Of Menus, Pricing And Revenue Maximization

The Guardian has an interesting article that everyone should read on how restaurants subtly manipulate patron behavior.

First on the menu, sorry, list, is the famous “anchor” Pricing strategy:

While you would assume that we read a menu from left to right, studies show that our eyes gravitate toward the upper right-hand corner first. This is often where the “anchor” – or the most profitable item – is located.

But this particular ploy is more cunning than simply getting you to buy the most expensive dishes: typically, having this usually quite costly dish listed will make everything look reasonably priced in comparison.

“Having an outrageously expensive item is both likely to get publicity for a restaurant, and will also get people to spend more,” says Charles Spence, experimental psychologist at the University of Oxford and co-author of The Perfect Meal: The Multisensory Science of Food and Dining.

“People think ‘I wonder if anyone ever orders that?’, without realising that its true purpose is to make the next most expensive item seem cheaper.”

Conversely, research suggests that diners look at the bottom left of a menu last, so this is where the least expensive dishes will be positioned.

Be sure to check out the rest of the article for other clever ways in which restaurants (and waiters) maximize their revenue on your next visit. 

Should Governments Set Coffee Prices?

Starbucks is under criticism in China because its drinks cost more in China than elsewhere.

 

As Barney Jopson writes in The Financial Times (paywall),

 

Asked if Starbucks was willing to reduce its prices, he (John Culver, a Starbucks group President) did not give a direct answer, but said Starbucks felt it had “the right economic model” and had won the loyalty of customers, while stressing that it would respect “local laws and customs”.

He said that in the past year Starbucks had invested $100m in the country.Seeking to scotch a “misnomer” that China was a relatively low-cost place to do business for Starbucks, Mr Culver said that at store level its investment and labour costs, including staff training, “approach the levels of what we see in the US”.

 

“The bottom line operating margin in China is in fact not any higher than what we see in the US,” he said.

So, though Starbucks is trying to push back, it is reasonable to expect that there will be some kind of “give” or conciliatory gesture soon enough, given the size of China’s market.

But this brings up some critical questions. 

Companies price their wares differently in different countries all the time. In fact, prices vary across states and across regions all the time. They might do this because

  • their costs (labor, raw materials, taxes, duties) are higher, or
  • they might do this because consumers’ willingness to pay is higher, or
  • they might just be responding to competition, or
  • because they want to be viewed as a luxury brand. 

Since coffee purchases are completely discretionary and voluntary (unlike, say, baby formula or cancer drugs) – shouldn’t companies have the right to price at whatever level they want?

How can governments dictate this?

Is The Price Right? Let Me See Your Brainwaves.

Most consumers will pay $X for a product or service as long as $X is more than the “value” they receive (B minus C, anyone?). And depending on the difference between that received (perceived) value and $X, they may tend to classify it as cheap or expensive. This, we know.

From the perspective of the company providing that product or service though, how much should $X be? 

On the one hand, they don’t want to price it too high and deter potential purchases. On the other, they don’t want to set it too low and lower their profitability. So companies do a lot of market research and analysis to arrive at just the right price. And they tweak it every so often based on any number of variables. 

But at the end of that exercise, how do they know they’ve hit the sweet spot?

Brainwave analysis, says a researcher in Germany. 

Using the example of a small cup of coffee, for which Starbucks charged €1.80 ($2.45) in Stuttgart, (Neurobiologist Kai-Markus) Müller tried to get to the bottom of the question. He showed subjects the same pot of coffee on a screen several times, but with different prices in each instance. At the same time, an EEG plotted the subjects’ brain activity.

 

Graphic: The Price Is RightZoom

DER SPIEGEL

Graphic: The Price Is Right

Especially in the case of extreme offers, strong reactions appeared in the brain within milliseconds. Prices that were either too low or too high, such as 10 cents or €10 per cup, were unacceptable to the brain’s control mechanism. “When the brain was expected to process unexpected and disproportionate prices, feelings of shock, doubt and astonishment manifested themselves,” Müller reports.

Is Starbucks Missing Out on Profits?

According to the study results, the subjects would be willing to pay between €2.10 and €2.40 for a cup of coffee, which is significantly more than Starbucks actually charges. “In other words, the company is missing out on millions in profits, because it is not fully exploiting consumers’ willingness to pay money,” Müller concludes.

Effective? Yes. But also highly intrusive and a bit creepy, IMO.

Enjoy the rest of the article here

T-Mobile: The Growth Strategy Seems To Be Working

A couple of months ago, I thought T-Mobile might have some messaging-to-the-masses issues despite its fresh (and much needed) thinking on multi-year contracts and subscribers.

And then, though they had lines out of the door in thousands of stores the day they introduced the iPhone and the new plans, I thought one should wait for the quarterly results to see if they had indeed succeeded with their new growth strategies. 

And…boy, did they succeed!

Brian Chen writes, on The NYT, that the growth is here:

The company on Thursday said it had gained 1.1 million customers, including 685,000 contract subscribers, over its second quarter. That compares with losing 557,000 contract subscribers, the most valuable type of customer, in the same period a year ago. The uptick represents its largest customer growth in four years.

The company, based in Bellevue, Wash., only started offering the iPhone in April, when it also began offering new phone plans that address common frustrations with wireless companies, like confusing contracts and expensive data plans.

“By fixing the things that drive them mad, like contracts and upgrades, and freeing them from the two-year sentences imposed on them by our competitors, they are choosing the new T-Mobile in unprecedented numbers,” John Legere, the chief executive of T-Mobile US, said in a news release.

Over the last several years, T-Mobile lost many customers largely because it lacked the iPhone, and customers were unhappy with its service. But this year has been jam-packed with change for the company: it finally landed a deal with Apple to sell the iPhone, it began an overhaul of its network and it started offering lower-cost plans to lure customers from competitors. The company also has extra muscle from its merger with the smaller carrier MetroPCS, which was completed in May.

The change is costing T-Mobile. The company posted a loss of $16 million for the quarter, compared with a profit of $207 million last year in the same period. But it also reported revenue of $6.23 billion, up from $4.9 billion last year.

One quarter is just one quarter, and the big boys aren’t going to take defecting subscribers (to T-Mobile, or anyone else) lying down. Also, part of these gains could be ascribed to the iPhone’s availability, not just the new, better-for-consumers plans. 

Still, time for me to set my unduly cautious tone aside and congratulate T-Mobile and their CEO on these terrific numbers! 

Is Microsoft Leaving $1.4B On The Table?


Microsoft made news (not the good kind) for a $900m write-down on its’ Surface RT tablet - which is different from Surface Pro which is different from a Windows 8 laptop because it doesn’t run all the Windows apps, just some of them, which…you get the picture. A lot of confusion, not just here but in consumers’ minds too…which may have led to the lackluster sales, a build-up of inventory and the $900m write down denouement – last week.

And then it slashed prices on the tablet. And also released ads attacking the iPad (above).  

Anyway.

J P Gownder, a VP and Principal Analyst at Forrester, writing on this topic, concludes that 

The bottom line is that “protecting” Windows RT by keeping Office off of Apple’s iPad and Android tablets isn’t working. It’s instead creating risk for Office as users find other ways of getting things done. If 10% of the 140 million iPad owners bought Office for $99.99, Microsoft would earn $1.4 billion in topline revenue – or $500 million more than the Windows RT write-down last quarter. 

Microsoft – are you going to bite the bullet and go after that revenue? Or are you going to dig in and open a new front in the Tablet wars?

Is Amazon Slowly Raising Prices On Books?

That’s what David Streitfeld, writing on The NYT, concludes, using some anecdotal data:

Jim Hollock’s first book, a true-crime tale set in Pennsylvania, got strong reviews and decent sales when it appeared in 2011. Now “Born to Lose” is losing momentum — yet Amazon, to the writer’s intense frustration, has increased the price by nearly a third.

“At this point, people need an inducement,” said Mr. Hollock, a retired corrections official. “But instead of lowering the price, Amazon is raising it.”

Other writers and publishers have the same complaint. They say Amazon, which became the biggest force in bookselling by discounting so heavily it often lost money, has been cutting back its deals for scholarly and small-press books. That creates the uneasy prospect of a two-tier system where some books are priced beyond an audience’s reach. 

and a few other conversations:

Stephen Blake Mettee, chairman of the board of the Independent Book Publishers Association, said that Amazon was simply following in the tradition of any large company that gains control of a market. “You lower your prices until the competition is out of the picture, and then you raise your prices and get your money back,” he said.

Now if Amazon were a conventional company that lowered prices in the face of competition and raised them when the competition had been squished, one would have to agree that there is something to this story. And on isolated titles, these price increases (discount reductions, to be accurate…but they have the same end-result) might very well be happening for any number of reasons. 

But in the absence of a systematic price point comparison (correlated against other external variables and developments (Stata, anyone?)), it might be a bit tough to support this blanket conclusion.

No?

PS: Evan Soltas suggests, on Twitter, an Amazon Price Index, to get a better, truer picture:

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