Keurig’s Efforts to Lock-In Customers Backfire

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keurig-2-0-k550-brewing-system_5000052036The razor/blade business model has powered many profitable companies — from Gillette to Kodak to HP — all have taken little to no profit on equipment but made healthy profits on the blades (literally or film, or printer cartridges in the cases of Kodak and HP).

Keurig’s single-cup coffee brewing system has become very popular. Keurig makes money selling machines, its own Green Mountain Coffee, and licensing fees from other coffee sellers who use its K-Cups. Patents recently expired on K-Cup technology — so many competitors are offering the coffee without paying license fees to Keurig. So the new coffee makers with DRM (digital rights management) technology was designed to keep Keurig’s profits flowing. Unfortunately, customers are not happy. In this Verge article, “Keurig’s attempt to ‘DRM’ its coffee cups totally backfired” (February 5, 2015) you can read more about Keurig’s blunder. Of course it is not clear that, as disastrous as this may be, Keurig had other choices if it was seeking to maximize profits. For now though, profits are down and customer outrage is high.

The article might be used when you talk about patent protection. It also raises interesting ethical questions. It might also develop an interesting discussion around business models and strategy. For example, will complaints about Keurig’s DRM eventually fade away? Is it profitable enough of a strategy to weather the complaints?

Caterpillar Uses Viral Video in “Built for It” Campaign

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Many of the most creative campaigns are for consumer brands — so I really enjoy seeing a B2B brand do something creative. Caterpillar (the high quality, premium priced tractor and heavy equipment maker) has been running a campaign for about a year now: “When you choose Cat®, you get what you pay for — durable and reliable equipment, and long-lasting relationships. Discover what we’re built for…” They have released a series of five (so far) clever videos that demonstrate their products in action. The videos are great two minute stories. Any one of the videos could be used to motivate topics as diverse as B2B, product quality, premium pricing, promotion — even international. One of my favorites is this play on the old game of Jenga but using 27 blocks that weight 600 pounds each:


We have also posted this at Learn the 4 Ps.

Value In Use Pricing, Ethics and 42 Days

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“Value in use pricing — which means setting prices that will capture some of what customers will save by substituting the firm’s product for the one currently being used.” (Essentials of Marketing 14e, p. 486).

pillsHow do you price a pharmaceutical drug that offers patients (on average) 42 additional days of life? This is the question that faced the makers of Zaltrap — and the answer ended up being $11,063 per month of treatment. I heard this story on one of my favorite podcasts “How Much Would You Pay for A Year Of Life?” (Radiolab, December 23, 2014). When doctors at the prestigious Memorial Sloan-Kettering Cancer Center wrote an op-ed in the New York Times, the drug maker cut the price in half — still pretty pricey. Another drug example discussed on the podcast is Sovaldi — which is also discussed in this Forbes magazine article.

Value-in-use pricing is always an interesting issue when we teach Price. This adds an interesting ethical question that you might discuss when you cover pricing. What responsibility does a company have to its shareholders? the medical community? customers?

Why prices fall

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hdmiSome products typically get more expensive over time (think food, college tuition, healthcare). Other products exhibit falling prices. Technology markets often exhibit declining prices (and often improving quality). Think about that smartphone in your pocket — in real terms (after inflation) an iPhone is cheaper today than five years ago. Plus, it offers significantly more benefit (more computing power, more apps, more services, etc.).

Competition often fuels attention to price. In tech markets, one company fueling rapidly lower prices is Monoprice. I first became aware of Monoprice after reading that there was little technical performance difference among HDMI cables (those cables that connect your TV to your DVD player or cable box). So one didn’t have to pay $50 for a Monster cable but could pay less than $4 for a Monoprice cable. For more details, I encourage you to listen (or download the transcript) to the Planet Money podcast “How Stuff Gets Cheaper” (November 28, 2014). It includes some interviews with Monoprice managers.

The Monoprice example could be leveraged into a class discussion of how a competitor of Monoprice’s should react. What can Monster do? What can Apple do when Monoprice’s CrystalPro, which sells for as much as half as much as the $1000 Apple Cinema display? The Apple model has more features, but both of these examples point to the power of a brand like Monster and Apple. Of course the Monster brand was not as strong and they have consequently lost a lot of share in the cable market. Is Apple’s display Monoprice’s next victim?

New Produce Development

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SweeTangoDesigner apples are becoming more popular. The hottest apple on the market is the Honeycrisp — which was developed at the University of Minnesota, which cross-pollinated several different apple trees. After tasting different apples, they chose Honeycrisp and the rest is a story of a popular fruit. The patent on Honeycrisp has expired, and apple growers seeking to find the next big thing are now looking at SweeTango. This radio story (and written article) from NPR’s Morning Edition, “Want to Grow These Apples? You’ll Have To Join The Club” (November 10, 2014) describes how this time the University of Minnesota is protecting its intellectual property. I think someone up there in Minnesota’s research labs has learned some marketing principles.

This is an interesting article and example of new product development, the product life cycle, and value creation.