Strategic Movements February 2018

February 2018 Corporate

McDonald’s Did Price Segmentation 101 Right

McDonald’s rolled out its “McPick 2” meal deal and lower priced beverages and saw same-store sales growth for the 10th consecutive quarter.  Was it just that it was offering cheap meals?  Negative: lower-priced items cannibalize sales of higher priced items.  Positive: lower-priced items enable companies to tap into a more price sensitive segment and attract that market, thus drive sales.  How to balance this is always tricky.  But one thing McDonalds definitely got right: Along with the discounted items, they increased prices on items outside of the Dollar Menu.  Price Segmentation 101 states that if you are going to do it, you should raise prices on the normal priced items.  McDonalds did that.  Check!

Social Media Police Content:  Another challenge for Facebook and Alphabet

Both Facebook and Alphabet’s YouTube started out as free speech zones.  But, it isn’t just “fake news” that will drive them to be content police.  Self-damaging acts of teens eating Tide Pods became a social media meme. Facebook and Alphabet both have policies against material that encourages dangerous behavior, and is taking it down as it becomes aware.  Soon—to address issues of hate speech, fake news, and bad behavior—every posting on their sites will need to be screened before it is released.

Qualcomm is a Bit Slow

Margrethe Vestager, EU’s antitrust chief, hit Qualcomm with a EUR 977 million fine for anticompetitive practices.  Crime: contracts with rebates paid to Apple for using Qualcomm chips exclusively and had a dominant position.  Qualcomm should have known better than to do this.  The EU has hit Intel with a similar issue back in 2007 for EUR 1.3 billion, and they haven’t been the only firms hit similar business practices.  You can’t have both dominant market share and exclusivity contracts tied to rebate in the EU. Is their legal team slow?

Amazon Grew Due to Opportunities Created by Government Regulations

“Researchers at the University of Nebraska and Ohio State University analyzed transactions in 19 states that implemented the Amazon tax from 2012 through May 2015. They found that Amazon purchases declined by 9.4% after the website began taxing online purchases. The effect was greater for purchases of at least $250, with an estimated reduction of 29.1%.”  Implication:  Amazon wouldn’t be as big as it is if they had been forced to apply sales tax over the past 20 years.  Taking advantage of opportunities created by government regulations is a well-documented marketing strategy, and Bezos did just that.  Result:  Richest man on earth.  He does not owe the government for his wealth, but he wouldn’t have it without it.

MoviePass Launches MaaS:  Movies as a Service

MoviePass offers a $9.95 per person, month subscription to see movies, what appears to be, any movie theatre in the U.S. With a compelling offer like this, the subscriber base has swelled to above one million compared to 20,000 last year, prior to Helios & Matheson Analytics, Inc.’s purchase of a majority stake in MoviePass. Challenge: With average movie costs of $8.97 per ticket, MoviePass loses when customers see more than one movie a month and is currently unprofitable. Goal: to make money on the data, not the movies. Expectation: Short-term, Helios & Matheson may suffer but the long-term has high potential.  Question: Can they sustain themselves till they get there?  Amazon did. But MoviePass may need to raise its rates.

Amazon Whole Foods Flexes Buyer Power

Whole Foods Market Inc. is asking suppliers to pay up: (1) Suppliers need to offer bigger discounts to earn shelf space, minimum of 25% off for a national promotion. (2) Suppliers to pay an average of $25,000 shelfing fee to be featured in high-traffic areas. (3) Suppliers are being asked to pay $300,000 for a multi-week promotion and prime shelf space. (4) Suppliers selling more than $300,000 in products per year must pay a stocking fee to have their products organized of 3% of the cost of goods ordered for standard products, 5% for beauty. Questions: Will suppliers play?  What impact will it have on the selection at Whole Foods?  Will end customers be happy?  Given that similar structures are standard at other grocers in the U.S., the transition should succeed yet expect a few bumps.

Impending Bust Indicator:  Executives Buying Private Jets Is Up

Since 2010, orders for private jets have been around 600 per year. Recent activity suggests orders will hit 800 per year by 2020. Last high: 1,154 deliveries in 2008, right before the Great Recession. When executives are buying jets, you can suspect they have money to burn.  (Yes, there are good reasons for executive jets, but it is also an indicator of excess. Both sides.)  Doubt the bust of 2008 will be repeated, but considering tax-cut and spending-increase creating a sugar rush to the U.S. economy, a crash is inevitable—and it may be harsh.

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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