Variable pricing:  The ultimate brand-destruction machine.

June 1, 2009

A former New York Times editor recently wrote a full-page article for Forbes magazine advocating “variable pricing” for art museums.

“Art institution directors should start thinking like airline yield managers,” was the subhead of the article.

That’s strange. You might think the yield-management gurus would have the

airlines rolling in dough. But that hasn’t happened.

Take the five largest U.S. airlines. United went bankrupt. Delta went bankrupt. Northwest went bankrupt. US Airways went bankrupt. And American Airlines is losing money. In the last 10 years, American has had revenues of $199.8 billion and managed to lose $6.7 billion. Not exactly an industry to emulate.

Why do otherwise intelligent people borrow ideas and concepts from failing industries and think they will succeed in a different setting?

The unfortunate answer to that question is that in today’s world, ideas and concept  don’t seem to matter. What matters is “execution.”

If you can execute well, goes the thinking, you are going to win. Which in itself is true. What is not true is that execution is unrelated to the power of the ideas and concepts driving the business.

Variable pricing is one of those ideas. No matter how well you execute a variable pricing strategy, you wind up undermining the brand.

Airline customers used to be brand loyal. When I worked at General Electric in Schenectady, New York, I always called American Airlines first. If they didn’t have a flight to where I wanted to go and at roughly the time I wanted to leave, I would ask the American representative to suggest another airline.

Variable pricing has destroyed the bond between airline and customer. Almost nobody books a flight without first asking, “What would that cost?”

Yesterday’s brand loyal customer is today’s price-comparison shopper.

Except for Southwest Airlines, of course. While the airline does use yield management strategies, it also puts a cap on its fares so they are never out of line.

According to a recent survey of the American Customer Satisfaction Index, Southwest came on top of the airline category for the 16th year in a row with a score of 81 out of 100, its highest ever, compared to a score of 64 for the airline business in general.

The major airlines should hold their heads in shame. It’s like Walmart coming out first in customer satisfaction ahead of Nordstrom and Neiman Marcus. 

High prices by themselves are not a problem. Often you need a high price to define your brand. Without its high price, Rolex would be just another watch brand. And Porsche would be just another sports car brand.

It’s the variable pricing that causes the problems. You can see a mini version of this effect in the cola aisles of many supermarkets. In our local supermarket, for example, you normally see both Coca-Cola and Pepsi-Cola priced at $4.69 for a 12 pack. But often one or the other brand is on sale for $3.00 for the 12-can package.

With this much disparity in price, many consumers automatically buy the one that’s on sale. In other words, the brands don’t matter anymore. What matters is the price.

You can also see the effect in cola market shares. Normally a No.1 brand has twice the market share of a No.2 brand. But Coca-Cola’s lead in the U.S. market is much less. On an index basis, Coca-Cola is 100; Pepsi-Cola is 65. (And Pepsi would have an even greater market share if it could do something about Coke’s enormous lead in sales to restaurants and fast-food chains.)

Years ago the Coca-Cola Company began testing a vending machine that could automatically raise prices for its drinks in hot weather. Consumer reaction was immediate and caustic. One beverage executive said, “What’s next? A machine that X-rays people’s pockets to find out how much change they have and raises the price accordingly?”

Brands have a function to perform and one of the most important functions they perform is communicating the brand’s price level and its equivalent quality level.

Consumers equate quality with price. The higher the price, the higher the quality. Not that consumers always want to buy the highest-quality products. Often they would rather save money and buy something less than the best.
These decisions usually depend on the category. Some categories are more important to a consumer; some categories less important. Some consumers buy expensive watches and cheap toilet paper. Or vice versa.

There’s nothing wrong with being a high-end brand. There’s nothing wrong with being a low-end brand. There’s something wrong when you try to be both.

Take Lenovo, for example. What’s a Lenovo? Is it a high-end computer or a low-end computer. Actually it’s that and a mid-price computer, too.

Lenovo has three lines of laptops, for example. The ThinkPad line is at the high end. The “value line” is at the low end and the IdeaPad line is somewhere in between. Prices in America range from $349 to $1,999. Lenovo like many companies around the world is trying to increase sales by appealing to everybody. That seldom works.

Lenovo is suffering. After eight years of profitable sales, the company lost $226 million in its last fiscal year. Out went Lenovo’s American chief executive to be replaced by his Chinese predecessor.

That sort of strategy is one of the reasons the U.S. automobile industry is in trouble. Trying to cover a wide swath of the market with a single brand name.

Years ago, I remember a Dodge executive bragging about the fact that the Dodge brand covered “85 percent of the market.”

Is that good? It doesn’t seem to be since Dodge is currently in the dumpster along with the rest of the Chrysler brands.