Cost-Based Pricing, Value-Based Pricing and Awesome-Based Pricing

Bicycle Biz Economics Glass Houses

I've written previously about how we set our prices. We use what is called cost-based pricing: we start with what it costs us to procure and deliver a frame or wheelset to you, and then add to that amount an amount of margin (or profit) that makes the effort required on our part worthwhile. If we chose higher margins, we'd make more on each sale but have fewer sales overall. If we charged less, we wouldn't make as much on each transaction and we'd grow to resent all you cheap bastards taking advantage of us every time we shipped a frame or wheels.

Parenthetically, we don't think if we charged less that we'd sell more, as is usually the case. We think our prices are about as low as they can go to allow us to still convince you that our products are of excellent quality. Right now when people ask, "What's wrong with your frame that it only costs $945" we can reply convincingly "Nothing. The question is what's wrong with what you paid for your last frame." But if our in-stock frames were $700 we think people would write us off as a couple of hucksters. I don't think we could convince you they're every bit as good as the $2K-$3K frames we compete with. You'd hear our arguments, but that delta is just too large. So in addition to our prices being as low as we can afford to make them, we think they're also as low as you'd give credence to.

What a lot of other brands do is offer value-based pricing. Value-based pricing sets the price for consumers at what they perceive the product is worth to them. Don't get thrown by the word "value" - value-based pricing is a terrible deal, as it has customers paying for brand prestige, projected benefits of the features instead of the features themselves (like safety features, for example - "never mind what they cost Volvo to install, they protect my family and I'll pay whatever they ask"), and other forms of psychological differentiation

The right way to use value-based pricing is to earn it over time. Charging a premium for perceived value is an effect of brand equity. Yet in the bike business, many brands try to use value-based pricing as a cause of brand equity. As if a brand that has never sold a bicycle can suddenly show up and ask $2800 for a frameset, and by pricing that way alone they should be considered alongside the major players that have spent a decade or three earning their position in the market. Premium positioning solely through premium pricing is a great trick if it works. But it rarely does, so brands should probably just knock it off and either deserve the price they charge, or charge the price they deserve. 

Let's talk about Neil Pryde Bikes for a minute. And no, I'm not changing the subject. There is an article in the June 15th Bicycle Retailer magazine about their "modern distribution model." The company is huge in windsurfing and decided to get into the bike business, owing largely to their relationships with carbon fiber suppliers in the far east (the company is HQ'ed in Hong Kong) and their experience with international sourcing and distribution. They inked a partnership with BMW Group DesignWorks USA (the Singapore branch, not the one in the USA or Bavaria, as the name may suggest) to tack some more extra-industry prestige onto their own brand, signed Martek in Taiwan to manufacture the frames, and launched with two framesets at $2600 - $2800. 

As a bicycle industry colleague, what I like about Neil Pryde Bikes is that they designed their business model around a competitive advantage of theirs in fulfillment. Owing to their expertise in shipping large windsurfing equipment around the world, and being a bigass DHL customer, they came up with a model that houses frame inventory and assembly capabilities in the Far East, and ship directly to customers from there within a few days of receiving an order. They save money on inventory, warehousing, distribution and shipping. The model lent itself perfectly to a direct-to-consumer online sales approach, so that's how they launched. 

As a bicycle industry competitor, what I love about Neil Pryde Bikes is that despite having a cost advantage that allows them to centralize inventory, cut out an entire tier of distribution (the very expensive retail tier at that), and ship for less than just about anyone in the industry, they still charge three times what we do for a very comparable frameset. Selling direct certainly plays to convenience, but ultimately it's a truncated value proposition for consumers. The bike industry is built around a customer's ability to go into a shop, see, pick up and throw a leg over a bike, repeat as necessary, hem, haw, and then buy. We don't offer our customers that option, so we sell frames for $945, with our apologies. We know our experience is not ideal, so our price sure is. Neil Pryde offers a similar imperfect selling channel, yet they charge a premium for it. Their pricing, then, is no coincidence. Going beyond value-based pricing, they price at a level so high that it appears the aim is to achieve some exclusivity. It's Awesome-based pricing, or pricing selected to exceed a perceived value and throw a halo around the brand.

The trouble with exclusivity though is that it's incompatible with volume. There just aren't that many riders on the Gentle Dentists Saturday AM club ride willing to plunk down $7K or more for a falootin' frame with no racing pedigree or even cycling legacy. To Neil Pryde's credit, they saw this not long after they launched. The Bicycle Retailer article is about how they have switched their model to one that sells through dealers in addition to direct. (If you needed proof that theirs is in no way cost-based pricing, you have it in this move - their pricing didn't change, even though they added an entire tier of distribution.)

Their U.S. rep is quoted as saying, "After three months we said, 'we made a mistake We need dealers.'"

At those prices, they sure do need dealers. But who is thinking about what dealers need?

We are. More on that soon.  


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