pricing strategies gone wrong

Companies need to make money – I get it.  And as a capitalist at heart, I generally subscribe to the business practice of charging what the market will bear.

But as I’ve learned about the recent pricing decisions of two high-profile institutions of American culture – Starbucks and The New York Times – I’ve wondered if pricing models based on traditional understandings of profit margins and price elasticity can backfire.  That is, charging higher prices for certain offerings may make sense on paper – but they actually incentivize the wrong behaviors and reward the wrong customers. Here’s what I’m thinking:

Starbucks-logoStarbucks rolled out a new pricing plan last week, boosting the cost of some menu items by as much as 33% in some markets, according to the New York Post.  The price of an extra shot of espresso jumped from 55¢ to 70¢; shots of syrup and soy milk also cost more now.  However, customers with simple orders like plain coffee were rewarded with a price decrease of around 10¢.

On the one hand, I can see the logic behind this decision.  Given that the coffee drink passionistas who order their venti soy caramel lattes are already paying around $5 for their drug, er, I mean drink of choice, perhaps they won’t notice or care about paying an additional 50¢.  These kinds of drinks are already perceived as premium products, the logic might continue, so if you’re going to raise prices on anything, you should do it on these products.

The extra shots and special orders also require extra labor, something any margin-conscious business wants to make up for with higher prices.  Plus, you want to protect market share from the competitive encroachments of Dunkin’ Donuts and McDonald’s. Offering plain coffee at lower prices seems important, since many plain-joe customers are more price-sensitive and it’s easier to compare prices on a simple cup of coffee.

But here’s my question – does Starbucks want people to buy plain cups of coffee or does it want them to buy fancy souped-up coffee creations? I would think the latter – after all, those specialty coffees are unique product offerings which differentiate the brand and add to the brand cachet.  I’m also guessing that folks who buy the specialty products are more likely to linger in Starbucks’ stores and partake in the “romance” and “theater” of the coffee experience which CEO Howard Schultz has been trying to reinvigorate.

Charging disproportionately more for higher priced products also doesn’t seem to make sense in the current post-recession period.  I would think you’d want to encourage people to trade-up, not down – and make it easier for people to get back in the habit of buying premium products.

That’s why I’m thinking Starbucks’ pricing move may make sense in spreadsheets but, viewed through the lens of customer behavior, it may end up hurting the chain’s profitability more than help it.

nytlogo152x23The New York Times’ recent pricing announcement also raised questions for me.  The venerable newspaper announced that starting next year, people will be allowed to view a certain number of articles free each month on NYTimes.com — but to read more, readers will be charged a flat fee for unlimited access.  Subscribers to the print newspaper will receive full access to the site without any additional charge.

Again, this seems a logical solution to the problem that all publishers are struggling with.  Advertising revenue is no longer sufficient to sustain the business and as James McQuivey, media analyst at Forrester Research explains, “You can’t continue to be The New York Times unless you find” a new source of revenue.

Plus it’s clear NYTimes.com provides a valuable service and the capitalist in me believes people should pay for things of value.  So I’m all for levying a (reasonable) price for the site’s content.

What I question, though, is the practice of charging more for the exact behavior the Times want to encourage.  Reporting on the change, NY Times writer Richard Pérez-Peña says, company executives “said they wanted to create a system that would have little effect on the millions of occasional visitors to the site, while trying to cash in on the loyalty of more devoted readers.” (emphasis mine)

Said another way, the Times wants to assuage infrequent users while gouging loyal readers.  This doesn’t make sense if the ultimate goal is to increase readership.

Yes, most business models incorporate some sort of free offering and do so with the hopes of upgrading folks to a paid service.  We’re all familiar with the barebones software which is offered for free, while its full-featured counterpart is available for a price.  This approach is a form of sampling.

But this is not what the Times will be offering.  It won’t be offering access to exclusive content, additional services, or any other value-added benefits for its fee.  It’s simply charging more for more usage.  Won’t this discourage additional usage?  Particularly when there are so many other sources for content?

It might seem the Times is trying to get more print subscribers by waiving the fee for those customers.  But does it really want more print subscribers?  Perhaps having print subscriptions was the way the company used to make its money, but given the costs of distributing printed vs. digital content, I can’t imagine its future profitability is in print.

Why not, instead, institute a pricing strategy that encourages digital subscribers?  Make a digital subscription worth something and charge for it.

Am I wrong?  It seems price is not simply a tactic for making margin.  It’s a powerful tool for influencing customer behavior and impacting brand perceptions which ultimately have far more impact on profitability.

I’m really trying to get my head around both of these companies’ pricing moves, so I would appreciate hearing your perspectives.   Please comment (it’s free!)

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