The Art of Decoy Pricing

Over Christmas, I read Dan Ariely’s “Predictably Irrational” – a fascinating Book. One surprise, then a few snippets that suggest Apple execute a few important things to textbook standard – albeit with one glaring mistake.

The one surprise was from The Economist, who offered:

Economist Subscription Offer

At first blush, a silly offer. In tests, 16% chose the Internet only edition, 0% the print only one, and 84% the print plus Internet offer. However, offer only the basic and top flight offer:

Economist Revised Offer

and the takeup goes to 68% and 32% respectively. Hence, the presence of a similar, but clearly inferior, decoy swings the takeup of the high priced option from 32% to 84% of the takeup. Which is exactly what happened when Apple’s iPhone line-up became the iPhone 4s, 5c and 5s – with the 5c and 5s prices starting at circa £469 and £549 respectively. Everyone jumped at the most expensive 5s model, leaving short supply of that model and a glut of the slightly less expensive (but less capable) unsold 5c models.

As to the more positive things that reminded me of Apple, the following struck chords:

  • Perceived prices being high through restricted product supply
  • Setting (high) price anchors with arbitrary coherence; Johnny Ives gushing verbals at Apple announcement events, no less. Reassuringly expensive, just like some french lager ads.
  • the use of “free” components to take all risk out of a risk/reward comparison
  • Social norms of help at a Genius Bar versus competitor costly pains when a product goes wrong
  • Minimising options. I recall Steve Jobs redefining the Mac lineup to a 2 x 2 matrix; consumer/professional vs laptop/desktop, one model in each box. Likewise iPhones and iPads to good/better/best models.
  • Lower prices distinctively make us believe lower quality; Apple do the opposite, even wrapping the packaging to reinforce the quality feel. Even their boxes are things of beauty, apparently no expense spared.

There are further snippets about folks following a herd instinct as a sense of belonging (ordering meals aloud in a Restaurant; make sure you call your choice first!). Also the fact that if you affirm your honesty in some way before initiating any task, you are likely to follow it with the absolute truth – something our judicial system does very well.

I ended up in a difference of opinion with a friend on DNA testing (Jane ordered a testing kit from 23andMe, just before the US Food & Drug Administration told them to stop releasing results of their genetic tests). Textbook defence on my part having invested in one side of the argument, just like supporters of opposing football teams having self centred views of the exact same incident (it’s a penalty! No, he dived! How could you think that, it was right in front of you! …).

So, with that, some karma. I know how I’d react, and I could see my own irrationality.

People. They are confusing things. And in all ways but one slight pricing hiccup, Apple are eerily clever.

“Big Data” is really (not so big) Data-based story telling

Aircraft Cockpit

I’m me. My key skill is splicing together data from disparate sources into a compelling, graphical and actionable story that prioritises the way(s) to improve a business. When can I start? Eh, Hello, is anyone there??

One characteristic of the IT industry is its penchants for picking snappy sounding themes, usually illustrative of a future perceived need that their customers may wish to aspire to. And to keep buying stuff toward that destination. Two of these terms de rigueur at the moment are “Big Data” and “Analytics”. There are attached to many (vendor) job adverts and (vendor) materials, though many searching for the first green shoots of demand for most commercial organisations. Or at least a leap of faith that their technology will smooth the path to a future quantifiable outcome.

I’m sure there will be applications aplenty in the future. There are plenty of use cases where sensors will start dribbling out what becomes a tidal wave of raw information, be it on you personally, in your mobile handset, in lower energy bluetooth beacons, and indeed plugged into the “On Board Diagnostics Bus” in your car. And aggregated up from there. Or in the rare case that the company has enough data locked down in one place to get some useful insights already, and has the IT hardware to crack the nut.

I often see desired needs for “Hadoop”, but know of few companies who have the hardware to run it, let alone the Java software smarts to MapReduce anything effectively on a business problem with it. If you do press a vendor, you often end up with a use case for “Twitter sentiment analysis” (which, for most B2B and B2C companies, is a small single digit percentage of their customers), or of consolidating and analysing machine generated log files (which is what Splunk does, out of the box).

Historically, the real problem is data sitting in silos and an inability (for a largely non-IT literate user) to do efficient cross tabulations to eek a useful story out. Where they can, the normal result is locking in on a small number of priorities to make a fundamental difference to a business. Fortunately for me, that’s a thread that runs through a lot of the work i’ve done down the years. Usually in an environment where all hell is breaking loose, where everyone is working long hours, and high priority CEO or Customer initiated “fire drill” interruptions are legion. Excel, Text, SQLserver, MySQL or MongoDB resident data – no problem here. A few samples, mostly done using Tableau Desktop Professional:

  1. Mixing a years worth of Complex Quotes data with a Customer Sales database. Finding that one Sales Region was consuming 60% of the teams Cisco Configuration resources, while at the same time selling 10% of the associated products. Digging deeper, finding that one customer was routinely asking our experts to configure their needs, but their purchasing department buying all the products elsewhere. The Account Manager duly equipped to have a discussion and initiate corrective actions. Whichever way that went, we made more money and/or better efficiency.
  2. Joining data from Sales Transactions and from Accounts Receivable Query logs, producing daily updated graphs on Daily Sales Outstanding (DSO) debt for each sales region, by customer, by vendor product, and by invoices in priority order. The target was to reduce DSO from over 60 days to 30; each Internal Sales Manager had the data at their fingertips to prioritise their daily actions for maximum reduction – and to know when key potential icebergs were floating towards key due dates. Along the way, we also identified one customer who had instituted a policy of querying every single invoice, raising our cost to serve and extending DSO artificially. Again, Account Manager equipped to address this.
  3. I was given the Microsoft Business to manage at Metrologie, where we were transacting £1 million per month, not growing, but with 60% of the business through one retail customer, and overall margins of 1%. There are two key things you do in a price war (as learnt when i’d done John Winkler Pricing Strategy Training back in 1992), which need a quick run around customer and per product analyses. Having instituted staff licensing training, we made the appropriate adjustments to our go-to-market based on the Winkler work. Within four months, we were trading at £5 million/month and at the same time, doubled gross margins, without any growth from that largest customer.
  4. In several instances that demonstrated 7/8-figure Software revenue and profit growth, using a model to identify what the key challenges (or reasons for exceptional performance) were in the business. Every product and subscription business has four key components that, mapped over time, expose what is working and what is an area where corrections are needed. You then have the tools to ask the right questions, assign the right priorities and to ensure that the business delivers its objectives. This has worked from my time in DECdirect (0-$100m in 18 months), in Computacenter’s Software Business Units growth from £80-£250m in 3 years, and when asked to manage a team of 4, working with products from 1,072 different vendors (and delivering our profit goals consistently every quarter). In the latter case, our market share in our largest vendor of the 1,072 went from 7% UK share to 21% in 2 years, winning their Worldwide Solution Provider of the Year Award.
  5. Correlating Subscription Data at Demon against the list of people we’d sent Internet trial CDs to, per advertisement. Having found that the inbound phone people were randomly picking the first “this is where I saw the advert” choice on their logging system, we started using different 0800 numbers for each advert placement, and took the readings off the switch instead. Given that, we could track customer acquisition cost per publication, and spot trends; one was that ads in “The Sun” gave nominal low acquisition costs per customer up front, but were very high churn within 3 months. By regularly looking at this data – and feeding results to our external media buyers weekly to help their price negotiations – we managed to keep per retained customer landing costs at £30 each, versus £180 for our main competitor at the time.

I have many other examples. Mostly simple, and not in the same league as Hans Rosling or Edward Tufte examples i’ve seen. That said, the analysis and graphing was largely done out of hours during days filled with more customer focussed and internal management actions – to ensure our customer experience was as simple/consistent as possible, that the personal aspirations of the team members are fulfilled, and that we deliver all our revenue and profit objectives. I’m good at that stuff, too (ask any previous employer or employee).

With that, i’m off writing some Python code to extract some data ready ahead of my Google “Making Sense of Data” course next week. That to extend my 5 years of Tableau Desktop experience with use of some excellent looking Google hosted tools. And to agonise how to get to someone who’ll employ me to help them, without HR dissing my chances of interview airtime for my lack of practical Hadoop or MapR experience.

The related Business and People Management Smarts don’t appear to get onto most “Requirements” sheet. Yet. A savvy Manager is all I need air time with…

What do you call a good version of “scarred for life”?

Pricing for Results Front Cover

There was an experiment some time ago where Students of a University were asked which lecturers had the most profound effect on their learning experience – 10 years after they’d left higher education. The names cited were rarely the ones that earnt the most, nor recognised for that achievement. I think I can relate to this in a couple of ways.

One from my education at Theale Grammar School – situated in the village of Theale, just west of Reading, who’s previous status as the half way stopping point on the two day London to Bath Stagecoach run blessed it with more pubs per head of population than any other village in the country. These days they call that route the A4, supplanted in most use by the M4 motorway in 1971 or so. I recall four morning assemblies of the hundreds served in my 7 years there (more detail in the footnotes if those are of any interest).

Secondly, while employed in my 17 years at Digital, I was blessed with many experiences that have had a material effect on several businesses since. The one standout has got to be two days spent in the company of John Winkler, who Paul Mears retained to take 30 of us through the art of Pricing; we did this in the surroundings of Newbury Racecourse in (I believe) 1992.

The first day ended with an overnight exercise to come up with a list of ways we could treble our retained profits based on learnings so far. Instead of going straight home, I took a detour back into my office in DECpark Reading, sat in front of my 19″ VAXstation, and started hacking around our recent sales transactions. Got home late, but was armed brimming with ideas for Day 2. Looked like countless ways of doing it.

Next day everyone gave their ideas, had some training on how to negotiate pricing, and were given guidance on how to behave in a price war. With that, the course finished, we thanked John and disappeared away into the night, armed with the training notes.

Fast forward to when I worked for IT Distributor Metrologie. They had bought Olivetti Software Distribution a year or so earlier, and moved their staff into the HQ office in High Wycombe. They were, at that point, one of Microsofts five distributors in the UK, all of whom were conscious of the vendors desire to reduce their Distributor line up. The guy brought in to run the Microsoft Business elected to leave, and in January 1997, Metrologie got slapped with what’s termed a “Productivity Improvement Plan”; basic Microsoft parlance for the path to the Firing Squad. Well, that’s what the Directors knew – I wasn’t told.

I was asked to park my other work and to go fix the Microsoft Business, and given a Purchasing Person who had ambitions to be a Product Manager, plus one buyer. We were doing around £1 million per month, 60% of the business through Dixons Stores Group, and (like most Microsoft distributors) tracking along at 1% gross margin.

The first few days were me just asking questions of reseller staff who bought Microsoft products from several distributors. Distribution staff turnover, lack of consistent/knowledgeable licensing expertise and price inconsistency across several phone calls were consistent concerns. We also had the concern of having one very large customer, who consumed peoples time like no tomorrow and had a few unfortunate ways of doing business:

  • obeying edicts from the top not to pay suppliers to agreed terms at certain points
  • routinely doing “reverse ram raids” at the Warehouse door, sending 40 ton trucks full of returned products for credit close to the end of a trading month
  • bad mouthing our performance in pursuit of a goal to trade directly with the vendor

We employed the learnings from John Winklers Course – in particular the guidelines of how to behave in a price war – and it worked with a vengeance. While the DSG business didn’t grow, the overall business went from £1m/month to £5/month in four months, and at doubled margins. Due to the dynamics of how a Distribution business works, and major suppliers being very strict on payment terms, I learnt how “overtrading” feels at close range. But at that point, i’d been headhunted for a role at Demon Internet, but extended my notice by 4 weeks in an attempt to avert the Firing Squad which i’d since learnt about on the journey. We already found we weren’t being invited to Microsoft Social Events that our status should have conferred on us.

I went into a meeting at Microsoft with my Chairman and the Group Marketing Director from France; their body language going into the meeting was all wrong, and we were told that despite our recent performance, that Microsoft were going to lose us as a Distributor. We lodged an appeal, and I left to my new role in Demon Internet; Product Manager Tracy left shortly afterward to a Software Business Manager role at reseller BSG, doubling her salary in the four months we’d worked together. A week in, I got a phone call from my immediate ex-boss, Bob Grindley, to be told that the Microsoft Contract had in fact been retained.

I learnt one set of very useful guidelines on how to measure and improve any business from our then Microsoft Account Manager, Edward Hyde, early in my time in that role – the core ones I still use to this day. That apart, the work on pricing I learnt from John Winkler made a material difference; I can think of no other reason that it took 4 months to grow the business 5x in revenue and 2x in margin in the middle of a 5-way price war.

The dirty secret is that the 2-day course is condensed into a paperback book entitled “Pricing for Results” by John Winkler himself. Now out of print, but if you’re quick, available for the princely sum of 1p plus postage from several third party sellers on Amazon. A real steal. Or you can hire me to assist with any business improvement project!

Pricing for Result - Back Cover Text

Footnote: John Winkler still appears to be running his Pricing Courses:

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Has the Apple iPhone 5c really failed?


There is some commentary on the Techpinions site where Brian Hall waxes lyrical about the relative failure of the iPhone 5C ( Apple admitted that they got the projected mix a bit wrong; the most expensive, aspirational 5S model exceeded their most optimistic sales projections, where the 5C sold much less. I think there were two fundamental reasons:

  1. Apple targeted the 5C at a younger audience than the 5S, with bright colours and functionality equivalent to the previous iPhone 5 model. The handset price really only made it affordable for the 50% of people who obtain their handset as part of a 2 year contract.
  2. The full retail price of the 5C handset was £100 short of the £600+ of the aspirational 5S product above it. At first blush, that appeared to be very high, though it may be difficult to understand the complexity Apple faced in other markets and trying not to upset the existing customers of iPhone 5 handsets.

My theory is two fold. The UK is around 50% contract, spreading the cost of the handset over a two year term, and 50% pay as you go, where the consumer has to pay full retail for the handset up front.

Theory One is that by launching in October, they missed one of the “purchase binge” periods where new Secondary School kids were bought their first handsets by their parents. You are then subject to a slow burn, selling volumes gradually as existing 2 year contracts of older kids come up for renewal month by month.

The Second is more complex, and relates more to the folks buying the handset outside of a contract; the preserve of the wealthy, or of those on SIM-only or Pay as you Go tariffs. As an illustration from the excellent book from Dan Ariely entitled “Predictably Irrational“, he cited a rather strange special subscription offer from The Economist to their readers. They offered:

* a subscription to for $59
* a subscription to Economist Magazine for $125
* a subscription to the online and print edition for $125

At first blush, a silly offer. In tests, 16% chose the Internet only edition, 0% the print only one, and 84% the very expensive print plus Internet offer. However, if you alter the offer to reflect only:

* a subscription to for $59
* a subscription to the online and print edition for $125

then the takeup goes to 68% and 32% respectively. So the presence of a similar, but clearly inferior, decoy in the 3-way offer swings the takeup of the high priced option from 32% to 84%.

Remembering that the very inferior, older iPhone 4S is still sold at a massively lower price, doesn’t that sound exactly the effect of Apple pricing the 5C too close to the 5S in their 4S/5C/5S lineup?

So, for the UK market, Apple were late with the 5C and fundamentally have priced it too close to the 5S, making it a decoy price; it really needed to be in the £300-400 band to make a fundamental difference here. That said, dynamics in other markets, and not wanting to undermine the second hand price for owners of previous iPhone 5 users, may also have been factors tying Apples hands.

I’m sure the next generation they release, likely encased in a Liquid Metal enclosure (cheaper to fabricate than milled aluminium) and with a Sapphire screen, may allow Apple to come down far enough in price to correct this and hit their next spurt of growth without lowering their margins. If indeed is that is something they want to do.