While listening to an HBR podcast (one of my favored), there was a segment concerning adaptive product pricing which struck me as interesting. In this piece the researcher compared the tactics of the fast food sandwich chain Subway ™ with its competitor Quiznos ™ on the handling of their pricing models during the economic downturn and the quandary now created as these fortunes turn a bit.
In the first example, the researchers looked at Subway ™ where to maintain volumes during the downturn; the firm released a “promotion” of 5 of their foot long sandwiches for $5 dollars. This met with a positive response from their customer base and provided Subway ™ a means to weather the economic storm with reasonable success.
On the other side of the fence, researches pointed out that Subways ™ competitor Quiznos ™ instead released a “new” set of sandwiches priced in the $2 to $3 range. There too, Quiznos ™ was successful in maintaining sales volumes and market share to weather the recessionary downturn.
However as the recession abates and the American economy starts to pull back on the nose dive of the past two years. Who you do think will fare better in taking advantage of the reversal of economic fortunes? If you guessed Quiznos ™ you would have voted correctly as their business acumen is as good as their toasty warm sandwiches.
Why you may ask as both companies weathered the storm well, however as the clouds cleared one had found they were plagued by an intrinsic pricing problem which the auto companies have been caught in a negative viral loop since post September 11th 2001. Yes the dreaded “rebate”, or reduced cost for the same product. As the customers of Subway ™ for roughly two years grew use to a price point for a “specific” product. However once the company raised the price back up, there was felt a violation of loyalty by the customer base. Hey they (the customer) stuck with Subway ™ during the thin times and now the company is taking advantage of them? Talk about a dilemma.
As a side bar, an entire book could be written on the topic of “profits” and public perception. As it’s my hypothesis that when a person is acting as a general “consumer”, they assume a “margin-less” transaction and much like the Heisenberg uncertainty principle. They (as consumers) cannot differentiate inequalities between certain pairs of economic properties, such as “value” and “margin” at the point of purchase.
However back on topic, their competition, Quiznos ™ took a different path while yielding the same goals from a bottom-line perspective; it also provided them with exit options which allowed the chain to minimize the potential of customer backlash from the loyalty front. Because they added a “new” set of products to the established menu, they could then simply drop the discount items as an act of menu consolidation and bam they are basically back to where they were with a minimal impact upon their Brand Loyalty.
Now admittedly the food service industry is one of the most dynamic in which a quick change up in product lines is achievable. As here it’s possible to shave off a slice of meat or cheese and have a substantial impact on the base cost model. However how do our friends in say the auto industry do the same? Do they trim off a piece of break line or offer one less tire? Clearly not an easy task, however one may find some answers in the modularity of the car design and manufacturing. As a sandwich is comprised of components (breads, meats, cheeses, vegetables, etc) as are other assembled products such as cars.
While I can say I don’t have all the answers, there is a clear lesson to be learned from the dynamic sandwich duo and the concepts of applied pricing…