Trading Margin for Insight
Marketplaces have always been the center of trade. We understand the transactions and benefits that the buyers and sellers exchange, but what does the marketplace itself get? A commission, or something more?
Walgreens
Walgreens, the largest drug store retailer, launched it’s own private label brand, Nice, in 2011.
As a store that sells other companies’ goods, one of the benefits is that it can learn a lot about is
- shopping habits of different demographics (if a loyalty card is present),
- price sensitivity for categories of goods, and
- margins of those goods.
From there, stores like Walgreens can create their own generic products, basically risk free because of the insight that they have gained and make a killing in the processes.
For example, let’s say that Walgreens sees that people pay 2x more for baby shampoo made by Johnson and Johnson than normal shampoo. They can:
- Recreate a similar looking product. By using the same colors, the consumer would feel a sense of familiarity.
- Place the white label bottle at eye level on shelves. A planogram is defined as a “diagram or model that indicates the placement of retail products on shelves in order to maximize sales”. Within these planograms, one phrase commonly used is “eye level is buy level”, indicating that products positioned at eye level are likely to sell better.
- At the same time, raise the price of J&J’s baby shampoo, making theirs look like a bargain. Consumers will begin to buy it and eventually switch over.
Amazon
Amazon has been doing something very similar, but online, with AmazonBasics. Launched in 2009, it’s one of the e-commerce giant’s popular private-label brands, one that lets it directly sell basic, commodity-level items at lower prices than many of the companies that populate its site.
Amazon has the same level of data that Walgreens has, if not more, because they don’t need a loyalty card, because everyone has a member account.
By singling out the:
- highest margin product,
- which are cheapest to ship,
- are popular,
- are small and can be easily lost, and
- tend to compliment a more expensive purchase — Amazon can segment a range of goods it would white label. From the screenshot above of Best Sellers in Audio & Video Cables & Interconnects on Amazon, 75% (in red) of all product in the top 20 are AmazonBasics.
ClassPass
ClassPass is a monthly fitness membership program that lets you go to the best boutique fitness studios. Since launching in early 2013, ClassPass has facilitated over 1.5M reservations at 1,000+ different classes in over 30 cities in the US and recently went international, launching in Toronto, Vancouver and London.
ClassPass members enjoy greater variety and engagement in their fitness regime, all at a lower price than if they were to book classes individually on their own. Participating studios benefit by attracting new students to further grow their business.
Pricing
ClassPass, when launched cost $99/month, now is at $125/month. A participating studio, Barry’s Bootcamp, charges $34 per class. At the allotted 3 classes per studio per month rule, you are 82% to breakeven in the first 3 days of the month. In theory, if you go to a comparably priced gym class ($34/class) everyday (30 days), that would be a ~$1000 value for $125. How is this sustainable?
Companies like ClassPass can do the same thing as Walgreens and Amazon — they make money with the data. They see the types of classes that certain demographics enjoy taking, and in which parts of town those classes are taught. From that data they can, in theory, start their own boutique gyms catering to the needs of the ClassPass user. And the best part, they already have a database of users in all major cities.
Being cheaper is not a long term strategy, but it does allow you to grab customers quickly. Price subsidies are meant to onboard users to test a company’s assumptions on their user base. Once those are proven out, the result will be a better offering. The better offering, even at the same price point as the incumbent, should win over customers, assuming other factors are handled (i.e. switching costs).
If you liked this post, you might also like:
If you liked the overall message of this post, feel free to get in touch with us. We do speaking engagements — http://www.citadinesgroup.com/#contact
