Make Marketing History

The views of a marketing deviant.

Tuesday, May 23, 2006

The Price Is Right.

McDonalds are launching a bigger Big Mac in Britain (their biggest ever apparently) and the press and health lobby are up in arms. Scratch below the surface and you find that it's only a promotional item running for the duration of the World Cup. The real story is the huge success of the $1 menu which since late 2002 has offered eight staples like the double cheeseburger, the fried McChicken sandwich, an order of fries or a 16-ounce soda for just $1.

It's being introduced here, in a bizarrely British way, as the 99p menu - repeating the bewildering high street practice of assuming that the "penny off" sways consumers. For me, all they're doing is reducing their revenue by 1% and increasing the time, fussiness and cost of the monetary transaction. But hey, they probably market researched it and got a positive response to a question their consumers actually wouldn't have considered if left to their own devices.

The P of price in the marketing 4Ps has always struck me as the most difficult of all to control. The measurement of the price elasticity of demand is a notoriously difficult thing to do and, of course, if you get it wrong you can lose customers and lower revenue, so a lot of caution prevails.

I recall meeting with a magazines group's chief executive some years ago and being asked what I thought about raising the price of a very popular men's magazine? It was an issue at which he’d had high-priced strategy consultants looking so I had to sound intelligent! Based on my knowledge of opportunity cost, the best I could do was to suggest that the target audience probably thought of the cover price in terms of the amount of pints of beer foregone and that since the price of beer had risen extraordinarily, it would be possible to raise the magazine price without appearing a rip-off.

After all, something is only worth the amount of money someone will pay for it. That was very evident a year ago when I was speaking to a Floridian property developer with decades of experience who couldn't believe that, regardless of how he increased the price of his units month on month in a totally arbitrary manner, demand kept increasing.

Moving in the opposite direction is equally tough. As Tom Peters says "Don't compete with China on cost or Wal-Mart on price" because you can't win. British newspapers have seen years of vicious price wars which require deep pockets to fund and while effective for News International on some of their titles, the very steady increase in cover price that follows has to my mind made them look expensive. Marketers must ask if lowering price, implicitly devalues your product and whether, as you raise the price again, are you making it look like worse value for money?

With the rise of low cost economies in China and India, the "high price equals high quality" relationship has, I think, been weakened especially in the mid-range. Returning to the British high street, there has been a distinct fall in clothing prices and a willingness by consumers to accept a trade off in terms of slightly reduced quality in exchange for having a larger more varied wardrobe. And this brings me back to what I think McDonalds are doing.

The Spanish clothing giant Zara has transformed the high street by constantly introducing new stock into their stores on an almost weekly basis, thus ensuring that every time a customer browses their store she finds something new that wasn't there last fortnight. Consequently footfall (the number of people coming through the door has rocketed) and the same is true at McDonalds where in the US they get one million more visitors a day compared to a year ago, primarily in the 18-24 age group. They generally don't have enough money in their pocket to buy the expensive items, but as long as they're in the outlets on a regular basis, there's always a chance that they will.

This is surely Price as Promotion (in the four Ps sense) but it's not one-off price promotions. It's long-term disruptive changes and the impact this has on the general consumer mindset cannot be underestimated. If you're a marketer with a premium or quasi-premium product, you better have a damn good story to tell.


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