In this article Rafi Mohammad argues that companies should avoid offering discounts as a way to increase sales. He uses the example of Pizza companies that have recently reduced their prices and are now offering $10 any size, any number of topping pizzas. These discounts did increase sales for companies such as Dominos and Pizza Hut but how will consumers respond when they have to raise their prices back to $16.00 a pizza?
Rafi argues that companies should use an adaptive pricing model vs. the broad discount pricing model. Adaptive pricing capitalizes on the fact that different consumers have different needs and therefore place a different value on certain products or services. By using adaptive pricing companies can adjust a products attributes to better appeal to a consumer without having to lower the price.
To illustrate the benefit of adaptive pricing Rafi uses the example of Subway and Quiznos. Subway reduced the price of its foot long subs to $5 vs. Quiznos which created an entirely new set of less expensive sandwiches. By doing this Quiznos was able to still charge full price for its signature sandwiches and avoid the dilemma that Subway will face when the economy turns around that they are faced with having to raise prices.
Do you think that the pricing model that Rafi advocates in the article is an effective way at increasing demand while avoiding price decreases?
How can companies like Subway and Pizza Hut raise prices without sacrificing demand when the economy turns around?
Can you think of some other examples of adaptive pricing?
I throughly agree that the adaptive pricing model is a more effective way of increasing demand without eroding prices. I have worked as an automotive supplier for the majority of my career and the OEM as constantly making decisions based on price alone to the point where the best value is not being considered.
ReplyDeleteI also agree that it will be difficult for companies, such as Subway and Pizza Hut to raise prices after lowering prices to increase or maintain volume. It is always more difficult to differentaite yourself from your competition by adding a lower priced product that provides value and does not erode your brand or higher priced products. But it is a much better, longer term strategy to just simply lowering prices, which is a short term option, with long term ramifications.
I have no work life experience in this so this is just from a customer point of view. I am responding because I found this an interesting topic. I think the best thing is upfront to create new dishes at the newer cheaper price. This allows them as Quizno’s did to keep their signature items at an appropriate price for their targeted profit margins. If a firm hasn’t done that I think it will be difficult for them to raise prices later. In general I think once we can afford to pay more for a pizza for example, we will go to a place we think is better, we will pay for an experience...not more for the same pizza. We will forever think Little Caesar’s as a $5 cheap pizza. Though I did notice their radio add announced their price at $5.55 – that’s 55 cents more than it used to be. Maybe they thought we wouldn’t notice.
ReplyDeleteIs this adaptive pricing? I remember when a store in Lansing was reported on a local new station about raising their prices just before they ran an add for 20% off everything in the store in the 1980s. Their sales were up as everyone responded to the newspaper add without a loss in profit margin. That was until the media ran the story. So many people were outraged and boycotted the store it eventually went out of business.
I don’t think that Rafi’s pricing model is workable in every product situation because it allows the consumer to experience the product in a limited fashion. Thus, this may have the customer take away a different product experience in comparison to a full product experience which may influence overall future consumer product purchases. For Example, when a customer experiences the smaller Quiznos sandwich it is different compared to the full Subway Sandwich. This can make the consumer come away with a perception that Subway sandwiches are better and how will that perception effect future purchases.
ReplyDeleteTherefore, after the Subway sandwich moves back to the higher price, then it can become a value purchase decision. I think companies like Pizza Hut and Subway can revisit their pricing structure upon the economic change by making is a positive thing that they have lowered prices during this time and now, with increases in supplies, staff, etc. they will need to move prices back up with the change in the environment; extend an appreciation to all the customers that supported them during this time. They will then need to continue their business with an effective value proposition to their marketing. This can be a workable strategy, it’s all about the delivery.