe they’re paying for it. Imagine $24.99 a month for all-access music, Netflix-like streaming, two current movie downloads, and a lending library for paid games where you can “check out” one paid game for free for one week at a time. That would be a way to make Google Play media content do more than merely copy iTunes, Pandora, and Spotify, it would take media consumption beyond the reach of Netflix, Amazon, and anyone else. But evidently Google wasn’t ready to reach for the real prize.

That last sentence is the key, IMO: Google may have exactly those ambitions, but its not ready. Yet. 

The bundle itself makes a lot of sense in theory, at least to me. Why have consumers sign up with 4 different services, for their audio, video, movie and game needs, when they can just sign up with Google? (Or Amazon, for that matter, who may also presumably be thinking along those lines…) 

And if you look at the Google Play snapshot I included above or go to this site and click on Books, Magazines, etc., you may just be impressed at the choices that already exist. (Question – do you know that you can buy magazine subscriptions via Google now? How about bestsellers from the NYTimes’ list? No? Thought so). 

So if I were Google, while I develop Google Music, on a parallel track I would furiously work to increase my partnerships in Movies and TV (Priority #1: Add streaming video) and start work on that all-inclusive monthly media bundle.

If and when this happens, successfully, not counting its driverless car business and its cloud provider (ala Amazon EC2) aspirations, Google would have transformed itself into a twin-headed colossus: An ad-driven “free” online enabler or provider of all kinds of data/user-content driven services, and a non-ad-revenue driven consumer media distribution giant. 

What do you think? 

PS: A big caveat here is that consumers that are willing to pay for movies, those that are willing to pay for music and those that will pay for other kinds of media may all behave very differently and may (or may not) see the value in a bundled offering. Just because something sounds good in theory is no excuse to expect it to succeed in practice. So I would imagine that Google either already has models that tell it that bundled offerings may not succeed, which is why it hasn’t already offered one just using the libraries it has access to – or – its models are telling it that such a bundle will be a runaway success, and all it needs is access to vast content libraries and a reputation in this space, both of which it will build in the coming months and years. As they say, watch this space…

OK, So Foxconn IS Going To Launch Its Own Brands

Back in February, when Foxconn announced a hiring freeze, sage pundits (ahem…) prophesied that this could actually foreshadow Foxconn-branded electronics. And that, in doing so, it would just be the latest contract manufacturer to want to move up the value chain. 

Well, guess what?

Foxconn appears to have already tested the waters with low-priced 60-inch TVs (back in November 2012?!!). And, writes Lin Yang on The New York Times (definitely a NYT thing going on today on this blog), it may be getting ready to make a much more aggressive push on this front. 

While Lin attributes this to Foxconn wanting to “move out of Apple’s shadow”, I suspect, and the comments from a Foxconn VP in the article echo this, that this is really more of a increased-value-capture-via-vertical-integration strategy. And the first step in that direction was a 9.9% investment in Japan’s Sharp corporation, in exchange for USD $840m. 

But, as Lin notes, the global demand for TVs – LCD and non-LCD – is declining. And this may be a problem for Foxconn. This, despite the fact that Foxconn may be mitigating the brand-building problem, at least for now, by selling TVs in China under the RadioShack brand and in the US under the Vizio brand. This, also despite the creative financing strategies it is using to both get its TVs into consumers homes more easily and not dissing its upstream contract-manufacture partners. 

Still, this is a long-game. Mr Gou, Foxconn’s CEO, is tenacious and quite shrewd, as any number of profiles have described him. Ten years ago, most Americans didn’t even know who LG and Samsung were, leave alone buying their appliances and electronics. And it wouldn’t surprise me if we are buying Foxconn branded electronics a decade from now.  

Chickpeas, Instead Of Tobacco = What US Consumers Want

Hummus, like Greek Yogurt, has been becoming increasingly popular in the US. 

Many restaurants (in major metropolitan areas) now offer a hummus appetizer and many grocery stores, airport eateries and even gas stations, now carry Sabra’s hummus spreads.

But, David Kesmodel and Owen Fletcher write on the WSJ (paywall), Sabra, a joint venture of Pepsico and Israel’s Strauss Group (who knew?!), has too many chickpeas (the main ingredient in hummus) in its Washington and Idaho supply baskets. 

So, as a way to mitigate those risks and potentially lower costs, Sabra has been encouraging farmers in Virginia to switch from Tobacco to Chickpeas. And given slowing US demand for Tobacco products and rising demand for hummus (between $315m and $530m), they are making that switch:

James Brown, a 72-year-old tobacco, corn and soybean farmer in Clover, Va., said he knew nothing about chickpeas when an extension agent from Virginia State (which receives research funding from Sabra) called him several months ago and asked if he would plant the legume.

He said he jumped at the opportunity because he is looking for ways to make his roughly 300-acre farm more profitable.

Mr. Brown planted four acres with chickpeas in mid-April. That week, his wife served him the first chickpeas he’d ever eaten. “They tasted pretty good,” the farmer said.

And because the vast majority of American consumers still don’t know about hummus, this market, and the acreage devoted to Chickpea cultivation, are both likely to grow significantly in the next few years. 

Tesco’s US Adventure – Fresh & Easy, But Also Costly

Tesco, the world’s third largest retailer, after Walmart and Carrefour, entered the US market in 2007. 6 years and 1 billion pounds later (1.2B pounds, per a NYT piece from today), it is leaving – once it decides exactly how to exit. 

Failures are never pretty for shareholders or employees, but the point of this post is to briefly discuss how consumer behavior regularly defeats executives and large multi-national companies in “foreign” markets.

Of course, consumer behavior defeats execs and local companies in “home markets” on a regular basis too – just ask J C Penney. But when a company tries to build on domestic successes, abroad, it faces a number of problems such as regulations, contract risk, local partners, foreign exchange fluctuations, etc.

But the biggest problem is consumer behavior.

(more…)

Positioning – This Tata Nano Example Shows Why It Matters

One of the 4 Ps of marketing is “Positioning”.

But unlike some other business theories and concepts, this one is highly pertinent to real life. In fact, entire companies and brands and products can succeed – or fail – depending on how they are positioned. 

Consider the Tata Nano, the revolutionary $2,000 car that the venerable Tata group produced in India a couple of years ago.

When it was unveiled, it was supposed to cause an explosion in small car sales in India, with modified versions of the cars knocking on foreign shores not too far into the future. 

Today though, the Nano is not a commercial success, having sold just 229,157 cars (to date). Adding insult to injury, it experienced a 86% drop in sales this March, compared to the same period last year. [Note: data excerpted from the Bloomberg article cited below.]

Why? Positioning. Or rather, a problem with positioning. 

Consider this excerpt from a Bloomberg article by Siddharth Philip:

The Nano’s marketing “didn’t gel with anybody,” (Tata Managing Director Karl) Slym, 51, said over coffee in his spacious office filled with cricket and soccer memorabilia at Tata group headquarters in Mumbai. 

Scooter drivers weren’t attracted because others “don’t think I’m buying a car, they think I’m buying something between a two- wheeler and a car. Anyone who had a car didn’t want to buy it because it was supposed to be a two-wheeler replacement.”

That “gel”ing that Mr Slym talks about? Code for positioning. 

Clearly, they didn’t have issues with segmentation or targeting. They knew who they wanted – aspirational scooter owners and current car owners that might consider the Nano as a second, cheaper car to keep around – and they were targeting them. 

But because the Nano was positioned somewhere in between what each really wanted, neither one bought it.