CHAPTER 10 / Pricing: Understanding and Capturing Customer Value
10-13 Given the cost per king-size sheet set above, and
assuming the manufacturer has total fixed costs of
$500,000 and estimates first year sales'will be 50,000
sets, determine the price to consumers if the company
desires a 40 percent margin on sales. (AACSB: Com-
munication; Analytical Reasoning)
Video Case Smashburger
Hamburgersare America's favorite food. Consumers spend more
than $100 billion on the beef sandwiches every year. But despite
America's infatuation with burgers, there is often considerable
dissatisfaction among consumers based on hamburger quality
and value. Many customers just aren't happy with yhat is served
up at market-leadingfast-food outlets. They want a bett* burger,
and they won't hesitate to pay a higher price to get one. Enter
Smashburger. Started just a few years ago in Denver, Colorado,
Smashburger is now a'rapidly expanding nationwide chain. And
all this growth started during a severe economic downturn de-
spite Smashburger's average lunch check of $8. Many custom-
ers pay as much as $10 or $12 for a burger, fries, and shake.
The Smashburger video shows how this small start-up employed
.C..
Company Case Cath Kidsten: Nostalgic Fantasy mat Creates Value for Consumers
This case study examines the pricing strategy of Cath Kidston,
a UK-based company that sells furnishings, home and personal
accessories, and clothes, operating mainly in the UK, Europe,
and Asia regions.
How much are you willing to pay for a key ring? The market
price charges just a bit more than $1. But would you pay $2 for
a comparable product? How about $71 A low-price strategy is
often used by companies if their products are not well differenti-
ated. Although a low-price strategy might seem attractive, espe-
cially in an economic downturn, some companies are focusing
on creating value for customers and adopting customer-value-
added pricing strategy. Cath Kidston Ltd is one UK-based com-
pany which understands that sometimes it pays to charge more.
Cath Kidston's key rings sell for roughly $7 to $10, whereas
the market price charges less than a third of that. To understand
how Cath Kidston has succeeded with this pricing strategy, let's
look at what makes the brand so special. The cheery colors and
/ fun patterns Cath Kidston created allows it not to focus on price-
sensitive market segments but instead lure customers with a
value-added pricing strategy. It is Important.for a brand to create
something that people respond to with their hearts, which is a
sure-fire way to breed success for a brand. Cath Kidston is a
brand that is confident in its design style and fun in its character.
From Humble Beginnings
Cath Kidston Ltd was' founded in 1993 when designer Cath
Kidston opened a tiny s h o ~in London's Holland Park with a
$23,800 investment in her business, selling towels, vintage
fabrics and wallpaper, and brightly painted "junk" furniture she
remembered fondly from her childhood. Cath Kidston's clever re-
working of traditional English country style made her tiny shop
soon become a cult success. Today, the brand carries a wide
product range, everything from furnishings, crockery, cutlery,
343
10-14 If the company decides to sell through retailers instead
of directly to consumers online, to maintain the con-
sumer price you calculated in the previous question, at
what price must it sell the product to a wholesaler who
then sells it to retailers? Assume wholesalers desire a
10 percent margin and retailers get a 20 percent margin,
both based on their respective selling prices. (AACSB:
Communication; Analytical Reasoning)
pricing strategy to pull off a seemingly impossible challenge. After
viewing the video featuring Smashburger, answer the following
questions: It-
10-15, Discuss the t h r w j o r pricing strategies in relation to
Sm~hburger.Which of these three do you think is the
company's core strategic strategy?
10-16 What effect does Smashburger's premium price have
on consumer perceptions? How did a restaurant with a
premium-priced product and rile track record take off
! during a recession?
10-17 Is Smashburger's success based on novelty alone or will
'
it continue to succeed?
cloths, toys, china, bed linen, and bags, to women's and chil-
dren's wear and accessories, charging price premiums that fans
are gladly paying.
In 2012, Cath Kidston had 57 shops and concessions in the
UK, 2 in Ireland, 27 in Japan, 7 in South Korea, 3 in Thailand, and 1
in Taiwan. The business is also driven by successful web, mail-or-
der, and wholesale divisions, with UK, Euro, and U.S. transactional
Web sites. Cath Kidston has become a powerhouse of British de-
sign and retail, up there with the likes of Burbeny and Pringle.
Design is core part of Cath Kidston's brand. However, it is more ,
than the vintage-inspired patterns and the stunning shop interiors.
Walk into any Cath Kidston shop and you are able to "experiencen
the brand that other retail shops do not offer. And this "experieny'
permeates Cath Kidston's Web sites and all of its printed cxqrnu-
nications. If you are a fan, you can feel the essence of th96rand
in every aspect. In color psychology terms, Cath Kidstorl is pure
spring-fun, creative, warm, inspiring, and young, a y d g a splash
of color and vintage c h to a routine day /
Cath Wdston not only offers a wide product r k g e but is actually
a lifestyle store. You can buy almost everything for your home, chil- 14Hw
dren, or yourself. The braad product range maximizes the brand's
appeal and m w s that it works for both gift and personal pur-
chases. Cath Kidston allows its brand personality (fun and bright-
ness) to shine through its brand identity (colors and typography),
hence becominga brand consumers can fall in love wlth.
Value Versus Price
In certain respects, cross-comparing personal products such as
key rings can be problematic, because there is so much varia-
tion in both features and price. But consider some popular Cath
Kidston products, Its scarves sell for roughly $77, whereas com-
parable products from apparel retailers such as Marks & Spen-
cer or Monsoon range from roughly $20 to $55. Cath Kidston's
+
 344 PART 3 I Designing a Customer Value-Driven Strategy and Mix
plastic-coated fabric bags sell from roughly $56 to $104, whereas
other apparel retailers only charge similar prices for their leather
bags. The fantasy of the English country childhood that Cath
Kidston creates for customers enables the brand to charge price
premiums as compared to competitors, such as John Lewis,
Marks & Spencer, and Monsoon. For the fans of Cath Ktdston,
her products excite them in a way that lKEA and other competi-
tors cannot hope to grasp.
In terms of competition, in the product category of home ac-
cessories, Cath K~dstoncompetes directly with UK retailers like
John Lewis and Marks & Spencer. In the clothing category, ap-
parel retailers such as Monsoon and Marks & Spencqr are the key
competitors of Cath Kidston, while it competes with retailers like
IKEA in the furniture category. Compared to its main competitors,
the weakness of Cath Kidston is that its product offerings are
still relatively limited and narrow. However, Cath Kidston's unique
strength is its product design offers its customeE a sWng per-
sonal statement and identity that other competitors find hard to
achieve. The biggest ,challenge for the Cath Kidston brand is to
continue its success with the traditional English country style and
---
fun brandCh%ii%Eer7Fwhilesatlstylng l€skq&msbmrmvith in-
novative product design and product line extension.
Retro Brands in Hard limes
Given the harsh economic clirrf8k1, you might expect to see the
cheerful floral prints that made Cath Kidston a household name
withering a little. However, Cath Ki&on has survived the reqs-
sion very well, selling the retro styling and a rose-tinted antidote to ship. The product-centricconcept of a brand is a business model
an uncertain world in the uncertain economic climate. The brand
is now a seemingly recession-proof "global lifestyle brand." In
2009, while other brands were chalking up serious losses due
to the economic downturn, Cath Kidston saw profits leap by
60 percent, and sales rose from roughly $30 to $49 million. The
reason for this phenomenon is that in these uncertain times, con-
suiners, although cash-conscious, have an appetite for nostalgia.
The products of Cath Kidston fulfil consumer needs for value and
meaning, because they are inspired by a comforting and familiar
1950s aesthetic.
For Cath Kidston, its premium pricing strategy coincided with
a trend of consumer preference toward nostalgia, which seemed
to provide comfort in the time of recession. Thus, the value de-
rived from Cath Kidston products was enough to justify the high
prices for mmy of its products. In an economic downturn, con-
sumers want a b it of security and comfort, and this trend shows
/ in the recession of the 1990s and today. UK retailers such as
Asda reported a surge in sales of nostalgic brands, as people
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seem to l o o ~ m ~ r m i n a r r a t t e m p t t t s ~ h e m -
selves up. Consumers want the comfort and security that retro
brands can give them, reminding them of their childhoods and
even their parents' childhoods.
In times of economic downturn, people are worried about the
credi crunch and losing jobs, and thus brands that act as an
antidote to anxiety will do well. A lot of people didn't see the most
recent economic crisis coming, and that makes them nervous
about looking fotward. The reflex is to seek comfort in things that
refer to the past. Also, as people stay at home more in a reces-
sion time to reduce consumption, stylish home comforts become
more important, which also helps explain why Cath Kidston has
done well in hard times.
Cath Kidston is conquering the world with her floral and polka
dot designs, and it is not surprising to see how such a powerful
brand can divide people. Consumers either love it or hate it. For
those who hate it, the products of Cath Kidston look like the junk
from a late granny's attic. However, as the key target audiences of
Cath Kidston are 30- to 40-year-old middle-classworking women,
their strong purchasing power sustains the growth of the brand.
Spotting the brand's potential to expand in all directions, Cath
~idstonJmbarked on a series of collaborations, including a range
of mobile phones for Nokia, eco-bags for the UK supermarket
chain Tesco, a flower-covered Sky TV box, tents for Millets, and
radios for the retro-styled Roberts range. To the fans of Cath
Kidston, the brand offers them a dream of a simpler and nicer
world that make them think of happy childhoods, homemade
cakes, picnics, and the m e .
In 2010, Cath Kidston.be~amethe subject of a high-profile
buyout, when a $159 m m d e a l saw the sale of Cath Kidston
Ltd to a newly incorporated company owned by the U.S. pri-
vate equity fin TA Associates. Cath Kidston Ltd had an equal-
ity sale valuing it at $1 19 million, while the funder and designer
~ R e d k g r u c m a i ~ ~ h avalued r eat ,
$39.75 million, and continued her design role for the brand.
Pressingon with Price Premiums
The core idea of the Cath Kidston brand is a product-centric
strategy. The control and expansion of the brand to a wider prod-
uct range is still the focus after the shifting of company owner-
that embodies perhaps the most essential brand ingredient for
business success: simplicity. By 2014, there were 59 shops in
the UK and Ireland, with a further 54 in Spain and the Far East,
including Japan, South Korea, and China. The brand is pressing
on with its nostalgic designs that create value for its customers,
justifying the premium price of its products.
Questions for Discussion
10-18 Does Cath Kidston's pricing strategy truly differentiate it
from the competition?
10-19 Has Cath Kidston executed value-based pricing, cost-
based pricing, or competition-based pricing? Explain.
10-20 Could Cath Kidston have been successful as a dekign-
focused product marketer had it employed a low-price
strategy? Explain.
10-21 Is Cath Kidston's pricing strategy su~tai~atjie? Explain
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Sources: Beth Hale, "Cath Kidston to ~ocketd50m from Sale of Brand
20 Years After Shop Assistant Created Famous Nostalgic Designs,"
aai~Maill,Febnraly23,201O, ww.dailymail.co.uk~fmaiVarticle-l252954/
Cath-Kidston-pocket-30m-sale-brand-20-yeed-
famous-nostalgic-designs.htrnl; Kathryn Hopkins, 'Designer Cath
Kidston in Deal to Sell off Her Retail Empire," Guardian, March 7,2010,
www.guardian.co.uklbusiness/201O/mar/07/cath-kidston-privateequity-
buyout; Rachel Porter, 'The REAL Domestlc Goddess:-HowCathKidston
Is Conquering the World with Her Floral and Polka Dot Designs,"Daily
Mail, August 11, 2009, www.dailyrnail.co.uWfemaiVarticle-l205665me-
REAL-domestic-goddess-How-Cath-K~dston-conquer~ng-worldfioral-
polka-dot-designs.html; and other information from www
.cathkidston.co.uk/, accessed November, 2014.