Extended-form Case Study

Pricing strategies: the case of Verifone

Published on December 31, 2015   21 min

A selection of talks on Finance, Accounting & Economics

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Hello, my name is Michael McDonald. This is a case study for Henry Stewart Talks. Today's case study is entitled Pricing Strategies: The Case of Verifone.
Let's start by talking about business models. The idea of a business model is a critical one within most fields' study in business. In particular, a company's business mode is the strategy that a firm follows to try and maximize its profits. In theory, the goal of any company is always to make as large a profit as possible. Some people or some particular companies might have slightly different views, for example, you have some companies where they want to make a profit but perhaps they also want to benefit society or protect the environment, things like that. But within the field of economics and certainly within the broader study of business, we start by assuming that businesses are there to make a profit. Company owners, be they shareholders or individual owners are self interested, hence the goal is to make as much money as possible while maintaining the long-term viability of the business. To accomplish this goal, the business needs to choose the right business model for its particular circumstances. And that means that different firms in the same industry can sometimes have different business models. A great example of this comes in the form of the retail space. Think about price clubs like Costco, or BJ's Wholesale Club. With those companies, you have to have a membership in order to shop there. If you're not a member of the club, you can't go in and buy things from that store. In contrast, in a traditional supermarket that's just selling you food, you don't have to be a member, it could be the first time you've ever been to the store. As long as you have money, the store is happy to sell you food. Both of these companies, Costco versus a traditional supermarket, sell food, but they're using a very different approach to doing that. Now there are numerous business models in use today. But it's worth going over a few of the most common ones before we dig in with Verifone. In particular, four of the most common business models are the Razor/Blade model, the inverted Razor/Blade model, the Loss Leader model, and the subscription model. The Razor/Blade model is used by companies like Gillette, by printer companies like Hewlett-Packard and Lexmark, by Keurig for their coffee makers, et cetera. This is the model that we're going to focus on in depth today, but basically under this model, the company earns very little profit on an initial product they sell you, like, say, a razor, and then they earn large profits on the sale of the tied product, the razor blades. In contrast, in the inverted Razor/Blade model used by most famously Apple, the margins are larger on the upfront item. Apple sells iPhones and iPods, for example. They earn a big profit on the iPhone itself, or on the iPod or on the iPad. They don't earn that much on the sale of subsequent ancillary products, things like songs on iTunes or apps downloaded from the App Store. Those are relatively low margin items for Apple. The Loss Leader model is commonly used by most big-box stores, companies like Walmart, for example. These big box stores, mass retailers. Tesco might be another one. They bring in customers by advertising very, very low prices on certain popular goods that they know customers are looking for. The companies actually expect to lose money on the products they're selling at these low prices. But, once they get you in the store, they hope that you'll buy other things while you're there. Thus, they are taking a loss on a product consumers care about, the loss leader, to bring them in the store. The subscription model is similar to the Razor/Blade model. Consumers pay for something in increments over time. The difference between this and the Razor/Blade model is that with the Razor/Blade model, you get an upfront product. With the subscription model such as what happens with the gym or a magazine or newspaper subscription, you don't get anything upfront. Instead, you receive a series of products over time, either a gym membership that allows you to use the gym, or you get a newspaper every day, et cetera.