Disney Membership Pricing Decision Spine: Unknown of 5 Vertebrae
In 1957, Walt Disney sketched the “Synergy Map” (shown above) as a way to connect the many different properties and revenue streams within the larger Disney ecosystem. The concept has evolved since those early days and is now going through a refresh.
Today, in 2022, Bob Chapek, the current CEO, is exploring the rollout of a new membership program that could further support the cross-selling of Disney merchandise, parks, and experiences with Disney+ streaming customers.
Membership programs, such as those at REI, Sam’s Club, or Amazon Prime tend to attract the segment of the market which are likely to be both heavy purchasers within the category and also price sensitive. They act like a two-part tariff in that the entrance fee (membership) provides discounts on the metered offering (in Disney’s case, merchandise or other experiences). Two-part tariffs can be highly profitable and have been deployed and studied since 1920. (Two-part tariffs are a one hundred-year-old pricing strategy that many have never heard of.)
Disney has long impressed me with their strategic pricing decisions. At the same time, this too sounds promising. However, this strategy cannot be fairly evaluated yet because we do not know its price point nor what membership would imply. That is, a decision hasn’t been made.
Disney’s Pricing Spine: Unknown out of 5 vertebrae for this decision.
DIS (Walt Disney Co.) has been relatively unchanged in the weeks following the news at 112. 2022 revenue of $67 billion with a 3% margin and P/E ratio near 64.
Toonkel, Jessica and Krouse, Sarah (2022, September 1). Disney Mulls Member Benefit Program. Wall Street Journal, B1.
Campbell’s Pricing Decision Spine: 2 of 5 Vertebrae
Campbell’s recently reported a 6% revenue increase. Drivers include higher prices, greater amid greater promotional spending, and lower volumes. Profits decreased despite the higher prices partly due to the higher promotional spending but also largely attributable to variable cost increases driven by pandemic-related supply chain restraints and Russia’s invasion of Ukraine.
On the plus side, Campbell’s market share has increased despite higher pressure from store brands in stock and other kitchen basics.
For many executives in consumer-packaged goods (CPG), market share is more important than other business performance metrics. The primacy of market share among many possible metrics is largely due to Profit Impact of Market Strategy (PIMS) studies first released in the 1970s and highly marketed by the Boston Consulting Group (BCG). The PIMS study concluded that market share and profits are strongly correlated. Despite the numerous economic, finance, and marketing studies that have challenged the PIMS study and its conclusions, market share remains a priority for many executives that cannot be threatened by a price increase.
Moreover, sales and marketing executives are often biased toward pursuing volume over price to drive profits. Mark Clouse, CEO of Campbell Soup Company, comes from a background in sales and marketing of consumer package goods (CPG) after serving in the U.S. Army. (Thank you for your service.)
Due to the shrinking profits among higher variable costs and promotional spending, and due to known industry biases favoring market share over pricing quality, we have come to the following conclusion.
Campbell’s Pricing Spine: 2 out of 5 vertebrae for these decisions.
They should have raised prices faster and reduced their dependency on promotions.
CPB (Campbell Soup Co.) fell in the weeks following the news from 51 to 48. 2022 revenue of $8.6 billion with an 8.8% margin and P/E ratio near 48.
Kang, Jaewon and Seal, Dean (2022, September 2). Campbell’s Profit Slides as Shoppers Rethink Spending. Wall Street Journal, B3.
Dollar Tree Pricing Decision Spine: 3 of 5 Vertebrae
Dollar Tree Inc., after raising prices, saw a revenue increase 4.9% over the same quarter last year from comparable sales.
If revenue increases following a price increase, the company was priced in the inelastic range. No profit-oriented company in a mature industry should price in the inelastic range because it leaves money (profits) on the table. Dollar Tree was in this position. Therefore, their price increase was appropriate.
Dollar Tree reported fewer customer expenditures on high-margin items. This mix shift should be attributed to an exogenous factor of inflationary pressures on consumers in the current economic environment rather than an endogenous factor of management decision-making.
Dollar Tree also reported fewer store visits but higher expenditure per visit, and also that they are attracting more households with income of $80,000 or higher thus bringing in above median-income families into what is perceived as a low-priced outlet. While these facts provide interesting insights into the dynamics of consumer behavior during this inflationary period, they do not provide great insight into managerial decision-making and its business outcomes.
The management team at Dollar Tree is demonstrating pricing competence.
Dollar Tree Pricing Spine: 3 out of 5 vertebrae for these decisions.
DLTR (Dollar Tree Inc.) fell sharply in the weeks following the news from 165 to 142. 2021 revenue of $26 billion with a 2022 5.0% margin and P/E ratio near 20.
Nassauer, Sarah (2022, August 26). Higher Prices Lift Dollar Stores. Wall Street Journal, B2.
Dollar General Pricing Decision Spine: 3 of 5 Vertebrae
Dollar General Corp., after raising prices, increased revenue 4.6% over same quarter last year from comparable sales.
As I previously stated, if revenue increases following a price increase, the company was priced in the inelastic range. Dollar General was in this position, and therefore their price increase was appropriate.
Dollar General also reported that customers lowered spending on apparel, seasonal goods, and home products and raised spending on consumables such as food. This mix shift should be attributed to the exogenous factor of inflationary pressures on consumers in the current economic environment rather than an endogenous factor related to management decisions.
The management teams at Dollar General demonstrated pricing competence.
Dollar General Pricing Spine: 3 out of 5 vertebrae for these decisions.
DG (Dollar General Corp.) fluctuated in the weeks following the news, starting at 240, falling to 237, then rising to 247. 2021 revenue of $34 billion with a 2022 7.0% margin and P/E ratio near 25.
Nassauer, Sarah (2022, August 26). Higher Prices Lift Dollar Stores. Wall Street Journal, B2.
Sony Pricing Decision Spine: 4 of 5 Vertebrae
Sony is increasing the price of a PlayStation 5 console in select markets including the Middle East, Africa, Europe, Asia-Pacific, Latin America, and Canada. However, they are not raising prices in the U.S. Inflationary pressures were cited as a driving force behind this decision.
The price increase will be market-dependent. A 20% price increase is expected in Japan. A 10% price increase in Europe. And again, 0% in the U.S.
Supply chain issues impacted this decision. Sony has had silicon chip challenges, similar to its competitors, as well as other supply chain challenges related to COVID restrictions and production in China. As a result, sales of PlayStation 5 plunged 26% in Q2 of 2022 over the same quarter last year.
Sony also reported demand is outstripping supply.
The market specificity of the price increase, the factors influencing the decision, and the industry concentration of the gaming console industry all lead to the following conclusion.
Sony’s Pricing Spine: 4 out of 5 vertebrae for these decisions.
SONY (Sony Group Corp.) fell in the weeks following the news from 84 to 74, yet it is highly doubtful that the price of the PlayStation 5 alone impacted this performance. 2022 revenue of $882 billion with an 8.9% margin and P/E ratio near 14.
Vipers, Gareth (2022, August 26). PlayStation 5 Prices to Increase as Much as 20% in Certain Markets. Wall Street Journal, B4.
Kraft Heinz Decision: 2/5 Spines of Pricing Backbone
Organic revenue grew 10.1% in Q2 2022 over the same period year prior. Price increased 12.4% while volume decreased 2.3%.
Miguel Patricio, CEO of Kraft Heinz, stated “We are mindful of the current inflationary environment and how it affects consumers.”
If the magnitude of price increases exceeds that of volume decreases, the company is priced in the inelastic range. Kraft Heinz was in this position. Therefore, their price increase was appropriate, despite the small loss of volume.
Kraft Heinz executives revealed their strong pricing performance with announcements about increasing promotions.
Should Kraft Heinz increase promotions today?
- In support of increased price promotions: industry volatility, consumer price expectation theory, and price segmentation.
- Against price promotions: profit impact and alternative investment decisions.
Regarding industry volatility and price promotions:
- During the pandemic, Kraft Heinz, like many of its peers, decreased promotions. This was wise back in 2020 when supply chains were snarled, production plants were short on labor, demand shifted from industrial to grocery channels, and simply offering consumers a familiar and useful product was sufficient to drive sales. (Recall, there was once even a shortage of dried beans.)
- After the pandemic crisis period, the industry challenges changed. Today’s economic environment is one of high inflation and an uncertain economic future. Plus, low-cost competitors are able to reliably supply once again. Today, CPG companies are experiencing increased brand betrayal towards lower-cost store brands.
- As competitive pressure has returned, we should expect a return to promotional activity.
Consumer price expectation theory warrants price promotions during moderately high-inflation periods (1).
- Research into behavioral economics demonstrates that consumers strongly anchor their price expectations based upon the price point they last purchased at, not the price currently required to purchase.
- When prices are above consumer expectations, demand decreases. Consumers often respond with thoughts like “I will wait for the price to come back down” or “they are trying to rip me off.”
- Moderately high inflation drives noticeable price increases above that expected by consumers.
- To soften the blow of a large price increase, temporary coupons and promotions can give consumers the feeling that they are “getting a deal” and beating the system while the new list price adjusts the expected price to pay upwards.
- Thus, when taking a large price increase on branded goods, increased promotions may be expected on a transitory basis.
Price promotions can be a good form of price segmentation.
- Pricing fundamentals state that price segmentation can increase profitability.
- Price promotions and couponing activity is a form of price segmentation because not everyone will make the effort to use coupons or change their behavior to participate in a price promotion.
- As such, price promotions can increase profitability.
Repeatedly, research has demonstrated most price promotions harm profits.
- At the most basic level, promotions lower prices in the hopes of gaining volumes to improve profits. The volume gains are rarely sufficient to overcome the price losses.
- In 1990, Scott Neslin published a model for estimating the impact of promotional activity on profits. This and similar modeling efforts repeatedly reveal that most price promotions harm profits.
Price promotions are not the only choice.
- While a price promotion may drive volume growth temporarily to the cheers of many sales and marketing executives, it is not the only choice. That same budget can be used for branding.
- Across the consumer packaged goods industry, companies find the branding elasticity is around 0.2 on average. This means that a doubling of the advertising and branding budget should drive a 20% increase in sales volume.
- PepsiCo made the decision to decrease promotions and increase brand advertising with positive outcomes during 2019 and before the pandemic.
- Miguel Patricio, CEO of Kraft Heinz, stated a need to nurture national brands in early 2020 right before the pandemic. Hence, we are aware Patricio and his team are aware of the alternatives. We just wish they had taken them.
Weighing the pros and the cons, we are skeptical.
Kraft Heinz Pricing Backbone Demonstrated in the Decision to Increase Prices: 4 out of 5 Spines.
Kraft Heinz Pricing Backbone Demonstrated in the Decision to Increase Promotions: 2 out of 5 Spines.
KHC (Kraft Heinz Co) fell from 38.6 to 35.6 on the day of the announcement and has since recovered. 2021 revenue of $26 billion with a 2022 P/E ratio near 37.
Gasparro, Annie (2022, July 28). Kraft Heinz Raises Outlook, Plans Promotional Items. Wall Street Journal, B3.
(1) Inflation of around 10% is only moderately high in my judgment. Given the experiences of currencies across the globe in my professional lifetime, I think of 20% as high and 100% or greater as entering the hyperinflation territory. Comparing the relatively recent experiences of people in Turkey or Argentina versus Yugoslavia or Zimbabwe, we conclude that the current inflation felt in Europe and North America is painful and unpleasant but should be categorized as merely moderately high.
GM Pricing Decision Spine: 4 of 5 Vertebrae
GM is setting a $30,000 price target for an electric (EV) vehicle version of the Chevrolet Equinox SUV to be released in the fall of 2023.
Is $30,000 a good price target?
The Equinox is currently GM’s second-best seller behind the Silverado pickup. This will join GM’s current EV offering lineup that includes a $110,000 GMC Hummer and a $62,000 Cadillac SUV. The EV Equinox will help GM meet its goal of selling one million EVs in North America by 2025. An EV Equinox will compete most directly against the Volkswagen ID.4 EV starting at $37,500, the Kia EV6 and Toyota bZ4X starting around $40,000, and the Tesla Model 3 starting at $47,000, given current prices. Regarding the lower price point, Doug Houlihan, an executive engineer on the program, stated “the more volume we can get, the lower we can get the price.”
To evaluate, consider the reality of this price target, how it might be set, and the role it plays.
Is the price target real?
Any price target set today for an offering that won’t be released for at least 12 months is likely to be missed, especially in a rapidly evolving product category such as EVs. Battery prices, chips, and other component costs are likely to vary as are the prices of the competing alternatives. Both of these factors will greatly impact the price of the EV Equinox when it is actually released. As such, it is best to realize this is a target and no more. It is not a promise nor a final decision. It is just a target and one that is likely to evolve. On the plus side, the price target is not unrealistic considering the highly favorable and asymmetric role of federal incentives to purchase a largely U.S.-produced EV.
Yet how might this target have been created?
For starters, GM has an internal “Good-Better-Best” product lineup between the Chevrolet, Cadillac, and GMC Hummer brands and price points within the EV category. Versioning is a proven profitable value proposition in auto manufacturing. Moving beyond this high-level directionally appropriate strategy, we get to the detailed challenge of defining a price point. Why around $30,000 and not higher or lower? The best practice approach to get to that level of accuracy, even if we are talking about ballpark accuracy and not a single specific price point, is to use conjoint analysis. Adding different GM models and price points to the Volkswagen, Toyota, Kia, and Tesla models and price points currently on the market, one would test the attractiveness of an EV Equinox that currently doesn’t exist through conjoint analysis and define the profit or strategy optimizing price point. If this wasn’t done at GM, I would be greatly surprised.
And why is the price target important?
For over 30 years, Ron Baker and other pricing strategy leaders have called on executives and brand managers to start with the customer to define the price rather than the other way around. That is, ditch the process which calls for marking up costs to define a price that you demand customers to pay (Product >> Cost >> Price >> Value >> Customers) and replace it with a process that calls for working from the customer’s needs and desires to identify the price that matches their willingness to pay and then engineer the cost and product to deliver to that need profitably (Customers >> Value >> Price >> Cost >> Product). GM’s price target could play that role. It provides a boundary to engineer the EV Equinox for delivering an offering that meets customer needs and desires profitably.
The above arguments lend towards a highly strong decision-making process until we get an executive’s dubious claim regarding higher volumes and lower prices. To my current understanding, the average variable costs of producing an EV do not decrease nearly as quickly as those of producing an internal combustion engine (ICE) automobile, hence the correlation implied in the statement is questionable or at best weak. I suspect that statement is a red herring.
After considering the above, we have come to the following conclusion.
GM’s Pricing Spine: 4 out of 5 vertebrae for this decision.
GM (General Motors Co.) rose the day following the news from 40.5 to 41.4. 2021 revenue of $127 billion with a 7.9% margin and P/E ratio currently near 7.7.
Colias, Mike (2022, September 9). GM Sets ’23 Release of $30,000 Electric SUV. Wall Street Journal, B1.