Who's In Charge of Pricing the Coffee???

Pricing goods on the supermarket shelves is as much an art as it is a science.  More often than not the end result - a price, reflects the logical outcome of all the input factors.  From time to time, however we get an output - a price that seems to defy logic.  We can only conclude one of two things - either our assumptions about the way the world works need to be revisited or - there is just a quirk, an oddity, an outlier.

As an investment manager I'm trained to look for the outliers.  Buying or selling an outlier can make the difference between having average performance and having above average or below average performance.
Finding the outlier makes a trip to the supermarket or shopping mall more interesting and more fun.  It's a bit of a hobby for me.  Some people spot planes and trains.  Some people follow the minute details of sports statistics. I follow prices.

Our journey in search of the pricing outliers begins of course at the manufacturer on the desk of the Product Manager. The Product Manager is in charge of practically every element of brand and product development, from the look and feel of the packaging, timing and delivery of advertisements, wholesale pricing, promotional pricing and finally, MSRP or manufacturer's suggested retail price.

Whenever I go to the supermarket I pay attention to prices, in part because, like every consumer, I want my hard earned dollars, koruna, pounds, rubles and yen to go as far as they can.   Aside from the practical implications of smary buying, I'm always interested to finding what I call pricing idiosyncrasies  - the quirks or departures from would seem to be the norm or logical progression.

Lately the biggest quirk I've seen is in the instant coffee aisle.  I happen to shop in Prague very often.  The local currency is the Czech Koruna, so I'll reference my local currency.  Also to be consistent we will talk about 200g packages. Those of you in other countries can substitute numbers proportionally.  Makes no difference.
 
When I am in the US I drink Taster's Choice.  Here in the Czech Republic we don't have that brand.  We have NesCafe, which it so happens is a product of the same fine company that makes Taster's Choice.


Pricing in the instant coffee aisle works something like this:  the stuff that tries to be something reminiscent of coffee sells for Kc 60.  Then the store brands sell for somewhere between Kc 75 and Kc 99.  Lidl, a local supermarket I shop in, sells a private label brand called Green Eclipse which is just wonderful.  It sells for Kc 79 and sometimes it's on sale for Kc 69.

I buy Green Eclipse because I like the taste, but also I especially like the price. I the taste were lousy I wouldn't buy it.  Life is too short to drink bad coffee at any price. 
Between Kc79 and Kc 160, there is nearly nothing to speak of.  It's what I call the DMZ - the de-militarized zone.  It is practically an empty, barren wasteland.
After that the mainline brands start.  The major brands include Jacobs, Douwe Egberts,  Tchibo and Nescafe, with prices ranging from 159 to 259.  Premium coffees, including the "Gold" versions of the mainline brands, cost usually between 199 and 259.  The very top of line is Davidoff, which prices at 390.  It's sold in 100g packs at 199.

I think the biggest indication that product managers are getting nervous is when they develop brand line extensions and odd pack sizes.  For example, a number of brands have introduced "velvet" or finely ground variations, are lower priced.  Also some of the brands have pack sizes of 95g, 180g and 190g.  This makes direct price comparisons hard to make and also enables them to meet price point targets.

Pricing Quirk Number 1 - A Range Big Enough to Drive a Truck Through
Pricing variations in the coffee aisle are among the widest I can find in the supermarket.  Producers seem to believe that once the consumer finds the right taste price sensitivity ends.  What producers seem to miss is propensity among consumers to substitute.

I find it hard to believe I am really very different from the average consumer.  I like the taste of NesCafe.  It's my favorite coffee except for Taster's Choice. But it's not my favorite coffee at any price.
For every jar of NesCafe or I can have at least two jars of the Eclipse.  NesCafe is among the less expensive of the mainline bands. For some of the other brands the ratio is more like 3 jars of Eclipse or 1 and a half jars of NesCafe for 1 jar of the main brand.

I just don't understand this pricing case.  If coffees like Eclipse are readily available, why should mainline brands be two, three, four times more expensive.  And why should such large price dispersions occur within the mainline brands. Do people care so much about taste? Shouldn't propensity to substitute be greater or is there something else I am missing here? Consumers respond to the weekly supermarket sales circulars and switch supermarkets at the drop of  hat when they see laundry detergent on sale.  But once inside the market they don't care about what they pay for coffee?

Pricing Quirk Number 2 - The De-militarised Zone in Pricing
Between Kc 79 and Kc 159 the pickings are few and far between. My guess is that the product manager doesn't have a lot of influence at this level and the pricing battle shifts to the supermarkets.  Pricing managers in supermarkets well understand the behavior of consumers and where the elasticity of demand can vary.  Pricing managers also look at gross margin - the the difference between what the price at the cash register and the price from the manufacturer.  Still - why should there be this big gap in pricing  50% - 100% between the bargain  brand and the mainstream brands?

Pricing Quirk Number 3  - Putting the best value for money on sale
Why should something that's already priced well go on sale? This coffee is the best value for money!  I hardly think the sales will change much when it goes on sale.  Demand is probably pretty inelastic at that level.  Makes no sense to me!

And yet - incredible as it may seem, Eclipse sometimes goes on sale, with a big red sign pointing out the 10% discount.

Pricing Quirk Number 4 - Putting the Brands on Sale

From time to time NesCafe runs a promotion.  They price the 200g bottle down to 119.  This is still a hefty 50% premium to Eclipse, but a is a healthy discount to the other main line brands.  At that price my price sensitivity goes out the window and the taste devil drives my decision.  I stock up.  I'll by three or four at that price and keep them in my pantry and draw down the stash until next sale comes around.  Judging by what I observe at the cash register, many other consumers are doing the exact same as I do. When NesCafe is on sale it seems to just fly off the shelves.
I wonder - if NesCafe decided to change it's strategy to everyday low pricing - say the Kc 129 level instead of the 179 or 199 level would NesCafe's revenues go up or down?

Pricing Quirk 5 - Deep Discount Overkill
This week and next NesCafe they are pricing at 79.   They've actually gone through the pricing DMZ and are going head to head with Green Eclipse.  I'm stocking up and how and judging by what I see in the stores, even the twenty-four/seven neighborhood convenience store owners are doing the same.
I don't like to look a gift horse in the mouth.  But I don't understand why NesCafe felt the need go through the DMZ and go head to head with the bargain brand.  Leaving aside the velvet finely ground products, The mainstream brand pricing starts at about 159 and the bargain pricing ends at 99. A price point around 119 for the sale should be more than sufficient to pick up market share from the main competitors.

I Have More Questions than Answers - Don't You?
I'll be interested to hear what my product manager and supermarket executive friends have to say about the enigmas of coffee pricing.  I also will be interested to hear about other pricing idiosyncracies away from the coffee aisle.  E-mail me at msonenshine@symfoniecapital.com if you have suggestions or comments.
I normally write about Angel Investing and P2P Lending.  To learn more about my Angel Investment Fund click here.  To learn more about our P2P Lending Fund click here. 

Google AdWords - A Marketing Must????

 

Maybe yes, maybe no.  But don't underestimate it!

If any of you need an animated marketing video, get in touch with my friend, Radim Hladis.  He owns a company called Playou.  They create animated videos that are just spectacular!

 

Radim, like many of my friends, decided a few years ago that he wanted to do his own thing....be his own boss....master of his own ship....captain of his destiny. 

So he started an IT service and support company catering to small and medium sized enterprises called Caleum.  IT services is a tough, competitive business and one that depends on personal reputation and recommendations.   Radim and his colleagues worked tirelessly for three years to build a solid business.
Radim enjoyed the IT business but wanted to do something more creative.

Eventually Radim sold the IT business to his colleagues and headed for more colorful pastures.  He started a marketing company called "Big Family" to work with small and medium sized companies designing web-based marketing and advertising campaigns.

Radim found that animated videos were a particularly effective sales and marketing tool and Big Family started providing them to clients.  He become particularly adept at designing and producing the videos.  He also discovered, somewhat to his surprise, demand for animated marketing videos is increasing. He rebranded Big Family into Playou.

Radim can talk at length about what makes a good animated video and why his videos are particularly good.  You can get some insight into his philosophy if you see his blog about video productions produced by studios he has come to admire.

We'll get into the why's and wherefores about the appeal of animated marketing videos some other time.  Suffice to say for now that with a combination of client referrals and targeted marketing campaigns Radim has begun to develop a healthy growing business.

Keep Reading!  We're just getting warmed up.

That's where I come in to the picture.  Radim paid a surprise visit to our offices at SymCredit recently. Radim faces the typical problem that many entrepreneurs with growing businesses face.  Demand for his services is growing and he's had to hire more staff.  This places pressure on working capital, so Radim wanted to learn more about how a P2P loan can help his business.

Of course, I told Radim the truth, that he had knocked on the right door and SymCredit would happily serve him should he decide a P2P loan was right for him.  Watch the SymCredit site and maybe you'll soon see his loan listed :).

Since Radim is a web-marketing expert I decided to pick his brain a little and asked him about good ways to market.  Radim told me - "Google Ad Words is a must and being on page 1 of the search is even a bigger must!"

How can that be? I wondered.  To my naive thinking, pay-per-click advertising campaigns surely result in
many wasted dollars.  Customers who really are serious about finding a supplier will search past page 1.  They'll also read online magazines and they'll gather references.

Second in a village like the Czech Republic everyone seems to know everyone and there are not so many video producers to choose from. The better producers benefit from word of mouth - the best form of advertising I think I know of.

Third, isn't it better to develop a referral network?  That's what doctors do.  My friend David Wertheim is a pediatric allergist.  He knows lots of general practitioners.  When one of them needs an allergist David's phone rings.  David has developed a reputation over the last 20 years of practice.  His phone rings often.  David doesn't need to pay Google.  Radim knows a lot of marketing specialists who could send video business his way, so why should Radim need to pay Google?

Finally, the conspiracy theorist in the back of my mind tells me that a savvy competitor (or worse....Google) can help you waste your money by finding ways  to inundate you with wasted clicks.

My business is financial services.  Specifically, I run an Angel Investment Fund,  a P2P Lending Fund, a P2P Platform and a corporate finance advisory business. Investing in my products is not like running down to the store to buy a bottle of milk.  When someone wants to invest in P2P Lending Fund will they really just search Google to find me?  Will paying to have more people find me on Google really drive more business my way?  Or will I wind up paying for clicks and watching my bounce rate on Google analytics soar?  Aren't my clients far more likely to find me because they read my blogs or because they saw me speak at a conference or because they saw me mentioned in a news article or because they found me in a product focused database? Won't I propagate into Google naturally if my site and products are mentioned on lots of other websites?
Why should I spray and pray and pay for clicks I don't need when the clicks I need will find me anyhow?

Radim tells me that as many as 50% of his clients find him after they did on-line searches for video animation companies.   He tells me that his phone rings more often when he runs an on-line campaign, especially using AdWords. 

The most surprising thing I heard when Radim paid me his visit was that he actually starts to get enquiry from the US market.  Imagine that!  He's sitting in some small Moravian town and he gets enquiry from the US.  So Radim is starting to seriously consider investing in an AdWords campaign aimed at the US market.

Rounding the Final Bend and Heading Home

Is Google a Marketing Must?  I think the answer is....it depends on the the product and service you sell and how your customers are likely to find you and the decision process they are likely to go through before buying your service.  Probably the need for Google AdWords and similar services is inversely related to market size and product complexity.

Investing is a highly personal business.  Few people invest serious money with someone they don't know.  The bigger the investment, the more serious thought they put in before making a decision.   Advertising needs to be highly targeted and coupled with publishing, word of mouth recommendation and personal engagement. Paying for clicks and directed search engine visibility is probably not so important as simply being in the right place to meet the right people at the right time.

Video production is less personal.  There is a virtual crowd of video production companies in the global space.  Radim is a smart, talented fellow, but he still has to compete to get noticed. Unlike the investment space there aren't publications and databases dedicated to ranking video producers and discussing their most recent quarterly results.  Radim probably needs to use powerful tools like Google AdWords, banner ads and other ways to generate clicks.

My conversation with Radim forced to do some serious thinking. I'm not running out to start a Google AdWords campaign.  But there is a lot more to be said about how to e-market alternative investments smartly.  Stay tuned!
To find out more about Radim Hladis.  Click here or e-mail radim@playou.com.
To learn more about my P2P Lending Fund or my Angel Fund, visit symvest.com or e-mail msonenshine@symfoniecapital.com.