How Dollar Shave Club and UBER used pricing strategy to transform the entire industry.

I doubt that I am alone but when you work in pricing, every decision becomes an exhaustive pricing exercise. It was only a few weeks ago I bought a Pizza Hut panormous pizza because it only came out to dollar a slice than ordering a medium and getting $2 a slice. Well of course it made immediate sense in my pricing mind. I just didn’t think through why and how my wife and I would hog through 16 slices of pizza. Well, #pricingfail, that’s what she said !!

Now that brought up an interesting conversation, if pricing alone makes us change everyday pricing decisions then how far along in this product-customer ecosystem can it influence its power. We know it changes what we buy, how much we buy, when we buy. But what about pricing’s far reaching impact that extends further back in the pipeline. For example can a pricing strategy be a company’s main value prop, or can an industry be transformed at the back of a pricing strategy. So I thought over this and tried to find out examples of companies and industries that have transformed off the back of innovative pricing strategy and then tried to get some learnings out of those pricing strategies that can be applied elsewhere. I tried to look for companies that rely primarily on innovative pricing strategy, while still have some product proposition to support it. It’s hard to find a company that rely solely on pricing, until you are talking about discount retail stores which was not the intent.

Dollar Shave club: The pricing strategy that changed the industry

So the first one that occurred to me that revolutionized the men’s grooming industry with a very simple pricing trick is Dollar Shave Club. If you remember they were the people behind the hilarious ad campaign that got 22 million views on youtube. You can watch the video here if you haven’t had your daily dose of hilarity, marketing like a champ. Now this may come as a surprise to you but Dollar Shave Club is currently being valued at over half a billion dollars, not too bad for a company that started only 3 years ago. They transformed an entire industry around a price point and convenience value prop seen below.

For a $1 a month you get 5 cartridges of twin blades including a free stick, or you can upsell yourself to a $6 for 4 cartridges of 4 blade razors which is comparable to what Gillette or Schick sells in the market. The pricing strategy has propelled the company to the second most selling blade brand behind Gillette in US. The savings realized at that price point are hard to believe, $6 for 4 cartridges is $1.50 per cartridge which is at least half off the price of a a popular Gillette Fusion cartridge on Amazon or Walmart that go for $3/cartridge each, not to mention that Dollar Shave Club also includes a free razor stick and free shipping. Well, and the feeling of using a new blade every week and clean look every day, beat that Ryan Gosling’s beard !!

This simple pricing strategy take the stress out of having to decide from a thousand combination of brands, sticks, blades, or cartridges for the customers. Below is a snapshot of top 1/3rd of the walmart’s men’s grooming store page, mind boggling isn’t it.

This new pricing strategy attacks the age old pricing model of Gillette that split revenue into two categories: shaving sticks and replaceable cartridges. Every few years they would get a chance to upsell a customer into a new product, and charge a premium for that product. It almost felt like stockholm syndrome, you know you want to leave the kidnapper, but somehow you develop these lovey dovey feelings for Gillette that you just can’t leave, or there was no where else to go.Previous model= stick revenue +recurring cartridge revenue = Cha ching cha ching cha ching at the Gillette cash register. Now gone are the days when razor brands could command a premium price for its blades in the name of R&D when essentially nothing significant had happened in a decade. It feels like with every new blade, I am only getting diminishing returns, oh wait did I confuse this with the iphone here. See see, see what I did there..

It also created a new online razor sales marketplace which did not exists 3 years ago, prompting Gillette and Harry to start its own shave club. . A category that will soon surpass a billion dollar in annual sales. So the pricing strategy transformed the product, the company and the entire industry along with it.

In Anthony J. D’Angelo’s word they didn’t reinvent the wheel, just realigned it.

UBER: Where pricing strategy is transforming the industry and the economy.

What UBER has done for the transportation, and the pricing industry is fascinating. For people who don’t know what UBER is, it’s the alternative to taking taxi for prices that vary from 50% off the regular cab fare to over 5–10 times the regular cab fare. You point your pickup location, punch in your destination and rest will be taken care off. The service offers traditional cab rides driven by traditional cab drivers, or UBERX driven by everyday tom-joe-harry or you could get a UBERPOOL and get rock bottom prices for a shared cab to your destination.

But again, the beauty of UBER along with the swanky service is in its pricing strategy which relies on supply and demand, economics 101. For decades the supply-demand-pricing algorithm has been masked from the consumer in airline tickets, concert tickets. I remember experts always saying airline pricing depends on this complex set of rules but you never knew what those rules were and who created them. Before working in pricing, I really thought there is some magic wand and a crystal ball . However, UBER has brought this strategy front and centre. They took the traditional regulated cab fare structure and gave customers the option of paying more or less depending on their situation and even told you how much more than regular and at what times are you going to be paying a premium. It has gone out of its way to explain people how and why increased fares or so called surge pricing works and is a good thing for both sides.

The reason I am saying UBER is a pricing company is because the company has relied on using pricing as its core value prop as it tries to battle traditional cabs.Also, UBER has always maintained it is technology platform that connects drivers and users. What is that technology platform ? It’s an app that monitors supply and demand and changes prices accordingly all day long. So it’s a new new age pricing play in an otherwise very archaic industry.

You can see the example below as I compare a trip that I take quiet frequently with the different price options in Uber and traditional cabs.

UBER can take to me to my destination at prices that vary from 50% off the traditional can using shared ride or my own ride at almost 30%-40% off. And when I talk to uber riders they talk about two things the ease of hailing a cab and the cost savings aka pricing strategy.

UBER’s arrival has prompted companies like GM, and FORD to start investing in their own version of the ride hailing apps. GM invested in sidecar and FORD in its shuttle service, and both are still in their infancy. The bigger impact to these companies comes in form of declining or stabilizing car ownership.Look at the math below:

So for the amount of money I spend on my car I could take 60 UBERX trips a month without having to worry about a parking ticket or directions. Now it’s not a solution for all, but for some the equation could make sense.

So if car companies are not looking at that equation, then its not too long before UBER could price them out of the market. So should traditional auto companies move to a subscription based model that relies on usage and ownership duration to sell a car, maybe? Desperate times will call for desperate pricing strategies. So there is no doubt that UBER is changing the transportation and the automotive industry. But what about the economy as a whole ?

It has helped the economy in multiple ways. First, we know a drop in price sometimes can be used to entice buyers and increase the size of the market. UBER with its flagship UBERX has increased the size of that ride hailing industry. Second it has provided employment to over 160,000 drivers in US alone(yes a lot are part time), and third these UBERX drivers who work 40 hours a week make over $18/hour which is well over the minimum wage in any city. Not only that it’s $7/hour more than the hourly wage of employed traditional cab drivers. The numbers are based on a research that was commissioned by UBER, you can find it here. The $7/hour does not account for expenses, but that could be the same for traditional cab drivers who rent out cabs from owners on a daily basis and have to pay expenses. Te report also stated to contributing close to $3billion to the US economy, you have to take everything with a grain of salt. But, $3B is no small change for any economy.

I don’t want to seem like the one who drank the UBER kool aid, but we cannot deny the impact the UBER pricing strategy has had on our usage of cabs, its impact on the cab industry and on the economy.

So there are a few pricing lesson to be learned here from Dollar Shave Club and UBER here:

1) For entrepreneurs who are always on the lookout or waiting for the next big idea, go back and look at traditional businesses where something as simple as aligning the pricing strategy with some new value prop can become a game changer as was the case with Dollar shave club. There are numerous traditional business that might just need a boost in its pricing strategy.

2) And this one I can’t stress enough, that your pricing strategy needs to be simple and to the point. Look to Dollar shave club as it took the complicated relationship between razors, cartridges, and refill pack sizes out of the mix and combined it into 1 sweet no brainer price point.

3) Transparency can be your friend in pricing. When UBER launched its services, it told everyone straight up that it stood for demand based pricing. We can hate it as much we want, but demand based pricing hasn’t been this clearer before. It tells you how many cars(supply) are around, what your price point is before trip, what is surge factor (demand), and lets you make the the value-price decision. I was never told by my airline company, how much more than the regular fare I was paying, maybe If I knew my flyinfg decisions could have been different.

3) Always keep an eye on what is changing in the industry around you and change your pricing strategy accordingly. The automotive industry is changing. It’s going from traditional car ownership to subscription and ride hailing. If you can’t innovate at least innovate your pricing model, maybe it’ll give you sometime before your innovation can catch up. If apple can build a subscription program, so can you or at least see if it works in your industry.

4) Don’t make pricing an afterthought: Dollar Shave club did not create a product and then repriced it to a $1 and then named it a dollarshaveclub. It brought in the pricing strategy earlier in the product design so there are no show stoppers in the end. I have see a lot of companies that had interesting concepts, but a pricing decision in the end broke the entire product. I always remind of JC penny when pricing decisions and customers perception of price become an afterthought discussion.

5)Test your willingness to pay: Most companies are not very open to the idea of testing their customers willingness to pay because they are either afraid that customers would want to pay too little or because they think the customer would have no idea how much they should be paying. When ‘surge pricing’ which is the backbone of demand based pricing was created, the folks are UBER did not shy away from asking for 2X, 3X, 4X or even 10X times the regular fare. They knew when it becomes too much to ask for, customers will just kindly decline the service.

I am sure there are tons of other businesses that use pricing strategy as its core value prop. If you think of any of such businesses, feel free to add that to the comment section and we can discuss.

If you believe the ideas and the lessons in the post are worth sharing feel free to like, share, tweet or comment or send me a message via linkedin. You can find my previous articles on pricing strategy at here.

Karan Sood is the Senior Manager for Pricing and Offer Strategy at Yellow Pages Group, and has over 7 years of pricing experience working in the digital marketing and the automotive industry. There is always a method to the madness of pricing,we just have to decipher it.