American companies are increasingly offering products for $1 or less. Some are among the largest firms in the United States such as Wal-Mart (WMT) and McDonald’s (MCD). Other are smaller but use big distribution networks like the Apple (AAPL) iPhone App store to reach millions of consumers.
The most obvious reason for pricing products at $1 is to keep customers during a recession. When Radio Shack (RSH) sells four batteries for $.99, it may be the only way that it gets consumers to buy anything from Radio Shack at all. People may not be able to afford the retailer’s more expensive products. The fact that Radio Shack can offer something cheap and of real value keeps consumers “in touch” with the brand which will benefit the company when the economy recovers and higher priced consumer electronics begin to sell well again.
$1 products may be critical to survival for smaller companies. Some of the firms that sell iPhone software at Apple’s App store are solely in the business of engineering inexpensive products for the mobile market. Charging $1 for a product that sells 500,000 copies may be more than enough to keep a three or four person software operation up and running during a tough economy.
A $1 product increases the possibility that people will purchase more expensive products from a company if they can afford them. A consumer looking at a small $1 tube of Crest toothpaste may decide to get the $3 tube with tooth whitener instead. A Starbucks (SBUX) customer who comes into one of the chain’s stores to get three packets of instant coffee for $2.95 may buy a doughnut on the way out.
The recession has caused companies that would otherwise never resort to inexpensive products to re-examine pricing because it is generally better to sell something that is cheap than selling nothing at all.
Here is the 24/7 Wall St. list of ten companies offering products for $1 or less. These companies encompass a number of industries. If there is evidence that this kind of pricing works, consumers should benefit from more products priced inexpensively enough to sell by the end of the year.
1. The Radio Shack $.99 cent battery pack was a special promotion that the electronics retailer ran over Memorial Day. The product was four “AAA” Alkaline batteries. Radio Shack is one of the more troubled national retailers. Its average quarterly revenue is only $1 billion, tiny compared with companies like Best Buy (BBY). It also competes against the consumer electronics stores in huge big box retailers such as Wal-Mart (WMT). Radio Shack may not make money on this kind of promotion, but advertising $.99 batteries brings potential customers into its stores where the retailer has a chance to sell them a wide range of other products from more expensive batteries to things that the batteries operate like digital cameras and GPS devices.
2. McDonald’s (MCD) Dollar Menu is a good way to keep the customer who turns to the world’s largest fast food chain returning to the stores even if they are having trouble with their food budget. McDonald’s changes and updates the menu frequently and it has a fairly long list of food and beverages which includes $1 items such as “Fruit N Yogurt Parfait”, a small order of French Fries, the McDouble Sandwich, fruit pies, McChicken sandwiches, small soft drinks, side salads, and hot fudge sundaes. What are the odds that customers buy something in addition to the $1 menu items? Probably pretty high. What are the odds that the menu engenders customer loyalty? Close to 100%
3. The Wal-Mart $1 Aisles were announced during the company’s last quarterly earnings call. These sections of the stores at the largest retailer in the world could be a real benefit to a number of Wal-Mart customers who live near the poverty line, with government assistance, or on very low salaries. Items include Knorr Pasta and Rice Side Dishes, Angel Soft Toilet paper 4 roll packs, and Crest Toothpaste. For products such as Crest, which is owned by P&G (PG), the $1 promotion may also be a good way to get people to sample their products. For Wal-Mart, people may pick up other items as they head from the $1 aisles to check-out.
4. The Redbox $1 movie rental. The company has 15,000 movie rental locations for $1 DVD rentals with no late fees. Redbox has distribution outlets in Wal-Mart stores, Walgreen’s, McDonald’s, and Albertson’s. Customers go online and reserve a film and then pick it up at the closest location. The movie can be returned to any Redbox outlet. Since it started in 2002, Redbox has rented nearly 400 million DVDs. To make sure that the company can do well against larger competitors like NetFlix (NFLX) and Blockbuster (BBI) especially since consumers have limited discretionary funds in their budget, the firm is even offering “Free Movie Monday’s.” It is hard to imagine that the promotion does not lose money, but it is a great marketing idea and should take customers from other services and build a lot of customer good will.
5. Pillsbury, the baked goods division of General Mills, is offering Pillsbury Brownie Mix through Wal-Mart for a $1. It is a good way for Pillsbury to maintain customer loyalty and brand memory during a poor economy. The company already offers low cost frozen food, baking, and breakfast products. The Brownie Mix promotion involves using coupons from Pillsbury, a good way to make consumers think that they are getting a good “deal” from the firm.
6. Starbucks (SBUX) three instant coffee packets for $2.95. Starbucks is still viewed as an expensive alternative to the local coffee shop, McDonald’s or especially making coffee at home. The store chain has started to combat that with breakfast promotions that offer food and coffee together at a reasonable price. Starbuck’s most aggressive promotion is its new instant coffee. The price point should bring in customers who might otherwise skip a trip to Starbucks and it allows people coming to the store a chance to get a drink or food that is a little more expensive, even if they don’t do it on every visit.
7. The E*Trade (ETFC) $.75 per options contract trade. E*Trade is in battle with larger competitors Schwab (SCHW) and TDAmeritrade (AMTD) at one end of the market and smaller niche operations like Zecco and TradeKing at the other end. Since most of these firms offer very similar services, the price that they charge per trade is critical to keeping customers. E*Trade competitor Sharebuilder is offing stock trades at $4, so it needs to bring down trading one prices on other financial instruments. The online discount brokerage business might be one of the most cutthroat in the country. Stock trades for under $1 may be the next promotion from the industry.
8. Kraft (KFT) Macaroni & Cheese Crackers is another $1 promotion from a large consumer products company created to hold on to economy-minded customers. Kraft, like Pillsbury, faces careful consumers who are trying to squeeze every nickel they can out of their household budgets. This offer also involves coupons, a good way to keep a link to customers.
9. The Apple (AAPL) iPhone Apps store is becoming a tremendous market for both free and $.99 applications. Flight Control from game developer Firemint is one of the most popular game downloads at the App download store. Players get to land planes while going through hazards, and approach airports that require special dexterity. Firemint makes mobile games for a number of handsets including ones based on the film “The Fast and The Furious” and popular “Madden 08 Football”. It is not possible to know if Firemint makes money on its $.99 Flight Control game, but the product is a good way to promote its large line of video games.
10. Another company marketing a $.99 application for Apple iPhones is WeatherBug which put millions of “weather tracking stations” on PCs all over the world. Its phone application may well be a profit center because it has built in the interface and data collection for its other products. The iPhone application has another large advantage. WeatherBug has a suite of products that service industries as diverse as agriculture and country clubs. The branding from the Apple relationship has to help that.
Douglas A. McIntyre