In this episode of Pricing College – Aidan and Joanna discuss whether a pricing guru and a great pricing strategy can rescue a bad or outdated business model.

 

We discuss the examples of Blockbuster Video, Virgin Megastores and music retailer HMV.

 

We state that pricing generally can not rescue a bad business model – but can help a value-based business pivot early enough to survive and prosper.

 

 

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TIME-STAMPED SHOW NOTES:

[00:00] Introduction

[01:32] Business and customer life cycle

[03:56] Technological change that affects Blockbuster, Virgin, and other music stores

[05:05] EBIT opportunities

[08:23] Benefits of value-based pricing approach 

 

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A Bad Business Model

 

Today’s topic was suggested to me by something I was doing during the lockdown. We were watching a bit of Netflix, with the kids. I thought to myself, “God I remember the time when we used to go and rent VHS or a video at blockbuster.” And I wonder, what happened to Blockbuster?

 

What happened to Blockbuster? Well, nothing good happened to Blockbuster. And what we wanted to talk about today which relates to that story is that sometimes, you can’t fix a bad business model or a dying business model by simply pricing your way through it.

 

At Taylor Wells, some of the queries we get through are from new companies and companies that are mature and want to improve. But we also get queries from customers who are looking at pricing as a silver bullet. Basically, as a solution to their problems. And they’re hoping that this magic box of tricks will unleash new profitability and rescue them from failure.

 

Often, these companies are ones that haven’t considered the business lifecycle, or their customer lifecycle. And both of these concepts and measurements are important to pricing. Because good Pricing Managers will always look at the impact of pricing on a business model. And they’ll look at pricing within a business in terms of what pricing power they have, based on the total economic value a business can offer to customers and in the ecosystem.

 

So, to go through what that means…because there’s a lot of long words and concepts there.

 

We’ll go back to thinking about a business of the music industry, for instance. HMV and the virgin megastores from the 90s! Extremely popular for a good deal at a time. But, what happened?! They didn’t think that their business would ever die. They thought people would keep going back. And they had a very staunch view of business strategy.

 

They were almost, one could say, they feared the pain of losing that business strategy to inevitable changes that were occurring in the market. They were even resistant to changing their pricing strategy. They kept their prices very high. They assumed loyal consumers would keep coming back.

 

And they disregarded the fact that in their field, new entrants were coming in to provide consumers with cheaper DVDs. I’m thinking, they were the supermarkets who started to offer customers DVDs and music at like…half the price of HMV or Virgin.

 

Another thing they did, they didn’t think they should be getting online. They assumed people would always come back into the store to buy deep expensive music and vinyl, simply because they loved music.

 

All of these assumptions were proved incorrect. And at the very last minute, only then did they slash their prices to keep their doors open.  But by which time, it was too late because the business lifecycle was already at its end.

 

I think you can look at these companies, blockbuster, HMV etc. They had a very successful business. You could almost say it was a goose that laid the golden egg. Every year they’re making profits. They were selling and renting out DVDs or VHS or whatever it was at the time.

 

But technology moved ahead basically, without them fully being aware of it. There was a competitor growing somewhere where that was streaming. Or satellite television or something else. And that was growing in the background.

 

Technology against a Bad Business Model

 

Spotify in the world of music. When that came along, it wiped them out. Because these companies were focused on what they were doing at that time, that this massive technological change. And we can’t say something’s right or wrong or they should have moved ahead. Or they should have surfed that wave when it came. Because that would require great entrepreneurial flair, etc. And that’s not for everyone.

 

But the concept was when they saw that the writing’s on the wall, the question is, “could the pricing change have rescued Blockbuster Video? Could it have rescued HMV music virgin megastores?” That’s a really good question.

 

Well, it could have been for a time. They could have optimised prices, earlier than they did. But saying that, the business life cycle would have come to an end. So, it’s sort of optimising to an inevitable end.

 

What they didn’t do was capture the EBIT opportunities throughout the lifecycle. They did at the beginning. But then, they just kept their pricing strategy and price-setting the same.

 

From that, they didn’t optimise and then they lost volume because the traffic went to supermarkets. The traffic went online. So, they lost a lot of their customer base. They lost market share. They lost profitability, and then they didn’t even collect the EBIT that they deserved.

 

So, they could have done more price optimisation through the business lifecycle which they didn’t. So yes, there was an opportunity. What I’m saying is “Yes, there’s an opportunity for dying business models.” But you’ve got to be smart about it. And you’ve got to know what you’re doing to capture those EBIT opportunities.

 

Because in each phase of the business, there are different types of opportunities. And a good pricing expert or manager will know this. They will optimise which means they’ll adjust prices accordingly. Whether this is across the product group or according to different customer segments or price segments, they’ll do whatever it takes.

 

However, the important point to make here is that pricing is always connected to the business model. And for businesses that don’t see that they’re the ones that suffer in the end, and they don’t get any additional profitability – they lose volume.

 

My personal view is pricing could not have saved these businesses. They would have required a massive pivot. A term we use in startup businesses. You’re looking at those huge brick-and-mortar stores. Most of them were in very prominent town-centre locations. Or easy to access suburban locations. An example of the Blockbuster video where people could go easily.

 

 

With that, they either own the stores or rent. So massive rental leases have very large salary costs. And a lot of them would have debt as well which they would have used to expand. Or to buy more premises and grow their business.

 

The big issue with business and life in general is, you can only see so far ahead. And we tend to extrapolate. Who would have thought that Netflix and Spotify were coming so quickly and have dominated the market so fast?

 

It’s not these things that happen to any industry. But I suppose the lesson I will take from this is, industry pricing has to be focused on the value. The value you’re giving to the customers. At the initial stage of seeing these, challenges come along. And seeing these challenges appear, I don’t know the answer to this.

 

Did those companies think “Let’s ignore. Let’s keep the golden goose laying eggs for us as long as possible?” Or did they think “Let’s just go up against these guys. Let’s try to challenge them and let’s see where it could go?”

 

But we don’t know the answer to that. But I would have to say when you have a very successful business, it’s very difficult to get buy-in from a company to pivot to a less profitable one in the short term.

 

I think the answer to that is I think a lot of businesses fear the pain of loss. They fear that they’ve made, you know, when you make such large investment and effort into a certain strategy. And then you decide to pivot, you feel pain in the fact that you’ve made a wrong decision in the original strategy. You invested so much in it so you don’t pivot.

 

So, that’s almost like the opposite of agile. What I’m trying to say here is that, it’s okay to fail. But you have to understand that quickly before you can use pricing more effectively. You’ve got to know when your business model is failing. Because otherwise, you’re just pricing for the moment. And yes, you’ll get something in return if you’re doing your price optimisation right. But it’s not a long term strategy.

 

So, I think if these businesses have used a value-based pricing approach at the core of the business. But obviously, they didn’t. I think this would have informed their business strategy. And it would have helped these executives understand a bit more when the problems were occurring.

 

I think this is a lesson that a lot of businesses can learn now as we are all disruptive with the crisis of COVID. This is kind of a massive implication and change effect on how we price.

 

I think those that have a very value-based pricing model will be two steps ahead – if not five or six than those that have a fixed cost plus approach:

  • who have an insular view of their business strategy,
  • who are not looking out for better examples across the industry about what other people are doing 
  • and who are not looking at their customer base for cues about their pricing.

 

So, take this on board. Think about your customer lifecycle. Think about your business lifecycle when you’re pricing. And never look inward. Always keep looking outward.

 

I wrap up and I think nearly every country, certainly Australia, the United States, the UK, there’s a huge amount of government support for companies which is a plus. Because in the medium phase, it preserves employment.

 

But also in a capitalist society, companies have to fail, businesses have to collapse. They will have to move on to new business models and new companies. No company will last forever. Some do last a very long period of time. But the majority of companies last a lot shorter period of time than we think.

 

We need corporate failure to drive innovation and to drive new business models. Pricing can help optimise things along the way and can help people focus on the right business model. But if a business model is failing, there’s not very much you can do with it.

 

 

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