|
||
|
 |
The Recession Collection: Pricing and Business Commentary and Advice Articles
The Holden Advisors team works hard to stay ahead of the times and to offer critical advice in the moment you need it. With all the business news intimating another recession, we offer these recession articles with easy access so you can share them with colleagues.
Recession Library
Righting the Wrongs of Panic Pricing Commentary By Mark Burton, January 21, 2011
From:
Back at the start of the Great Recession, we warned companies about cutting prices in a vain attempt to maintain demand that was heading to the sidelines. Our rationale was simple; discounting your high-value offerings would condition customers to expect discounts and dampen revenues as a recovery set in. None-the-less, many firms got desperate and employed panic pricing to fight for business that could have been more profitable through smarter use of low-value flanking products and pricing resolve for key products.
One firm that played the game brilliantly is the luxury fashion company, Burberry. Burberry’s stated pricing strategy was to hold prices on core offerings, such as their trademark raincoats and cashmere scarves. This strategy, coupled with a focus on healthier markets, such as China, has led to two consecutive, blow-out quarters.
Now I know that some of you are saying, “Bully for Burberry, but we were one of the guys that panicked. What do we do now?” The answer is go do what you should have done two years ago. Remember the segments and offerings where you’re good and commit to firming up and even raising prices. Also balance your offerings with lower-value flanking products to enable your sales team to better manage tough negotiations.
As you make these changes, remember that morale on the sales team is likely to have taken quite a beating over the last few years. Before rolling out any pricing changes, make sure that they have the tools, training, and incentives to confidently present and defend them. In case you don’t do the hard work with sales, let me introduce you to one of our favorite sayings: “You’re better off drinking beer. It’s more productive and far less aggravating.”
Commentary By Mark Burton, February 17, 2011
From: “Walmart Asks Suppliers for Rock-Bottom Pricing” NACSonline.com, January 27, 2011
Here’s a sentence that should scare the pants off of anybody selling into the U.S. retail market. “According to several sources close to Walmart, the world's biggest retailer, recently began aggressively requesting suppliers for ‘opening price point’ goods, the cheapest items in a product category.” Feeling pressure from so-called Dollar stores, the retail titan is returning to its low-price roots and will start squeezing suppliers like never before. The question is, what should suppliers do when Walmart comes knocking?
The first thing to do is recognize how high-pressure procurement tactics will be applied. For most vendors, notification will come out of the blue and will likely be accompanied by an unreasonably short timeline for a response. It will probably contain seemingly impossible demands for price cuts. Recognize these tactics for what they are: a theater of the absurd designed to use fear of lost business to pressure suppliers into quickly agreeing to deals that make little to no sense. Also recognize that the terms presented represent an “in your dreams” scenario for Walmart. They are simply asking for the best and waiting to see how each vendor will respond. Take the request seriously but not literally. Determine a reasonable response but don’t give away the store. Time will be a precious commodity, as there are some very fundamental questions that need to be addressed before responding. Key considerations include:
This is a very brief and simplistic list for what can be a bet-the-company decision. The critical thing to remember is that this isn’t just a stand-alone decision about whether you can take the business. Doing business with Walmart will lower margins on much of your other business and is in and of itself, not a path to growth with other accounts. Given the consequences of the decision, firms must allow themselves the time to do a thorough, unbiased analysis. Quite often this means redefining the rules of the procurement game to get it right. After all, you may not get a second chance.
The Battle is Far from Finished Commentary By Mark Burton, August 20, 2010
From: Here’s a statistic that might be surprising to some: profit margins for companies in the S&P 500 are now higher than they were before the recession began. While this is a welcome sign and ordinarily cause for optimism, there are a couple of other statistics that are stark reminders of how tough the pricing environment continues to be. The Producer Price Index for Finished Goods declined 0.9 percent from March to June after rising 1.6 percent in the previous 3-month period. And not surprisingly, the Producer Price Index for Intermediate Materials, Supplies, and Components increased just 0.3 percent in the 3-month period ending in June 2010 subsequent to a 2.4-percent advance in the 3-month period ending in March.
It’s time for pricing professionals to step up to the plate and become value creators for their organizations. The last two years have been tough, frustrating, and exhausting, but the most important mountain has yet to be climbed. Many organizations have weathered the recession, by shrinking their way back to profitability, but they will not start to grow until we can do the hard work of restoring pricing power.
Commentary by Dr. Reed Holden, May 26, 2010
From: “Climate Changes for Medical Devices,” by Jon Kamp, The Wall Street Journal, May 17, 2010 “Auditing Your Auditor,” by Tim Reason, CFO Magazine, April 1, 2010
As we continue to bounce along the bottom of the recession and patiently wait for the recovery to seriously assert itself, it is a good time to look at the future of pricing. The key question is: what is the place of pricing in the business–both as a tool of tactical execution and as a strategic spear for the firm? In considering this question, I realize we still have a way to go in driving managers and writers to focus on the importance of pricing to achieve the primary objective of the firm: growth of both profits and revenue.
This caused me to be concerned to see a recent article on CNN.com entitled "Why Sales Matter More than Profits." The basic premise is that as we come out of the recession, we have seen an uptick in profits, coming primarily from cost cutting. And as the growth engine kicks in, sales will be more important as an indicator of corporate success. The message says that it is OK to sacrifice profits for the sake of revenue. While this may be is true in rare instances, in mature markets, it is wrong. There are indicators that we may be recovering from the recession, because demand is picking up, but that does not mean it’s appropriate to sacrifice profits for revenue. For a business to be healthy, during a recession or otherwise, profits are more important than revenue. The trick is to use pricing and sales skills to leverage the sales growth profitably.
It’s not OK to sacrifice profits for revenue—because it undermines the strategic position of the firm. In reverse, companies can sacrifice revenue for the sake of profits. The initial reason is obvious—we need profits to sustain the firm. This mindset should help salespeople (and hopefully managers) negotiate better. It gives them the confidence, and over time, the skills they need to establish a strong position with procurement people—the team on a mission to test how low they are willing to go with price. The profit focus is not intended to cause a salesperson to walk away from good sales, it’s intended to be the basis of better negotiation and thus, not leave money on the table.
The way good companies drive this basis is by empowering and listening to a strong pricing department. Knowing where and when to sacrifice revenue for the sake of profits is the strategy behind a good pricer. Sacrificing profits for the sake of revenue is what salespeople do–most often driven by their pay plan. The trick is to put pressure or conflict into the back-and-forth process to attain a balance between the need for profits and revenue. The point of leverage best comes from the pricing department, because in the end, without profits, firms die.
To complicate the delicate balance between pricing and sales, over time, products and services get commoditized. The 1970's saw manufacturing get commoditized. Then chemicals fell in the 1980's. Technology and some medical devices got nailed in the 1990's. The past ten years has seen high-value products and services, like IT outsourcing, auditing, software and more medical devices fall into the commodity trap. Accelerating this process is the widespread knowledge that high-value suppliers in these (and too many other) areas are falling prey to the commodity trap. "Climate Changes for Medical Devices" from WSJ (May 17, 2010) pointed to dramatic changes in incentive structures for physicians, which will increase the price pressure on medical devices. "Auditing Your Auditor" from CFO Magazine (April 1, 2010) pointed out that it's possible to get the big 3 to dramatically drop prices on even high-value audits.
Commoditization of high-value products and services is inevitable. Companies like Oracle in software, HP in computers, and Dow Corning in chemicals have done a great job in not letting commoditization destroy their value. They learned that while products may become commodities, the services wrapped around them can become points of differentiation. They also learned that just because a customer says a product is a commodity doesn’t mean it really is—often it’s a negotiating ploy. Unfortunately, there are many firms that haven’t mapped the lifecycle of their products and markets. The ones that do, especially the ones from the industries which were "commoditized" years ago, confront commodization, with the deployment of an effective pricing department to collaborate and guide sales. These are the companies that learned their lessons and overcame the market pressure. Some of their core disciplines are:
The ones who don’t practice these disciplines react to market pressure and let customers drive the prices down. These firms believe that if the customers say the product is a commodity, then it is true. They lose their value backbone.
Stop Wringing Your Hands and Get on with It! Commentary By Mark Burton, October 26, 2010
From: “Dilemma Over Pricing From Cereal to Helicopters, Commodity Costs Exert Pressure,” The Wall Street Journal, October 21, 2010
As evidenced by a nearly stagnant Consumer Price Index, few companies have been able to find much pricing power during the economy’s long, slow recovery. Here’s the problem–demand in emerging markets is pushing up commodity prices. As a result, many US industries are facing increasing margin pressures due to their inability and/or unwillingness to pass along corresponding price increases. I guess many executives have forgotten the memo about managing your markets instead of meekly reacting to them. Here’s some advice–get your tails out from under your legs and get on with it. Growth accompanied by decreasing margins may make customers happy but it’s also a recipe for killing a business.
Don’t get me wrong. Raising prices during still tenuous economic times is difficult. But many companies make it more difficult, because they frame the problem incorrectly. Their view is, “Our customers have a number of viable alternatives. If we raise prices, they will take their business elsewhere.” Logical enough, but this one-dimensional view is seriously flawed. First, it’s true 100% of the time, irrespective of economic conditions. Second, how do you expect customers to react when their prices are increased? The question isn’t whether they will be unhappy, it’s whether they will take the increase.
To successfully implement a price increase requires a broader view. First, if your margins are suffering because of increasing commodity prices, it is likely that those of other industry players are too. Second, if your sales force is compensated based on revenues, they are going to resist anything that might raise objections with customers. So price increases are not a one-dimensional exercise–they are three-dimensional and require attention to customers, other industry players, and your sales organization. Any plan has to take all three into account. Here is a brief summary:
The Industry: Pre-announce your intentions, your rationale behind the move, and this is key–your willingness to defend your market position against opportunists. An important part of this step is to train executives responsible for communicating with the press and consult with legal counsel to ensure that you are in compliance with anti-trust laws.
The Sales Team: Provide them with the business case for change. Ensure that they have the ability to describe and defend the value of the offerings and that they are equipped to provide options to customers that push back. Most importantly, make sure there is executive sponsorship in implementing a price increase.
Doing it Right in the Downturn Commentary by Dr. Reed Holden, December 16, 2009
From "HP Gets a Boost from Services Unit," by Justin Scheck, The Wall Street Journal, Tuesday, November 24, 2009
While we're all turning blue, holding our breath, waiting for the turnaround, here are few worthwhile comments about a company that got it right, regardless of the downturn. Under CEO Mark Hurd, HP continues to improve as a company and does quite well, despite the global economic downturn. For the latest quarter, they announced a 14% increase in profit, despite continued pressures in several of their key markets.
For example, their PC business saw a 12% decrease in revenues, even with an 8% increase in shipments. That's an indication that price is being used to chase revenue when demand is down–a common problem in market downturns. They did continue their march to more global share in this highly competitive market by doing a better job on introducing new products and leveraging their distribution channel. Their main competitor, Dell, saw a 54% drop in profits at the same time their unit sales were decreasing 6.7%. HP saw a similar set of problems in their printer business, too.
Fortunately, HP has two things going for them that Dell doesn't. First, in the printer business, even when printer sales are down, customers need to buy ink cartridges. That cash machine hums, even in a downturn. Second, with the purchase of EDS last year, HP follows mighty IBM into more of a services model in their business.
The services focus accomplishes a number of important things for HP. First, as products become commodities, it is often the services which provide the opportunity both for differentiation and leverage. Those services are where the value is created and, when priced appropriately, can become another cash machine for a company. The problem that most firms have with services is that they give them away to support the sale of commoditized products. That then commoditizes the services and fails to leverage the value they bring to customers.
Rather than discounting services, it is often better to discount the products. A balanced organization that understands customers lets that happen. DEC did just the opposite, which is why they eventually were swallowed up by Compaq and ultimately, HP. The "balanced" approach prices to value and doesn't try to do a financial shell game to prop up poorly performing products.
Finally, those services provide the salesperson something they can bargain with. If a customer truly wants a low price, just take the services away. When the customer complains about that, then you know you're playing better poker than they are. That's why HP's services profits are 48% in the quarter–and that's before some of the major cost improvements they're expecting from the EDS integration.
Even in a downturn, it's possible to use effective product, service, pricing, and sales approaches that minimize the damage of the downturn and the competition that follows. It is a fine balancing act sometimes, but if a giant like HP can do it, it's something we all should be looking at, too!
Pulling Pricing Back from the Brink By Dr. Reed Holden, September 25, 2009
This has been the worst recession in my lifetime. Activity in many business segments continues to be slow. While there are signs that we may be at the bottom (why is that suddenly a good thing?) unemployment continues to rise. Most companies are continuing in the survival mode. They're cutting expenses to the bone. Capital projects are on hold. Price discounting is used to keep the sales people busy or the plant active. Companies are cutting prices where they have to and trying to hold when they don't. We're all looking for the light at the end of the tunnel, but we aren't sure what it will look like or when it will come
There are companies that have survived during the downturn quite nicely. I wrote recently about Oracle, once the poster child of discounting. They've made quite a few good acquisitions at low prices and rebuilt their value and pricing power. And they've leveraged both with good success. Ford has gotten more customer focused and is beginning to see demand pick up in their popular models. Cisco has held prices, continued to innovate, and will be in fine shape when the global economy begins to rebound. Microsoft will do just fine–especially with their new pricing and product strategy rolling out in several weeks. They're introducing a value-priced flanking brand of Windows 7 and seem to have a good handle on getting customers to upgrade to the more functional suite of products.
A question for us all is: what should we do in anticipation of the upturn that everyone seems to be talking about? Here are a number of things to think about:
If you're reading this and don't have any policies and procedures, now is a good time to begin to stitch them together. Don't worry about doing anything fancy here–just do something!
Good pricers and leaders look ahead in the business cycle. In upturns or in downturns, that's true. It's a bit like walking a tightrope–you have to be ready to react, but sometimes it's just good to stay in balance. If you don't, it's a heck of a fall.
Conditions are Right for a Pricing Death Spiral Commentary By Mark Burton, September 25, 2009
From: “The Great Trust Offensive,”BusinessWeek, September 28, 2009
In Pricing with Confidence, Rule 4 is focused on playing better poker with customers. In discussing Rule 4, we point out the critical role that trust plays with both relationship and value buyers. Our research found that there were two major drivers of price-buying behavior. The first is the size of the company. The second? The level of trust in both the selling company and salesperson. In short, if your customers don’t trust you, they are far more likely to engage in price-buying behaviors and be far more aggressive at the negotiating table.
The BusinessWeek article ominously points to some serious troubles for American business in the area of trust–and the implications for pricing power are significant. “Polling in recent months shows that increasing numbers of consumers distrust not just the obvious suspects—the banks—but business as a whole. In a phone survey conducted from May 26 to July 3 by public relations firm Edelman, only 44% of Americans said they trusted business, down from 58% in the fall of 2007.”
While the research focused on consumers, you can bet that when these consumers put on their suits, go to work, and become your customers, their attitudes don’t change significantly. Mix in weak demand that makes many executives anxious for business-on-almost-any-terms, and you have a recipe for a pricing death spiral. Companies need business, so they are willing to negotiate ever-steeper discounts. But negotiating prices on supposedly high-value offerings makes it obvious to customers that any initial prices they are given are not to be trusted. This in turn undermines loyalty and increases price-buying behavior.
This vicious cycle is why pricing integrity is so critical. The actual costs due to increased customer churn and spread of the price negotiation virus are likely orders of magnitude higher than measurable discount dollars. Leading marketers like Proctor and Gamble, American Express, and Starbucks see this, which is why they are engaging in systematic changes to prices and focusing on trust in their marketing messages and interactions with customers. Does your organization understand the cost of eroding customer trust? Do you have a plan to build trust to grow profits?
Tales of Endurance, Pricing or Otherwise By Dr. Reed Holden, March 19, 2009
Most managers are beginning to recognize that they're in the toughest economic times of their lives. Sure, a few industries, such as software houses and the medical community, continue to do well. but when the dust settles from all of this, the only questions are whether the recession will a) become a depression and b) if it will be worse than 1929.
For a pricing blogger, this is certainly a "target rich environment." There are numerous examples of managers who are panicking and pulling the price discount lever. In doing so, they are dooming their firms to failure. As we said last week, "you can't price your way out of a recession."
But rather than focus on the failures, for the past week, I've been accumulating articles and notes on managers and companies that are little beacons of successful decisions in these trying times. What's been lacking is the bigger message that puts all of these together. After spending time on the phone with pricing managers over the past few weeks, it seems to me that the watchword for successful management today is "Endurance."
The thought comes from a book I read last year, Endurance: Shackleton's Incredible Voyage about Earnest Shackleton's voyage to Antarctica on his ship Endurance in 1914-15. Early in the 17-month trip, the ship was frozen in an ice pack, and the crew of 28 men had to live on the frozen ship for almost 10 months. When the ship was finally crushed and sank, they had to live on the ice for another 6 months (some had to live longer than that). They finally performed their own rescue by sailing to an island. It is an "astonishing" story of survival.
Another incredible story of survival comes from the book We Were Soldiers Once and Young by Hal Moore and Joe Galloway. It is about the month-long battle between the US 1st Battalion of the 7th Cavalry and a "superior force of North Vietnamese Regulars" in the Ia Drang Valley in South Vietnam in the fall of 1965, under the leadership of Lt. Col. Hal Moore.
The reason I selected these books is because in both cases, people faced incredible circumstances and survived (though too many were killed at Ia Drang). The other reason is that when the story finally was told, there were no dramatics. Yes, there were heroics, but that was expected from the trained and disciplined professionals who survived. And when they told their stories, it was about the basics of day-to-day survival of professionals who knew what they had to do and did it.
These are good stories to remember as we face our own harrowing economic times. Here, no one is facing death, and that's a good thing. If the crew of the Endurance and the members of the 7th Cavalry could maintain discipline and focus during their harrowing times, we should be able to as well. Hokey? Maybe, but there are good points here–leadership and discipline.
Last Thursday, Adobe Systems advised analysts that revenue was going to be down dramatically, and they were going to do what they could to control expenses in order to maintain earnings. This included the painful act of lay-offs of 8% of its work force. As we begin to see the nightly news images of the tent cities that are beginning to spring up, those visions of unemployment are sad for all of us. But the fact remains that those tough decisions need to be made or the whole company will be put at risk, as we are seeing in Detroit right now.
Speaking of Detroit, Alan Mulally, new CEO of Ford, seems to be making the decisions that GM and Chrysler have been avoiding. He got the unions to agree to dramatic wage and work concessions. He delayed the introduction of new models so that they could clear out the inventory of old models. And he ordered a 40% cut in production– this is on top of dramatic cuts he ordered over a year ago. It's no wonder that Ford continues to be the only one of the "once big three" that might not need any federal loan guarantees.
Finally, GE continues to rely on services to beef up the revenues of their extensive line of products. GE has continued their push to expand services on already-sold products, like locomotives and jet engines, to achieve growth and added profits.
How you survive in tough economic times and flourish in booming ones is through leadership and discipline, and by cutting revenue goals rather than cutting price, cutting costs rather than cutting price, relying on services revenue to beef up declining product sales, and by recognizing that profits are more important than revenue–much more.
No, the guys who head these companies might not be a Shackleton or Moore, but they are doing their best in tough times. They are facing the tough times, not with excuses and delayed decision but with clear purpose, focus on what needs to be done to survive, and the willingness to sacrifice the few for the greater good. Most of all, they know that they can’t change the circumstances, and that, in the end, they have to endure. Maybe when the story is written about the companies that survived and eventually flourished, they will be mentioned.
Pricing Services to Cushion the Shock of the Recession
You Can’t Price Your Way Out of a Recession By Dr. Reed Holden, February 19, 2009
Mark Burton and I were teaching a certification class using our book Pricing with Confidence at the Professional Pricing Society in Houston last week. We were talking about our famous "dirt" company (you have to read the book!) and repeated a quote from their CEO, "You Can't Price Your Way Out of a Recession." Someone asked what we meant by that.
Given the number of companies that we've spoken to in the past month that are still thinking about using price discounts to achieve: a) increased share, b) increased revenue c) increased profits or d) cover increased costs, it's worth it to give you the answer, too.
In mature markets or economic downturns, demand is down. That is, customers slow their purchasing. This is true for consumer sales, where year after year, demand is down 10% in retail and 50% in automobiles. And it's true in business-to-business sales, where declines seem to be in about the same range, except health care, which continues to show increases in demand. By definition, those markets are "inelastic." That is, demand does not respond (increase) that much due to changes in price.
When markets mature and demand becomes inelastic, price strategy for all products and services should stay skim, where you price high relative to competitors or evolve to neutral, where you stop using price as a competitive weapon. If you try to use price to increase sales, competitors respond, and price wars break out. When that happens, revenue drops (a characteristic of inelastic markets) and profits disappear. And during all of this, demand keeps going down, and it does not recover.
During the holiday season, we saw many retail companies try to use price discounts to increase demand. As a result, it is likely that many of those companies will go out of business. Some analysts predict that there will be "massive retail bankruptcies in 2009 and 2010." Reuters reported that "Restructuring experts see a wave of retail bankruptcies in the coming months, due to dismal sales and a credit crunch." What is interesting to note is that they failed to point to pricing strategy as the culprit, yet it is. The reason that many retailers are going out of business over the next two years is not because demand is down. It's because they are using price discounts to try to fix a problem that just can't be fixed with price. Business is going to be down for most of us for the foreseeable future. It's time to batten down the hatches and try to survive. Cut costs, put people on furlough, stop unnecessary expenses, but don't discount price. By using price discounts at the wrong time, retailers eliminated profits and sealed their fate with the bankruptcy courts.
We talked about Abercrombie in January, because they decided to stick with their skim pricing strategy in December. Lots of analysts thought this was wrong. Even some of our own people agreed with them. Yet most recent results for Abercrombie shows that while profits "plunged" 68%, their stock price is actually up 10%, because investors know that a) they'll survive and b) they have protected their high value-position in the marketplace, while many of their competitors (even Macy's!!!!) have pulled the panic lever and started dramatic discounting. Against the advice of many, Abercrombie used the correct price strategy and will survive the downturn.
What about the dirt company? Most recent results show that their revenue is up and profits are up more. They too will do just fine. Not without a little sweat but smart managers use recessions (maybe even a depression!) to tighten up controls and policies. They limit spending. They adjust their revenue goals down. They get people working smarter and better. The one thing they don't do is use discounting to try to solve the problem.
It’s About the Strategy, Stupid! By Mark Burton, February 19, 2009
As Reed so simply put it, you can’t price your way out of a recession. Too many firms have gotten caught flat-footed and are using price discounts in a panic to try to keep demand that is going away no matter what they do. The firms that do this are creating two very significant long-term problems. First, they are destroying the integrity of their pricing and the value of their brands. Second, they are training their customers to negotiate for every last penny, thus undermining their most valuable asset–trusting customer relationships. Both of these forces will make it extraordinarily difficult to bring prices back up when the economy finally does turn. In addition, it will take much longer to bring prices back up to a level that reflects the true value of the goods and services being sold.
The way around this is to look objectively at pricing as a strategic tool that must be managed systematically, based on value, market demand, cost structure, product lifecycle, and firm capabilities. This view leads one to make decisions on the basis of preserving and gaining pricing power, be it through reducing capacity to match demand, introducing low price–low value offerings, or making systematic adjustments to price lists, so that list and street prices are more in line.
Two weeks ago, Reed and I spoke with one of the most capable pricers that we know about getting through these times–“Fred.” He is thinking strategically. What has he done? First, he recognized that much of the incremental revenues that had come from pricing last year were going to disappear this year. Next, he engaged with his CEO, and they came up with a plan to reduce capacity to well below current demand levels. This creates pricing power and protects them against further downside risk from collapsing demand. It also paved the way for passing through a 20% price increase for their least profitable accounts. Some accounts will walk away–that’s OK, because there is not enough capacity to serve them all any more. The others will take the increase, because they value the service they get. Fred’s firm has now set the stage for a stronger recovery by enforcing a pricing strategy.
Clever pricing tactics and working the price waterfall are necessary but woefully insufficient for these times. The firms that understand that pricing is all about strategy will come through stronger and more formidable competitors. Those that don’t will be lucky to survive.
Winning the Game with Flanking Products Commentary by Mark Burton, February 19, 2009
From “Used Games Score Big for GameStop,” The Wall Street Journal, January 21, 2009
Amid one of the worst fourth quarters in history for retailers, video game seller GameStop didn’t just survive, they blew the doors off the place. In January, they reported a 22% jump in overall sales and a 10% increase in sales at stores open more than 12 months. By comparison, heavyweight champ Best Buy reported that sales of video game hardware fell by “mid single digits” and overall video game sales climbed 9% in December.
GameStop outperformed the market and the competition by using something that we remind value managers of every day–lower-price flanking products. In the case of GameStop, they are the only major retailer that deals in used games. That is something the competition didn’t want to touch for fear of cannibalizing sales of new games, and now it accounts for 23% of GameStop’s revenue. They also became a driving force for sales as the recession hit. In the nine weeks that ended January 3, sales of used games and consoles rose 32%.
Not only do used games keep cash-strapped customers coming into the stores, they serve two other valuable purposes. First, since customers can trade in games and use that money toward new games, it means GameStop is able to preserve price integrity by avoiding the massive discounts on merchandise that other retailers rely on. Second, as is the case with everything from used cars to used college textbooks to refurbished truck engines, the margins on used games are higher (48% versus 7% - 20% for new consoles and games). There is, after all, only one good purpose for price–to increase profits. GameStop has that game figured out.
Head-Off Price Wars with the Right Communication By Dr. Reed Holden, January 16, 2009
Over the past decade, companies like Monsanto, DuPont, and Novartis have invested heavily to improve the performance of seeds. They’ve made seeds for a variety of crops more disease resistant and higher producing. The current recession has had a dramatic impact on farmers, but seed companies still want to leverage the increased value of their seeds.
Let’s look at an announcement from Monsanto’s CEO Hugh Grant, who stated in The WSJ today that “he saw signs of a brewing price war…. (and that they) will hold the line on pricing, even if competitors turn to aggressive promotional strategies to win market share.” Kudos to Mr. Grant, because he is using communications to voice his concerns about a price war and his desire not to engage in one. Showing competitive leadership in tough times is what most markets need. Though Monsanto is not the dominant player in the industry, sending the message that competitors should avoid price wars is a good move in mature and declining markets, because price discounts don’t create more business. They just encourage switching. For more information on derived demand, see our book Pricing with Confidence.
Where Mr. Grant fell short in his announcement, however, was that he unwittingly told competitors that if they want to use price to gain share, Monsanto will let them. Competitors might interpret the announcement as now might actually be the time to use price discounts to gain share. BAD MOVE. Rather than state, “Monsanto would hold on price, even if competitors turn to aggressive promotional strategies,” the announcement would have been more effective if Mr. Grant had said, “We will respond to competitors’ moves to gain share but hope we don’t have to.” That would have told the competitors that if they tried to use price discounts, they would be matched to the detriment of all competitors.
Price communication is not easy and the practice is loaded with landmines. Too many companies don’t do it or don’t do it effectively. Too many corporate attorneys take the position that the firm shouldn’t announce because it is illegal. In both cases, they’re wrong. A top advisor in price communication in the country is Gene Zelek of Freeborn and Peters in Chicago. Effective communications can prevent price wars, even in a recession, and end up preserving profits and revenue.
There Isn’t Any Price Low Enough Mark Burton, December 18, 2008
Over the summer, we at Holden Advisors held up Dow Chemical as a shining example of how to manage pricing. The catalyst (pun intended) for our praise was the double-digit price increases that Dow announced. While skyrocketing oil prices provided a reasonable basis for increasing prices, many companies dithered. Dow acted decisively and profited handsomely for their efforts.
Now, scarcely six months later, Dow has announced that it is idling a third of its capacity and is laying off five thousand workers and terminating another six thousand contractors. What gives? Did Dow mismanage its business after all? Quite the contrary. They are still managing the business in a way that gives them the most pricing power, given current business conditions. The result of the current economic turmoil has been an evaporation of demand. Dow recognizes an important point that many managers miss–there isn't any price that is low enough to bring that demand back. Instead, they are working the other side of the supply-demand equation by cutting back supply until market conditions point to the ability to profitably restart idled plants.
We are experiencing perhaps the most volatile pricing environment that any of us will ever face. Just a few months ago, smart firms were pursuing price increases. Now many are faced with severe deflationary pressures (when the NFL reduces the prices of playoff tickets by 10%, we are in a deflationary environment.) These changes will whipsaw the unprepared and hamstring their ability to recover pricing power when markets eventually turn around. So what should we be doing with pricing right now?
Lessons Learned: Planning for a Recession By Dr. Reed Holden, December 18, 2008
Business objectives and strategies evolve around internal business capabilities, competitive conditions, and market conditions. When one changes, especially market conditions, objectives and/or strategies should change, too. If they don’t change in a downturn, suppliers find themselves hiring people and building inventory when neither the products nor the people will be needed in, at least, the short term. When you build excess inventory, it uses up cash that is often needed to meet other obligations of the firm, like payroll and operating costs.
By Dr. Reed Holden, November 14, 2008
The real problem is that using discounts in a down market will encourage a price war, and the reduced prices will cause revenue to drop and profits to disappear. Proper controls and processes will be needed to make sure the discounts given truly provide a benefit to the company–a.k.a. profits. Without that, price discounts will lead to more job losses, making the problem worse. It’s going to take a tough pricing manager to prevent the unwarranted discounting that senior leaders will favor.
By Nelson Hyde, November 14, 2008
Economists have predicted five out of the last two recessions, but this one is starting to look like the real deal. Unemployment is on the rise, lending is tight, retailers are bracing for slow holiday sales, and CEOs are making dire forecasts.
The first is innovation. If you want to be growing the business in bad times, you have to expand your product footprint. If you want that growth to be profitable, choose high-margin segments like Apple has. Its third quarter profit was up 26% on the strength of its iPhone, first sold 16 months ago. The second source of strength in bad times? Raising prices. That’s right, raising them. Higher prices at Sara Lee converted what would have been a loss this quarter into a 20% profit increase. Japan’s largest wireless carrier, DoCoMo, lowered its cell phone subsidies–a move that predictably slowed unit sales growth, but increased profits by 37%. On-line movie renter Netflix is taking a cue, too. Anticipating slower subscriber growth, it is raising prices $1 for some DVDs.
In raising your prices, demonstrate that the new prices are reasonable and justified–cite your cost increases and other benchmarks. Give your customers advance warning so they can pre-buy some at the old prices to ease in. Communicate your intent to the entire market, in public forums where competitors will hear it, too. If competitors try to undercut your new prices, take clear, targeted actions that hit them where it hurts to keep them in line.
Not everyone can duplicate this, but many who could, don’t even try. The problem with following conventional wisdom–“demand is weakening! lower prices!”–is that when the boat goes down, you go down with it. Some companies have created a few lifeboats of their own and set their own course instead.
Stress-Based Pricing Strategies Commentary by Steve Haggett, November 18, 2008
From “Niche Companies Make The Most of The Crisis,” Robert Weisman, Boston Globe, October 21, 2008
In a recession, offerings that save customers money or reduce risk can yield a growth opportunity. For many companies, a lower-value flanking offering can maintain revenues and help build new customer relationships, relationships that could be a source of growth during the rebound.
The key to an effective flanking offering is ensuring that there is an identifiable distinction in features and services (but not quality) between the premium offering and the lower-value offering. Smart customers will pay for the lower-value option, and hope to receive the services from the higher-value alternative. If you are going to cap your prices to serve this market, you need an easy way to cap your services–and your costs.
By Nelson Hyde, August 21, 2008
As oil prices remain high and the economy softens, like many industries, the recreational vehicle (RV) market has been hard hit. Sales are down 17% from last year and even more in some segments. The knee-jerk reaction of most vendors selling into industries like that is to lower prices. Yet some vendors in the RV industry have recently raised prices. How did they do that?
It all comes down to clear, consistent communications–and strong fortitude. One company anticipated and planned for the downturn. Managers knew costs were going up so they developed very clear, specific messages about the need to raise prices, well ahead of contract renewals. They presented a legitimate and understandable rationale–costs were rising–and highlighted ways it had already aggressively managed costs down. They talked up the story, both individually with large customers and in carefully chosen industry forums where everyone, including competitors could hear the story. They had a well-thought out plan for how to respond and communicate if market players tried to take advantage of their increases and carefully analyzed each competitive move.
It worked, they maintained their share, didn’t see a dramatic sales decline, and most importantly, profits stayed high, too. It didn’t require rocket science –but it did take advanced planning, exceptional execution, staying on message, and the guts to do something that everyone else said couldn’t be done.
Profits are More Important Than Revenue in a Downturn By Dr. Reed Holden, May 30, 2008
Yikes, another discussion of pricing in a downturn. Sorry, but I just finished an interview with Fast Company magazine,and the discussion point was how to get more for less. The writer’s initial thought was to figure out how to get more lean in a downturn by cutting costs and driving more efficiency at the same time. The problem is that cost cutting and efficiency can only go so far–you run out of fat to cut and you can only get so efficient.
One of the keys to success in a downturn is to stop chasing unrealistic revenue goals with price discounts. The revenue you thought you were going to get just isn't there any more. As we've discussed probably too many times before, chasing declining revenue with price discounts just makes the problem worse--you end up with less revenue and no profit. Smart pricers look for ways to eliminate discounts, especially on high value products and services–even in a downturn!
Let's look at two examples from our local paper, The Boston Globe. On April 25, they reported that Ford "Surprises with 1st-quarter profit of $100M." Remember, we talked about Ford in December? About how they had cut sales expectations and shut down capacity. Now we see that they're one of the few auto makers that made a profit. Also, the Globe reported that "Demand (is) down at Thermo Fisher." The real news of that header is that first quarter profits "rose sharply." That should have been the headline! Unfortunately, the press hasn't figured this out yet.
In Tough Times – Price Transparency is Key Commentary by Mark Burton, May 30, 2008
While American Airlines was making headlines through its “creative” means for dealing with higher fuel costs, Air Canada and its local competitors WestJet and Porter Airlines were trying something truly revolutionary: telling their customers the truth. All three Canadian airlines are dealing with the same escalating fuel prices that American is, but they have chosen a very different path. Rather than taking away basic services that have always been offered for free, they are adding a separate fuel surcharge onto their tickets.
The smart money is that Air Canada and the gang will have a much easier time of it than American for a couple of reasons. First is the issue of fairness. The skyrocketing cost of oil is in the news every day. Consumers are aware of it and are more likely to be accepting of a price increase that is driven by the costs of a key input that they understand. In addition, by calling out the fuel surcharge separately, the Canadian airlines are making the oil industry the bad guys in their approach–a perception that is already widely held. In contrast, American is giving customers the impression that service will suffer (now I’ve always had to carry my bag on–and those already crowded overhead bins just became more valuable than beachfront real estate on Maui) and thus damaging their own brand, rather than fobbing the problem off onto already unpopular suppliers.
The second reason is that the competitors in Canada are more disciplined. When Air Canada first rolled out their surcharge, they hid it in the fine print–and subsequently got whacked by full-page newspaper ads from WestJet, pointing how they don’t hide anything from their customers. This public shaming of Air Canada reminded all players of their common cause and has led to a consistent pricing approach. If only American Airlines were as smart as our friends north of the border.
It's the Services, Unenlightened One (Didn't want to say Dummy!)
From "IBM Lifts Estimate as Profit Jumps 26%" by William M. Bulkeley, The Wall Street Journal, Thursday, April 27, 2008
There are really two ways to make money in a downturn. The first is to walk away from price negotiations which will turn into price wars. That is, turn down unprofitable business–let your competitors take it. We know of several companies that are doing that now with dramatic results. The other way is to better leverage services. IBM, which started it's "services transformation" under then CEO, Lou Gerstner in the early 1990's, is seeing extraordinary pay-off, even in the midst of what is turning into a global recession.
Sure, currency devaluation helped. With a bulk of its business coming outside the US, IBM is able to weather the devaluation of the dollar better than most. Revenue is up a bit but profits are exploding higher. They're declining in the semiconductor business but are growing in the "way beyond mature" mainframe business. Remember when the strategy pundits told them to get out of that business? Good thing they didn't.
By focusing their development on the services that wrap around their technology, they were able to weather the decline in hardware demand. Even in downturns, customers want their IT systems to improve in how they handle internal applications and external relationships with customers. Providing more and better services to customers expands the customer and global footprint and protects firms from the decline in demand during a recession. Finally, it gives salespeople more price leverage with customers.
Pricing is Important, But Not How You Think: How to Price Smart in a Recession
Yes, the economy is hurting and most companies are reacting with big price cuts to keep your people and machines busy. Yet despite those price cuts, customers don't buy more. In fact, they are buying less, because they're going through the same recession you are. Don't feel bad. Most managers react with the wrong pricing decision in a recession. And they find that price discounts are quickly matched by competitors causing declines in revenue and profits to disappear.
A far better approach when there is a downturn is in the following rules:
Surviving in a recession is hard. Avoiding knee jerk reactions of price discounts is even harder. By following these simple rules, companies can not only survive but flourish in a downturn.
A Recession–So Now What?
We try to think ahead of an issue so that we can prepare for it. For the past six months, we've been talking about the recession and how to get prepared for it. Now it is here – that is -–according to The Wall Street Journal article on page A14, March 13, 2008 “Most Economists in Survey Say Recession is Here,” by Phil Izzo and Sudeep Reddy.
What should a manager do? First, you should do all the things you should have been doing for the past six months:
OK, the real list is a lot longer than that, but notice that we intentionally left "lower prices" off this list. That's because lowering prices in a recession won't get you much. Why? Because competitors will match or beat them and customers aren't going to buy more volume no matter what you do–they're going through the same recession you are.
Second, you should be looking for signs of a turnaround. The signal we watch is a buildup in the early stages of our sales funnels. Maybe your clues are the number of customer inquiries or longer lead times. Right now, a lot of businesses are in survival mode. At some point, you're going to have to switch back to growth mode. Unless you're looking for the signs that the time is right, you're going to miss an opportunity to start growing again. OK, you may get the message eventually, but if you are looking ahead in the business cycle for the next change, you'll be ahead of the revenue and profit curve when it's done. Remember–always look ahead of the cycle. Manage for today, but be ready for tomorrow, whatever comes. |
 |
