Cable T.V. and Customer Retention

Recently, I decided to test the waters for a less expensive television experience. I have been a loyal cable subscriber for thirty-five years, but friends have told me that other systems, especially satellite, are cheaper. I went online to DirectTV.com to check their packages. We have been spending about $112 a month. The equivalent package from DirectTV appeared to be about $81 a month. I was shocked at the size of the price difference. DirectTV was more than 25% less expensive than Comcast, my cable supplier.




Given the size of these price differences, I did some investigation in what is happening in the market. Today there are four potential television service suppliers: cable, telephone companies, such as AT&T and Verizon, satellite and internet companies, such as Netflix and Hulu. The cable companies command 60% of the market. Phone companies have less than 15% of the market. The satellite firms, including DirectTV and Dish, control most of the rest. The internet firms are still small, though they may become larger in the future. Over the years, the cable companies have held a high price umbrella over the satellite companies. Now the phone companies are getting under this umbrella as well. The cable companies lost two million subscribers last year. The phone companies picked up most of that loss, while the satellite firms picked up a bit. The combination of the phone and satellite companies took virtually all the growth there was in the market.



Customer retention is a big deal. Even in fast-growing markets, you would like to be able to retain your customers when competitors seek them out. The cable companies have sought to retain customers by emphasizing more services to higher spending customers. These customers tend to be less price-sensitive. It appears that the cable companies are going to have to alter their courses. They simply can not afford to let their competitors take away their market share. Eventually, the competition will be as big and as strong as they are. They will lose the market leverage that a leader enjoys. For examples see GM in autos, IBM in the PC market and U.S. Steel in the steel market.



The T.V. market is speaking in clear tones. The phone and satellite companies offer a better value proposition. The cable companies have to listen soon.

The Kindle with Special Offers…not your typical low-end product

Amazon has introduced a low-end Kindle product, the Kindle with special offers. This Kindle sells for $114 compared to the standard $139 Kindle with Wi-Fi. This is not a typical low-end product. Low-end products offer fewer benefits than industry-leading products (we call these Standard Leader products) for either the buyer or the user of the product in return for a lower price. We call these low-end products Price Leaders. There are two kinds of Price Leaders. The first, called Strippers, strip out benefits for both the user and the buyer of the product in order to achieve a very low price. The second, Predators, offers the user equivalent benefits to the industry’s main product but fewer benefits for the buyer. On average, Price Leaders cost about 33% less than Standard Leader products.




You will note that the Kindle with special offers does not fit easily into either of these two Price Leader categories. It reduces the user benefits by delaying the use of the product until the customer has viewed advertisements. There is no change to the benefits offered the buyer of the product. The Kindle with special offers deviates from the norms of Price Leader products with its level of discount. The Kindle with special offers sells for about 18% less than the standard Kindle product.



The Kindle with special offers varies from the Price Leader pricing norm in another interesting and important dimension. Some of these “special offers” are really good deals for the average Amazon customer. In one particularly interesting offer, Amazon will sell an Amazon Gift Card worth $20 for just $10. So, an avid fan of the Amazon web site receives additional user benefits with this new low-end product. In many cases, these special offers may more than offset the disadvantage to the user of a delay in using the product while the user views an ad.



This new Kindle with special offers is a very creative product innovation. Congratulations to Amazon.

Cable T.V. and Customer Retention

Recently, I decided to test the waters for a less expensive television experience. I have been a loyal cable subscriber for thirty-five years, but friends have told me that other systems, especially satellite, are cheaper. I went online to DirectTV.com to check their packages. We have been spending about $112 a month. The equivalent package from DirectTV appeared to be about $81 a month. I was shocked at the size of the price difference. DirectTV was more than 25% less expensive than Comcast, my cable supplier.

Given the size of these price differences, I did some investigation in what is happening in the market. Today there are four potential television service suppliers: cable, telephone companies, such as AT&T and Verizon, satellite and internet companies, such as Netflix and Hulu. The cable companies command 60% of the market. Phone companies have less than 15% of the market. The satellite firms, including DirectTV and Dish, control most of the rest. The internet firms are still small, though they may become larger in the future. Over the years, the cable companies have held a high price umbrella over the satellite companies. Now the phone companies are getting under this umbrella as well. The cable companies lost two million subscribers last year. The phone companies picked up most of that loss, while the satellite firms picked up a bit. The combination of the phone and satellite companies took virtually all the growth there was in the market.


Customer retention is a big deal. Even in fast-growing markets, you would like to be able to retain your customers when competitors seek them out. The cable companies have sought to retain customers by emphasizing more services to higher spending customers. These customers tend to be less price-sensitive. It appears that the cable companies are going to have to alter their courses. They simply can not afford to let their competitors take away their market share. Eventually, the competition will be as big and as strong as they are. They will lose the market leverage that a leader enjoys. For examples see GM in autos, IBM in the PC market and U.S. Steel in the steel market.


The T.V. market is speaking in clear tones. The phone and satellite companies offer a better value proposition. The cable companies have to listen soon.

A Squeeze at the Top

The very highest end of Parisian hotels includes such names as the Crillon, the Plaza Athenee and Le Bristol. There are four of these highest prestige hotels in Paris. Their prices start at Euro 750 a night. Average room prices run around Euro 1000 a night. These are among the highest prices for hotel rooms in the world. Still, occupancy rates run around 80%. Even in the doldrums of 2008 and 2009, they fell only to 70%.


Something new is happening, though. The high end of the market is about to see a doubling in capacity as four new luxury hotels open over a three year period. Two are already open and two more will open over the next two years. There is a prospect for even more coming beyond this next two year window, as other competitors mull a market entry.

Many experts believe that prices will hold steady despite the massive influx of new capacity. They cite an increase in demand to support their beliefs. This demand is to come from Chinese tourists upgrading from luxury boutique hotels and from the growth of major conference events.

Really, though, it isn’t the price that is at issue with this new capacity. It is margins. This new capacity, despite being at the very high end of the market, is coming faster than demand is growing. As a result, margins, if not prices, will fall. This margin squeeze has already started. The existing high-end hotels are spending money to upgrade their current offerings with celebrity-chef restaurants, branded spas and upgraded hotel rooms. Even if prices stay the same as they are today, margins will fall until demand fully catches up to this new capacity.

While it is always margins that suffer when the growth of capacity outstrips the growth of demand, I would not want to bet on prices holding as steady as these analysts expect. My guess is that industrial conferences who can afford to place their attendees at the highest end hotels will also be able to negotiate room price discounts over the next couple of years.

Another Creative Pricing Scheme

It is not often that you see companies using really unusual pricing to build future business. Here is one that I like.


Every price has three and, usually four, components: the Benefit Package, the Basis of Charge, the List price and usually some Optional Components of price. The Benefit Package includes all of the Function, Reliability and Convenience benefits associated with the main product. The Basis of Charge is the way the company quantifies the unit of sale that it prices with the List Price, which is the stated price per unit of product sold. The Optional Components of price enable the company to leave the List Price unchanged, but to alter the value the company offers the customer by changing Functions, Reliability or Convenience benefits beyond those of the main product. The most creative pricing schemes usually involve the Optional Components of price.


Recently, we described one of these Optional Components of price, a Call, offered by Continental Airlines. In this blog, we will describe a “Put” offered by Best Buy. A Put is an Optional Component of price that enables the customer to sell back a product to the seller at a stated price in the future.


Best Buy recently introduced the Buy-Back program for various electronic gadgets it sells. This program adds a fee to the original List price of the product. In return for that fee, the customer gets the right to bring the product back for up to two years for a return value of a stated percentage of the original List price of the product. These percentages run from 20% to 50%, depending on the time of the return. The value of the return itself comes in the form of a Best Buy gift card. Best Buy hopes the customer will use this gift card to purchase an upgrade on the product that the consumer returns.


This Put may be attractive to consumers concerned about the speed of technological innovation in electronic gadgets. The Put effectively reduces the future price of purchasing a new electronic gadget. It leaves the current List prices and future List prices unchanged. It also increases the odds that Best Buy will be the retailer who delivers the new technologically-advanced product.

The NYSE Stumble Offers a Lesson for All Leaders

Recently, the New York Stock Exchange agreed to sell itself to the German exchange, Deutsche Boerse. For generations, the NYSE was the place to trade equities of the finest companies in the U.S. Its sale to a German exchange is a sign of how desperate its market situation has become. The NYSE’s fall offers some important lessons for a market leader in any industry.


The NYSE’s market share has fallen out of bed. Six years ago, 75% of the traded shares of companies listed on the New York Stock Exchange traded on that exchange. Today, only 35% of those shares trade on the NYSE. This precipitous fall came because the NYSE fell behind in both service and price. The market changed and new competitors emerged.


First, the market changed. High frequency traders, using computerized trading algorithms, do two-thirds of share trades today. These market-dominating customers demand the highest speeds in their transactions and the industry’s lowest prices. The New York Stock Exchange struggled to meet these requirements.


Second, new competition emerged. There are roughly fifty trading venues which will provide these high-frequency traders with fast services and low prices. The majority of these venues did not even exist ten years ago. They sprang up using relatively inexpensive computers in low-cost outlying and suburban locations. These new trading venues offer newer, faster technology and lower prices than the NYSE.


The NYSE held a price umbrella over these emerging firms. The new firms grew and became ever more capable. Today, they can compete and win in competition for even small trades.


The New York Stock Exchange was a dominant market leader. Its precipitous fall holds lessons for all market leaders in any market. Among these lessons are these:


1. Always protect your relationships with the industry’s heart-of-the-market customers. These are the key, primary and secondary relationships with the industry’s large customers, those purchasing 80% of the industry’s unit volume. These key relationships usually hold 65% or so of the total industry sales.


2. Avoid consistent failure with these heart-of-the-market relationships, especially failures in function and price. Customers generally will not leave an established relationship until their supplier fails them. Any failure, especially consistent failure over time, opens the customer relationship to other competitors.


3. Parry fast-growing competitors at any price point. The fast growth of these competitors tells us that customers like what they offer. Their growth in share will not stop until the market leader itself puts an end to it. The NYSE has allowed many new competitors into its marketplace. It would have been much easier to stop them when they were much smaller or, indeed, even before they entered the market. This market will consolidate again into far fewer competitors. But now it is going to be a bloody fight.


4. Fix the products that are losing share in the heart-of-the-market. Customer retention is important in any market, but it is critical in markets where prices are falling. The first demand of product innovation is to fix problems that cause the company to lose customer relationships.


5. Cover any price point your heart-of-the-market customer purchases. Companies often have price point biases, either against a low price point because it pulls down margins, or against a high price point because it makes operations less efficient. If the heart-of-the-market customers are buying the price point, you have to cover it.


6. In a falling price environment, develop pricing that discourages competition. This pricing can, and should, involve more than simple reductions in list prices. There are several components of a price. The NYSE can use these components to beat back many of these competitors. In a low, or falling, price environment, the only real function that price serves is to discourage competitors from competing for your customers. Ultimately, low prices push competitors out of the marketplace. This takes a long period of time when there are as many competitors as the NYSE faces today.


7. Develop and exploit economies of scale to support the falling prices the company faces and to maintain the best returns in the industry. The NYSE is still the largest competitor in the market. It no longer enjoys dominant share, but it is still large enough to create a more productive cost structure, especially by matching benefits and overhead costs to customer segments and eliminating benefits that customers do not need.

Amazon's Blockbuster Innovation

In 2005, Amazon introduced its Prime Free Shipping program. This yearly subscription program promised free two-day shipping on any purchase the subscriber made from Amazon. Five years later, 13% of Amazon’s 130 million active users are Prime members. More significantly, 20% of the subscribers who purchased products from Amazon in the last twelve months are Prime subscribers. These Prime subscribers purchase two to three times as much as non-Prime subscribers over the course of a year. This Performance innovation removes an impediment to purchasing on Amazon. In fact, it increases the odds greatly that online purchases will be made on Amazon rather than on a competitive site. This has been a blockbuster innovation for Amazon. The innovation holds a special appeal to the larger customers in the market. The Prime subscribers may also offer Amazon an entry into a business that it has longed to gain, for several years, subscription video rentals. It appears that Amazon will introduce a streaming video product for its Prime subscribers. This new product will not cost the Prime subscribers any more than their normal subscription. Netflix’s Watch Instantly service cost about $96 a year so Amazon may have a price advantage on Netflix. Of course, Convenience and Price are only important provided Amazon offers equivalent Function, that is, streaming video content. We don’t know about that yet. Still, Amazon has proven to be an innovative company who can find ways to build a business in non-traditional ways. It continues to grab market share in the retail business.