We love to share stories of companies taking advantage of the enormous power of pricing, and the successes they help companies to achieve.
Unfortunately, not all pricing stories end well.
There are also the pricing horror stories. Those moments that companies and brands wish they could have a do-over.
These stories are helpful to recognize that pricing mistakes can happen to even the best of companies. Hopefully these pricing horror stories will frighten you from making the same pricing mistakes.
Uber: Expensive Surge
Imagine all the things you could do with $14,400 USD dollars (or about $18,518.50 CAD) —-throwing a huge yacht party, traveling to Europe for a month and buying tons and tons of food.
Instead of doing all that, a passenger in Toronto spent that same exact amount of money on one 20 minute Uber ride. A ride that was only 3.5 miles.
This was a result of Uber’s surge pricing model which charges significantly higher during times of high demand such as after a concert, rush hour, or a rainy day.
The moral of the story is to be cautious when relying on purely algorithmic pricing to determine your prices during times of high demand. Also be prepared for the shocked customer who might get that unexpected bill at checkout.
Amazon: Unchecked Pricing
One of Amazon’s biggest pricing glitches resulted in a temporary removal of the “buy” button from a handful of Marvel comics collections.
In 2010, Marvel graphic novels were marked down from over $100 to $15 with the lowest comic books being just $8. That’s more than a 90% discount which led to a huge buying spree by fans and retailers who were eager to get a hefty deal. The amount of orders was so overwhelming that Amazon was unable to fulfill each order. Instead Amazon had to give out $25 store credit to a majority of buyers.
You would think Amazon would learn its lesson from the Marvel frenzy. In 2019 on Prime Day – one of Amazon’s busiest and highest traffic days – Amazon listed expensive camera equipment for sale. They are usually priced between $3,000 to $13,000, but for Prime Day priced for only $94.48 dollars each. Amazon was able to quickly catch their error as the prices were reversed in a matter of 30 minutes.
The only difference this time is that Amazon decided to fulfill their orders and allow customers who purchased the $13,000 camera lenses to pay under $100 for it, which is over 99% off. Not a bad deal for the customer.
J.C. Penny: Pricing Strategy Misstep
When Ron Johnson, the innovative retailer that is credited with shaping both Apple and Target’s retail image, stepped into the CEO role at J.C. Penny, he wanted to give J.C. Penny a 180 degrees change. One big move Johnson wanted to make was to stamp out the discount image of the storied J.C. Penny brand. This started with a new “fair and square” pricing strategy that got rid of all in-store discounts, sales and coupons.
The huge discounts commonly seen at J.C. Penny stores were no longer visible as Johnson’s new pricing strategy came into play in January 2012. Instead, Johnson implemented an “everyday prices” strategy, which meant customers could expect the best deals “everyday” at J.C. Penny rather than having to go search for discounts or coupons.
Other changes Johnson installed was to target sales only during holidays or key retail promotion events such as back to school.
One of the last parts of Johnson’s new pricing strategy was to change how prices were presented. This included changing sale prices to end in a “0” rather than “99”, and to not display the original price of the products, which would show consumers how much they were saving.
By ending all sale prices with a “0” turned out to be against common pricing psychology. Research conducted by University of Chicago and MIT showed consumers are more likely to purchase items that end with a price 9 even if it is more highly priced. In the study, they sold the same piece of clothing priced at $34, $39, and $44. Despite $34 being the cheapest option, the clothing made the most sales when priced at $39.
The same goes for removing the original price tag as people are more prone to purchases when they feel like they are getting a good deal. Think of it this way, if you were to see a winter coat priced at $150 would you be more inclined to buy it if it said that it was previously sold at $1,000? Or if it just had the $150 tag on it? My bet is that you would have picked the first one.
To make matters worse for J.C. Penny, their competitor Macy and Kohl’s, decided to lower prices of similar products. J.C. Penny’s bold move to renovate their pricing strategy ultimately led to a 20% decrease in sales in 2012 and long-term ramification for the company as the company continued to close stores.
Netflix: Pricing Debacle
In 2011, Netflix offered two movie rental services – DVDs in the mail and a streaming platform – for a price of $10 per month. Seeing the potential of streaming platforms, Netflix CEO, Reed Hastings, decided to split his company into two. One called “Qwikster” for the DVD service and the other called “Netflix” as the streaming service. Customers would have to subscribe and pay $16 to subscribe to use both services.
Users were not happy with what they saw as a 60% price increase. And users decided to speak with their wallets – leading to a devastating loss of 1 million subscribers and a 77% decrease in stock prices in just four months.
Seeing the ramifications of his actions, Hastings decided to undo the split and combined the Qwikster and Netflix back together but held steady on the new pricing of $16 per month.
In a now deleted blog post, Hastings sent a public apology to its customers saying that he “messed up” and “owe[d] everyone an explanation”. However, the apology was not well received as tens of thousands of consumers published comments expressing their frustration and anger at the company.
American Airlines: Disaster of the “Lifetime Pass”
Following the American Deregulation Act of 1978, which introduced a free market in the commercial airline industry, American Airlines (AA) reported a loss of over $76 million dollars (equivalent to $320 million in 2021). Desperately needing money to sustain their business, AA turned to their passengers for this much needed capital.
AA decided to sell lifetime free first class passes to wealthy passengers so they could fly any time, anywhere, and for as many times as they like for a one time fee of $250k (equivalent to $800k in 2021). For an additional $150k, allowing the lifetime pass holders to bring along anyone.
Unfortunately, “lifetime” and “free” do not always go well together. Two of the most notorious examples that took great advantage of the lifetime free pass were Jacques Vroom and Steve Rothstein. Over the course of 21 years, Rothstein had booked over 10,00 flights and Vroom flew over 2 million miles per year.
In 2007, AA found themselves in another financial crisis as they realized the detrimental impact of selling their lifetime passes. They noticed that Rothstein and Vroom were creating losses of $1 million per year, per person due to taxes, and lost ticket sales.
Following these findings, AA took both Rothstein and Vroom to court and was able to revoke their passes on the grounds of “fraudulent activity”. To this day, there are still 25 people who hold what is known to be the “greatest deal in the history of the travel industry”.
What we can learn from this story is to recognize the potential long-term effects of our pricing decisions. This is especially true when there are no bounds to the pricing offer – such as “lifetime” and “free” offers. Even when they seem like great marketing and acquisition ideas at the time can really back fire in the long run.
Pricing horror stories can happen to even the best brands and companies.
Unchecked pricing systems or wholesale pricing changes can have major implications. At minimum it can create confused customers. At worst it can have a huge impact on the bottom-line and long-term customer relationships.
Always own up to your mistakes and listen to your customers. Your customer will always remember the way you dealt with a bad situation, a good customer experience and create a positive impact on their view of your company.
Testing out different pricing strategies before implementing them on a larger scale could help mitigate horrific outcomes. Through user testing, you could better tweak your new pricing regime before drastically making these changes.
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