In June, Netflix announced a price increase and the airwaves erupted in complaints of price gouging. But, this price increase may have been a brilliant, efficient and considerate
form of market withdrawal under certain circumstances.

Pricing is employed as a means of market penetration, but is seldom utilized for exiting a market. Yet, pricing provides a means of market withdrawal which allows customers to find alternative suppliers in an orderly manner. While it is unlikely that Netflix truly intends to exit the business, there utilization of pricing reminds us of several previous activities and it serves as a reminder of an important, underutilized method of market withdrawal.

We have worked with clients in considering pricing as one of a number of options for exiting a product or product segment. The objection most used is that the company withdrawing from the market does not want to be perceived as gouging their clients. Instead, the preference is to withdraw product from the market and leave the loyal customer in the position for an alternative sometimes with, but often without, a recommendation from the supplier. We have, nonetheless, worked successfully to implement a pricing approach to market withdrawal. We must also say that market reaction was quite positive.

Although long before the founding of Ozanne Analytics, one of the best examples of utilizing pricing to withdraw from a market comes from GE in the 1960′s. GE manufactured a key component of a large number of both commercial and military products. This component is virtually unknown to most people today. It was a vacuum tube (For information, go to http//en.wikipedia.org/vacuum tube). The tube business was being cannibalized by a somewhat more familiar product – the transistor or semiconductor. As demand declined for vacuum tubes, marginal costs increased substantially.

Many suppliers had withdrawn from this increasingly unprofitable market leaving a small number of players mulling alternatives from market exit. Customers were moving towards alternatives, but had to change their processes (and products) to meet the new technologies. GE decided it could not withdraw and leave these its customers in a lurch. Instead, GE decided to “encourage” faster movement away from the tubes to the new technology by increasing the price. In many cases, the price increased by hundreds of percentage points. This approach, they reasoned, provided cost incentives to change technologies (or suppliers) while providing support until that change could be effected. The decision was communicated and the strategy implemented.

Within months of the price increase, the other two major suppliers of tubes WITHDREW from the market leaving GE as the only provider. As late as the 1980′s when I was working for GE, the Owensboro, Kentucky plant met the worldwide demand for these tubes and was immensely profitable. Moreover, the customers were very pleased that GE had not left them without alternatives. In fact, in the short (and long) run, the strategy was extremely effective.

As you think about market withdrawal, think about pricing as a facilitator. Do it right and who knows.

We have had inquiries regarding behavioral segmentation – requests for more detailed guidance. The summer has been really busy and I did not want to give your questions short
shrift so I am a bit tardy in responding to your comments. Here are some thoughts regarding the methods that would apply to a hotel chain.

A hotel chain may wish to utilize the current in-house data on its customers. This may not be perfect, but it is a good, reliable and inexpensive place to start.
Let me begin by noting what you can expect to ascertain from the analysis.

1. You will be able to determine key segments and the percentage of your customer base in each segment. I can tell you that most of these segments will be familiar to you because of your knowledge of the business. Some segments which you may hypothesize exist will probably be subsets of others. It will provide targeting information and opportunities. There will be several segments of which three will be: (a) loyal frequent customers; (b) loyal less frequent customers; and (c) one time visitors who you will never see again
   and with whom you should not spend any time.
2. You will understand the characteristics of the segments for further use.
3. As you act on the segments, you will be able to measure movement across segments over time.
4. Don’t forget that since this is your data, no one else will be able to understand your customers as well as you can understand them.
5. You will be able to use any questionnaire research to hone your understanding given what you know from the customer behavior. That is, you can also target your marketing research given what you find from the analysis of your data.
6. You can also utilize the data to compare with other studies you have performed although this can be a bit tricky sometimes.

In addition, when you have finished the analysis, you are likely to be able to utilize the analytic output together with other information, such a census data, to target potential new customers immediately. You can always go back and refine your data collection and analyses later if desired.

The first step is to assemble the customer data you have on customer demographics (address, affiliations, and the like), visit information (dates, length of time, amount spent – which can be used to examine flow patterns), response to promotion programs and whatever else you might have.

From a statistical standpoint, there are several methods which could be used:

1. Cluster Analysis – K-means or hierarchical method which is generally preferred in the industry;
2. Q-Factor analysis which I prefer because of the reliability of reading the principal components and the rotated structures;
3. although with very large samples or 10,000 or more, R-Factor analysis gives quite satisfactory results.
4. Discriminant analysis which is appropriate with some data.

The key is to have someone perform the analysis who:

1. takes time to understand the data;
2. thoroughly understands the technique and nuances
   of interpreting the output from the analysis;
3. can help you apply the output to your needs.
4. Remember, another advantage of this approach is
   that it utilizes your proprietary data and is doing so gives you a strategic advantage over other approaches that tend to use information gathering templates and unreliable, ineffectual data gathering.

If your support cannot do all four of these, it is generally better to do something else. Using this approach correctly will provide insights with which you will certainly be pleased. However, you need to realize that the findings will not be rocket science as one of our European clients once said. Then, he added, “Of course, if it were rocket science, it would provide information which I wouldn’t believe”.

While we like to utilize three or four years of data, we find that even six months provides extremely useful insights allowing for actions when debate over actions has been the previous norm.

In terms of expectations, it is important to realize that there are likely to be few revolutionary outputs from the analysis. Rather, the analysis is more likely to define the six or eight critical issues for meeting customer needs as opposed to the 20 or more issues you currently feel you are facing.

You may have someone on staff or readily available who could help you with this. If you need outside assistance, it is our business to be able to help and we can so do as either project consultant providing guidance or as the principal consultant/analyst

As an aside, I think that you will find that the results are far more functional than results of surveys. Our experience (and the experience of most knowledgeable statisticians) with survey techniques is that the sampling frame can be perfectly designed and the output can be incredibly biased because of response rates. For an individual company, statistical techniques are usually less important because you possess information on a universe of your customers, not a sample.

I am confident that once you work with behavioral segments, you will see it provides more value and real feedback on any changing dynamics of your customer base than you have gained through other approaches.

Good luck if you pursue behavioral segmentation to understand your customers better. If we can be of assistance, that is what we love to do.