In Turnaround strategies, cost cutting is rarely sufficient and price increase often play a major role. Sustained premium pricing for a product, however, only works when customers place premium value on product attributes. Identifying the optimum bundle of product attributes requires a strong understanding of the market.
Background
In 1991, the Goodyear Tire and Rubber Co. was in a severely damaged position. The company had experienced its first financial loss in 58 years, and the company’s million-a-day debt service charges had placed Goodyear to the verge of bankruptcy. Newly appointed CEO Stanley Gault, charged with the responsibility of turning the company around, recognized that Goodyear also had to increase its selling prices wherever possible. Moving forward, Goodyear’s strategy moving would be to find and seize the industry’s fastest-growing, highest-margin markets.
“Most markers say if you’re going to increase share, you have to cut prices. We’re not going to do it that way. “
In the tire industry, the automakers who buy about half of the industry’s tires are sophisticated engineers who specify precisely what they want in a tire. On the replacement side of the market, however, Goodyear’s marketing team believed that consumers who bought replacement tires could be influenced by features created by a marketing-focused organization. Indeed, CEO Gault was quoted as saying, “Most marketers say if you’re going to increase share, you have to cut prices. We’re not going to do it that way.”
The Move toward Value-Based Pricing
Under Gault’s direction, Goodyear began the process of transforming itself from a manufacturing-based company to a customer value-based company. One of Goodyear’s’ earliest successes with executing customer value-based pricing came with the introduction of the Aquatred tire.
The first step was to conduct consumer research to identify and prioritize the attributes that would motivate consumers to purchase a new type of replacement tire. The research revealed some not-so-surprising information: namely, that consumers wanted a tire that was all-season, had a good ride characteristic, a low noise level, and provided good mileage. Consumers also placed a very high importance on wet stopping ability. But, in addition, what Goodyear’s marketing team also discovered was that consumers were also willing to pay more for a tire that looked like it provided wet traction. Armed with this information, Goodyear launched the Aquatred, a tire with a distinctive-looking groove placed down the center for wet traction.
At the time of Aquatred’s launch, the average price paid by consumers for the most popular-sized replacement tire was in the $50 range. Nevertheless, Goodyear’s customer research indicated that consumers would be willing to pay much more for a tire possessing the Aquatred’s features. So, to the dismay of most industry observers, Goodyear introduced the Aquatred at a price of $95/ tire.
Goodyear’s marketers realized that if the premium-priced Aquatred was as successful as their forecasts indicated, Goodyear’s competitors would be enticed to enter the wet traction market with “me too” products at price points below the Aquatred. Moreover, Goodyear’s consumer research indicated that the Aquatred brand name alone would not be sufficient to stem potential share losses from lower priced entrants, and that a large portion of consumers would switch to another brand for price alone. So Goodyear pre-empted this competitive threat by introducing the Intrepid, another wet traction tire, but priced below the Aquatred.
The Results
Shortly after its launch, Aquatred was accounting for 6% of Goodyear’s volume and 8.5% of profits. Today, the Aquatred still dominates the wet traction tire market, and continues to command a significant price premium over regular tires.
Lessons Learned
Through the use of value-based pricing, it is possible to gain a price premium for a new product innovation, even in industries where products have customarily been perceived as -commodities”.
In using value-based pricing, the key is to understand which attributes actually drive the customer’s purchase decision, and to be able to assess the relative importance of each attribute. In the case of the Aquatred tire, the appearance of the tire itself was valued just as highly by consumers as the actual traction ability of the tire.