In 2013 Bauer dominated the market for hockey skates with a 60% share. This was particularly true at the high end – they produced the most expensive skates and more than 70% of NHL players used their products.
Another sporting goods company, Easton, held a much smaller percentage. Known primarily for their composite hockey sticks, their line of skates accounted for about 5% of the market. Their most expensive skates ($600) were much less expensive than the $800 Bauer was charging at their high end.
Easton wanted a bigger piece of the market. There were a few different options available to them. They could have tried to increase sales by lowering their prices. They could have tried to explain through marketing that their $600 skates were as good or better than the $800 skates from the competition. They could have used some combination of the above – using lower prices and marketing to convince people that their skates offered the best value on the market.
What were their expectations? Easton executives planned on the new skate increasing their market share to between 10% and 15% – effectively doubling or tripling it.
It’s clear that higher prices alone would not come anywhere close to accounting for this kind of increase. The new skate increased their top-of-the-line price approximately 33%. Even if all prices were raised 33% and the number sold remained the same that would only get them to a little over 6.5%. Clearly they were expecting the new higher price to do something magical.
Easton understood that marketing alone could not be enough. No matter how well executed and skilfully worded the campaign might be most people won’t believe that a $600 skate could be equal to an $800 skate. We associate price with quality, and high prices send a very powerful message about quality – one that is far more credible with consumers than marketing materials. You can tell people your $600 skate is equal to an $800 skate but it’s more effective to show them it’s equal… by charging $800.
Easton was using the higher price to announce themselves as a manufacturer of premium skates, equal to the competition. Just as some people are attracted to the BMW 1 Series or Mercedes B class because they are an affordable way to own a premium brand the high priced flagship skate would lend cachet to (and increase sales of) all models in the lineup.
It would also improve the average sale price of their skates. First there was now a more expensive model – one that let people spend $200 more than they could have in the past. This flagship skate would also act as a pricing anchor – making the less expensive models in the lineup seem like a better value. When the $600 skate was the most expensive skate in the Easton lineup it would have seemed like an expensive extravagance to many buyers. On the other hand a slightly detuned version of the $800 skate, offered at $600, seems like a great deal.
How did Bauer react? Typically a company will be tactful and make a bland statement about welcoming competition. In this case however Bauer executives were outspoken in their criticism. They seemed to understand that higher pricing was a very bold claim on the part of Easton and they were quick to try and discredit it.
Another post looked at how we tend to view competition, and be more worried about competitors that charge less.
Imagine you are a baker. You charge 33% more than the competition across the street yet enjoy 60% of the market while they have only 5%. What would worry you more – if they lowered their prices further still, or if they raised them enough to be equal to your own?
Raising prices would, on the surface, seem counterintuitive. If your competition can barely sell his baked goods at his current low prices (remember that his volume is less than 9% of yours – you outsell him 12-to-1) who would buy those goods at higher prices?
But that thinking overlooks the magic of higher prices – that charging more can bring credibility. In Easton’s case they believed it would double or triple their market share.