The taxi industry is having a rough go as ridesharing apps like Uber capture market share with a business model that improves the customer experience and maximizes profit. But the taxi industry’s loss can be the meat industry’s gain.
Here’s why: Uber and the meat industry have a lot in common. Both are highly commoditized segments (most ground beef is ground beef just like a ride from the office to the airport is a ride from the office to the airport) which means they are both subject to the harsh realities of supply and demand.
More specifically, pricing for both meat and rides is the direct reflection of the current state of supply and demand. But when it comes to execution of optimized pricing, Uber is kicking the meat industry’s ox tail.
How Uber sets prices
Uber is a virtual marketplace connecting people needing a ride right now with drivers who are available right now. Uber prices a ride based on average rates for time and distance EXCEPT when supply of cars and demand for cars are out of whack.
Then Uber plays its trump card….surge pricing.
Surge pricing is when Uber raises the price for the rider which incentivizes more drivers to make themselves available. Of course this increase in price will also normally lower the number of passengers looking for rides – so Uber’s surge price goes up until the additional drivers, and fewer passengers reach an equilibrium, meaning the numbers of each side are equal. Surge pricing is how Uber optimizes prices in times of dynamic supply and demand.
How most meat companies set prices
Ask a pricing manager for a packer, a buyer for a distributor, or a retail category manager how they price meat and you’ll find some common practices like:
- Looking at what price an item sold for last week, month, and/or year
- Hearing what prices competitors are setting (this intel typically comes via customers with obvious incentives to be less than forthcoming)
- Using a basic “input cost + $.xy/lb margin” formula to insure some profit
- Try selling at a price and if it doesn’t work, take a stab at a lower price
- Using one’s gut/intuition to “feel out what the market will bear”
- Asking the customer what price they’re willing to pay
What can the meat industry learn from Uber?
No one at Uber is using their gut to set pricing.
No one at Uber cares what price a rider was charged for the same ride at the same time last week.
And no one at Uber asks the rider what they’re willing to pay.
Pricing decisions at Uber are guided by data. Data quantifies supply, demand, and price elasticity in real time in order to optimize pricing and maximize profit.
Sure, the meat supply chain has a ways to go before there is sufficient data available to react in real time to supply and demand changes the way Uber does.
But there are steps towards that goal that meat companies along the value chain can take right now to begin optimizing pricing. For starters, incorporating quantitative rigor and analytical tools to pricing procedures instead of relying on customers to tell you what they’d like to pay, or suppliers to tell you where the market “really is” today.
What steps are you taking?
Curious how Amazon’s acquisition of Whole Foods might accelerate this process? Download this white paper to find out.
This article was originally published on Meatingplace.