261-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.

Posted 4/20/11

Update:

Best Buy no longer offers a true Put program, where the item you return has a guaranteed price on the return. Instead, it offers a relatively robust trade-in program. Best Buy the product you are trading in and offer you a Best Buy gift card for its value. Many other electronics retailers also offer trade-in programs, including Walmart, Target and Amazon among others. The Best Buy trade-in program appears to cover more categories of electronics.

Best Buy has become a very successful electronics retailer after a culture makeover.  It revamped its culture to focus on training its people and helping them establish real relationships with customers. The company increased its pay scales and trained its employees to help customers find and become comfortable with what they might buy at Best Buy. Best Buy introduced an in-home advisory program which sent company salespeople, paid on salary rather than commission, to make up to 90 minute in person house calls to help customers choose products that would work in their homes.  It employed its popular Geek Squad to help with product installation and maintenance. The company built a seamless omni-channel sales process which made any purchase easy for the customer.  As a result, nearly 40% of company sales now occur online.

Over time these Convenience and Reliability innovations in its value system led to more satisfied employees and trustful customers. The company accompanied these changes with an aggressive “price match” policy. This policy will meet any local competitor price within 25 miles of the Best Buy store. The policy also matches any online price for the same product. Further, it will match these prices for up to 15 days after the customer has purchased the product, effectively offering a customer a call on the product.

The company converted what used to be a weakness into a strength. Several years ago, the company suffered from “show rooming”, where customers would see, touch, and feel a product in a Best Buy store and then buy it online for a lower price. With its aggressive “price match” policy Best Buy argued to every customer in its store that its price was as good as they could get so why not buy it right then at the store. This argument often worked with customers who had been encouraged to join in a relationship with Best Buy. The company became a winner on Reliability, Convenience and price. Quite an accomplishment.  See HERE and HERE and HERE for more perspective on Best Buy’s success in a hostile market.

12/22

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