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Newsletters 2005: Nov. | Oct. | Sept. | Aug. | July | June | May | April | March | Feb. | Jan.
Next Generation Marketing: Innovation, Innovative, or Both | Black Gold! $182,784 a Barrel! | Dell Is Trying Hard, but Is it Enough? | Less Dell Get Too Arrogant – Watch Your Goals – They Can Bury You | Swan Song for Delta's Low-Cost Carrier | Airlines Finally Drop Dumbbell Discounts | Dope Slap of the Month Award: The Automobile Industry | Good Reading!
Next Generation Marketing: Innovation, Innovative, or Both
Commentary By Dr. Reed Holden
From "Not Invented Here: Are U.S. Innovators Losing Their Competitive Edge?" by Timothy I. O'Brien
Hey, do you want to know how to avoid the commodity trap? Really? The answer is simple: innovate your products and services in ways that customers’ value. Yes, easier said than done, but we spend a lot of time convincing companies to get more innovative in the way they think about their products and services. I recently had an opportunity to present at the Conference Board's CMO Annual Conference in New York (see the presentation) and was pleased with the attention this important topic is beginning to get.
This New York Times article, which occurred the weekend after the conference, repeated the siren song of concern that American businesses are losing their competitive edge when it comes to innovation. The basis of their worry is that we are graduating fewer Doctorates to American citizens just as we are graduating more from other countries.
I believe that the real concern is just outside the door of every business in America – it's our customers. As managers have continued to be processed into sausage by the purchasing meat grinders of most customers, they don't think they have the time to have discussions with them about how to innovate their products and services, but nothing could be further from the truth. All we need to do is ask the right questions in the right way, and you'll be amazed at what you'll find out. Black Gold!! $182,784 a Barrel!!!
Commentary by Mark Burton
From "Ever Wonder Why Ink Costs So Much?" BusinessWeek, November 14, 2005
Exxon-Mobil doesn’t have anything on Hewlett-Packard. At $34 an ounce – or $182,784 per barrel – printer ink makes $60 per barrel oil look like fools gold. This is why there is a rapidly growing market for ink and toner cartridge refills. It is economics 101: any market with outsized profits attracts competition. And that competition is going to drive down prices. If you’re at HP where an estimated 50% of profits come from ink and toner supplies, you should be worried – very worried.
The competition comes from competitors like Cartridge World that refill ink and toner cartridges for prices 40% to 60% lower than name brands. So far HP has advantages in quality of technology, but their response to the new competition – threatening legal action – is inadequate and doesn’t serve the needs of their customers. So what should HP do?
Market leaders can never ignore low cost – low-price competitors specifically because they have much to lose if the upstart expand their beachhead. The key to success is to lock down the high end of the market with superior products and services to create fences to hedge against the price erosion that will inevitably happen at the low end of the market and then keep the pressure on by offering low-value flanking offerings. Dell Is Trying Hard, but Is it Enough?
Commentary by Dr. Reed Holden
From "Hanging Up on Dell?" BusinessWeek, October 10, 2005
To start this off, I've got to admit that we're one of the shops that decided to stop using Dell computers. A two-hour service call with an Indian-based service tech was enough to tip the scale. We identified the problem at the start of the call, but she didn't believe us and forced us to completely disassemble the computer. When we finally escalated to a senior technician, he asked what the problem was and sent us the right part. This experience was more than enough to convince us (and many other firms) that Dell's low-cost service approach was leading to low-customer satisfaction. Current customer satisfaction scores put them as an "average" supplier in a below-average field.
However, we've got to hand it to Dell with a number of their recent moves to a) solve the problem and b) effectively respond to an increasingly price sensitive segment without c) continuing to undermine growth in their non-traditional higher-value business base.
Look at some of the things they have recently announced and done:
While these are definitely the right moves, the real trick and the risk will be when it comes time to "walk the talk" of high to low levels of services. Isn't it funny how good strategy always comes down to better execution. If Dell can pull this one off, we predict that their growth will get back on the fast track. Less Dell Get Too Arrogant – Watch Your Goals – They Can Bury You
Commentary by Dr. Reed Holden
From “Dell Issues Sales, Profit Warnings” by Gary McWilliams
Dell computer has announced that they have too much inventory that resulted from less than anticipated sales. Dell with too much inventory? It seems that aggressive growth goals have led back to the bad habit of "build it and they will come" mentality. Yikes – here I thought they knew better than to let goals drive strategy. That little error has buried more companies than most would like to admit.
Another problem is that recent price cuts have failed to provide the anticipated lift in sales. Hello? Most PC markets are mature and price inelastic – that means they don't respond to changes in prices. Price cuts drop revenue in these situations. Plus, their direct model won't work in many of the developing countries like China and India – they need to be developing an indirect model over there. Swan Song for Delta's Low-Cost Carrier
Commentary by Dr. Reed Holden
From “Delta Shuts Song, but Keeps Its Style” by Evan Perez, The Wall Street Journal, October 29, 2005
After a brief three years of operation, Delta's low-cost flanking brand is being dumped. It is being blamed on restructuring, but we would guess that the real reason is that, being in bankruptcy, Delta is able to rework costly salaries and work rules in contracts for pilots, flight attendants, and mechanics in it's regular fleet and no longer needs another company to accomplish this.
It seems that the value structure of most "mainstream" airlines is upside down. In the airlines, I have no status with the low-cost carriers, such as Song and Southwest, and treat me better than most that I do have status with, especially United and Northwest. There is something wrong with that value structure when that happens. But why does it happen? All you have to do is look at the Operational Leverage piece of the Value DisciplineSM. Most of the mainstream carriers signed lucrative contracts with their employees in the years of regulation. Why not? Their pricing was cost based and the regulators let them raise prices and profits if their costs went up. With deregulation, the airline industry continues to suffer from slow response of operational models to catch up with faster moving carriers. In most cases, these carriers have both low cost and higher value and better operational leverage strategies than the mainstream carriers.
Boy does that sound familiar – just look at the energy industry, the car industry, the steel industry, and the tire industry, to name a few. I don't know whether Delta will survive this, but the choice is really up to management, how fast they can move, how well they can restructure salaries and work rules, and perhaps most important, how they can keep their employees happy and motivated. Let's not forget that when Delta's senior management was trying to get employees to participate in the pain last year, they gave themselves fat retirement plans to compensate for lower salaries and lost any credibility. If they don't make it, I'm sure that management will blame it on fuel costs and competition, but the real reason is, as usual, ineffective management and lack of discipline – the Value DisciplineSM of course! Airlines Finally Drop Dumbbell Discounts
Commentary by Dr. Reed Holden
From "Fliers Embrace Airlines' New Pricing" by Scott McCartney, The Wall Street Journal, November 15, 2005
The illogical extension of any good idea is usually a bad thing, and I have long been a critic of any pricing optimization programs that charge more to loyal customers than they charge non-loyal customers. Sure, you do that a little, but not a lot. The net result of airline price optimization programs is that loyal business travelers find themselves paying as much as 15 times more for the same seat as a non-loyal economy traveler. We saw a similar situation quite a few years ago when Digital Equipment Corp., in it's last gasp effort to survive, began charging their loyal customers 35% more per year for services and found their loyal customer base shrinking at 30% per year – it's called the death spiral folks!
I'm a frequent traveler and have stopped flying on United because they charged a huge difference and their service was poor. Everyone repeat after me: take care of your loyal customers. I continue to be amazed at the number of times companies exploit their loyal customers by charging them more for the same thing that some customers get for significantly lower prices. Do they think that the loyal customers won't find out? Do they think they're stupid? The sad answer to both those questions is yes. It is no surprise that when loyal customers do find out, they become price buyers or poker players just like every other customer.
If you can't introduce flanking products and services, you've got to offer uniform pricing to all customers. If you don't, it undermines customer loyalty, perhaps one of the most valuable assets the firm has. Take a look at your last price increase. Did you try for 10% and were happy with 5%? Take another look because chances are that some customers paid no increase while the other customers, usually loyal, paid 10%. How long has that been going on? Chances are you've got dumbbell pricing going on right in your own company. Get it fixed or get the tombstone ready. Dope Slap of the Month Award: The Automobile Industry
Commentary by Dr. Reed Holden
It is absolutely no surprise that today's papers had no less than three articles citing auto sales are declining and that car makers are offering more price deals. Tell ‘ya what, just take the headlines and keep repeating them on a monthly basis because this lunacy is never going to change.
Here's the big secret that the Detroit (and Japanese for that matter) don't understand. They do have loyal customers. Very loyal customers. The problem is that the distribution strategy and pricing approach permits dealers – who are too densely populated and not oriented to providing outstanding service – continue to bomb each other back to the stone ages over price. To make matters worse, the auto manufacturers do a terrible job getting the dealers to improve their performance. Sure, they have force-fed questionnaires, but they rarely ask the right questions to uncover the real problems. Instead, they continue to produce too much and jam it into a burdened distribution system that focuses on price dealing. Hey guys – the emperor has no clothes. Price-based competition provides the least sustainable competitive advantage. The real challenge is to figure out how not to compete on price. And, yes, I do get tired of saying this.
From Dr. Reed Holden
In Business, Planning is Everything | You Want Us to Stand Behind the Product Too? | Effective Leadership Drives Success and Customer Relationships | Good Reading!
In Business, Planning Is Everything Commentary By Dr. Reed Holden
Commentary by Dr. Reed Holden
From "The Only Lifeline Was The Wal-Mart" Fortune, October 3, 2005
It is no surprise that the most effective response to Hurricane Katrina came not from the government but from the truly excellent companies like Wal-Mart, Home Depot, and Federal Express. These companies have long learned the value of planning to prepare for crisis - be those crises of the business or the weather kind. In all cases, their planning took place many months before the time of the actual crisis and their response to the hurricane started days before the event actually occurred. An interesting side note is that they didn't rely on fancy technology to keep on top of the problem; they used frequent contacts with their people in the field to assess the extent of the damage and determine what their response should be. They also recognized the fact that the best plans can be wrong when disaster hits and it takes constant revisions and updates to keep the response on the right track.
It caused me to stop and think about how businesses, big or small, respond to business crisis. How many anticipate the market downturns and the eventual price wars? Think about it for a minute. What's the best response to a downturn in business? Usually downturns lead to cutting expenses to the bare minimum, downsizing of the work staff and putting off capital expenditures until we are assured of having enough cash to continue operations through the downturn.
It is rare to plan to reduce prices during a downturn because markets are much less price elastic. Weak competitors will often reduces prices, sometimes right down to their marginal costs, but these are usually second tier competitors who often can't meet the quality and service needs of the large customers. Unfortunately, when managers don't plan for a downturn ahead of the downturn, they get caught flat footed when the downturn hits. In that case, they rely on reduced, often unprofitable prices to keep the cash coming in rather than doing the other things that need to be done.
Hurricane and other natural or business disasters need to be planned. It doesn't require a lot of time or effort to plan for the worst in a business. When the plans are made, it reduces the likelihood that managers will do something they regret later with low prices or other desperate tactics. If you don't plan, chances are you'll do the wrong thing at the wrong time and exacerbate the problem rather than solve it. You Want Us to Stand Behind the Product Too?
Commentary by Mark Burton
From "Hanging Up on Dell," BusinessWeek, October 10, 2005
Develop a great product, allow customers to customize it, and sell it at a very competitive price - sounds like a recipe for success, or in the case of Dell Computer, market dominance. Not anymore. Customers in both business-to-business and consumer markets are no longer satisfied with great products: many want great solutions. Or, in Dell's case, they hope for easy-to-obtain solutions to common problems. While it has always been a great product company, the growing dissatisfaction with its basic customer service highlights the problems that many product or operationally-focused firms have in providing valuable, consistent services for their customers.
As product differentiation becomes nearly impossible to maintain, even the most routine services can become drivers of competitive advantage. Yet most product companies struggle with two fundamental but interrelated issues:
Product-focused companies look at the headcount required to deliver great service, get scared, and cut corners to keep costs down. Solutions-focused companies use their knowledge of customer value to focus on the most critical solutions elements and eliminate unnecessary customization to keep quality high and costs down.
The Value DisciplineSM tells us that the best place to start is with a broad and deep understanding of customer value. But just understanding what customers' value isn't enough. Managers need to look beyond the constraints of current offerings and have the imagination and courage to define high-value solutions. In doing so they define needs that can be easily satisfied with current offerings and blue sky opportunities that can be addressed through new and exciting services. Because not every customer is willing to pay for a complete solution, this definition should include low-priced core offerings and individual value adds that can be sold separately or bundled into a complete solution. This is exactly what Dell is attempting to implement to address past problems.
While Dell is just starting to take action, rival Hewlett Packard has been hard at work trying to get it right. Recent reports on market share in the PC industry indicate that HP's early efforts are paying off. We believe that this is temporary. Dell has the right vision for a tiered solutions program, the discipline to manage it, and a determination to get paid for them - qualities that HP isn't necessarily known for. Effective Leadership Drives Success and Customer Relationships
Commentary by Dr. Reed Holden
From "The Lessons for Sony at Samsung" BusinessWeek, October 10, 2005, pp. 37
It is a surprise that the consumer darling Sony is struggling financially; maybe it was the stars in their eyes from the foray into Hollywood. On the other hand, it is no surprise that Samsung is performing so well with stellar growth and profit margins. As Sony has struggled with isolated units that actually impede the development of other units and senior managers who like technology more than they seem to like customers, Korean Samsung seems to have done just the opposite. This is despite having a majority of its products in highly-priced competitive semiconductors.
Samsung routinely has its technical staff test and find new product ideas with consumers. They also have adopted a fast moving, get it done with lots of performance metrics for managers throughout the company. They even went so far as to send the head of their chip division, Hwang Chang Gyu, calling on Steve Jobs to get Apple to adopt new technology flash memory chips in the latest iPod nano. It wasn't easy but despite significantly higher prices for the new technology, the size and battery life benefit along with multiple sales calls was enough to win the day.
I'm tired of hearing that chips are commodities, even memory chips. As Samsung has proven, a dogged focus on disciplined and customer-focused technological evolution can position new technologies for successful adoption, sometimes in big ways. Add to that a senior leadership team that is very involved in customer-facing activities, and it will be a winner every time. That's what the Value Discipline is all about.
Recommendations from Dr. Reed Holden
Recommendations from Mark Burton
Pete | Getting Marketing’s Groove Back | The Terrible Titan Attacks Small Business Accounting Software: Intuit Wins Value Discipline Award | Good Reading!
Commentary By Dr. Reed Holden
Pete runs a small gas station in central Maine. His gas is usually about fifteen cents a gallon more expensive than the other gas stations but since he is local and there are no other gas stations within ten miles, we try to buy gas from Pete. During the recent run up of gas prices in the rest of the world, Pete kept his gas prices the same. He does get a limited amount of tourist business but most of his buyers are local people. He clearly didn't want to take advantage of his loyal customers. He knows that he has to take care of them and shouldn't take advantage of them when times are tough.
I was struck with how that compares with what we often see in a BTB environment. The loyal customers are the ones who don't complain; they are usually small and rely on their suppliers to take care of them. These are the customers who accept price increases. How about the non-loyal customers – the price buyers and the poker players? They usually complain about everything – especially price increases, and we usually back off the increases to those customers. How often have you tried to get, say an 8% increase and are satisfied when you end up with 4%? That's usually because the loyal customers accept them and the price buyers/poker players don't. Eventually, the loyal customers figure out the game and turn into poker players, and we wonder why. Pete is a simple guy running a simple gas station. But when the tractor got stuck in the mud last summer, he sent his tow truck out first thing in the morning to pull it out. Pete takes care of us, and we take care of him by giving him our business. Simple. Maybe we could all learn something from Pete. Getting Marketing's Groove Back
Commentary by Rachel Jacobsen and Ellen Quackenbush
From "The Decline and Dispersion of Marketing Competence" by Fredrick E. Webster, Jr, Alan J. Malter, and Shankar Ganesan.
Big marketing has gone the way of big corporate planning. Large, centralized think tanks that come up with grand schemes that lead to fancy advertising and golf sponsorships but don't drive the bottom line are becoming the target of cost cutting. Not surprisingly, both have disappeared from the corporate landscape, decentralized into groups, such as sales and individual business units that boast track records of listening to customers and driving top and bottom line growth. This is good, right?
In a review of the causes of marketingxs decline, Frederick E. Webster, Jr. and his co-authors observe that marketing must regain its passion for driving bottom line impact, balancing long-term versus short-term goals and leading a culture of innovation in the firm. They also sing the corporate marketing mantra of brand equity. This is where we disagree. Brand equity in most BTB environments is a cop out that results from the inability to determine the true impact of corporate-level advertising on the firm. If you are going to rely on corporate-level branding, read The Best of Branding: Best Practices in Corporate Branding by James R. Gregory, as it is a good primer on good process.
Also, what's missing from the article is the desperately needed playbook for BTB marketers on how marketing should drive collaboration across functional areas to identify profitable growth opportunities and tailor solutions to meet the needs of specific customer segments. Yes, brand equity is an enabler, especially in the world of big box retailers and transparent pricing, but it is not substitute for smart, surgical marketing.
We believe that value-based marketing, as embodied in the Value DisciplineSM, provides a blueprint for the new role of marketing within the firm:
BTB marketers have a choice, get better or get out. This article provides half the story, the Value DisciplineSM provides xthe rest of the storyx on the way to get better. The Terrible Titan Attacks Small Business Accounting Software: Intuit Wins Value Discipline Award
Commentary by Dr. Reed Holden
From "How to Face off Against Microsoft," Business Week, September 5, 2005, pp. 66
What do you do when a mighty competitor attacks your business? Just ask Intuit – producer of QuickBooks accounting software. Microsoft is introducing a new product this week to go after the $600M market for small business accounting software where Intuit controls 78% share. Fortunately, Intuit managers are old pro's at dealing with mighty Microsoft, having fended off similar attacks on six prior occasions. We predict similar results for this engagement as well. Why? Look at the examples of what Intuit managers have done to prepare:
Put all this together with "a passionate leader to rally the troops" and you have a winner. Microsoft has tried this before. But, like this time, their focus on developing a product rather than a solution will be their Achilles heel. We have to give Intuit kudos for both their guts and their approach.
The Black and White of Gray Markets | New Rules for B2B in Semiconductors | When it’s Right to Lose a Customer | Auto-Industry Price War Fuels Sales | Marketers Get What They Pay for With Price Buyers: No Loyalty | Good Reading!
The Black and White of Gray Markets
Commentary By Dr. Reed Holden
From "Pharmaceutical Groups Fight Back" by Andrew Jack, Financial Times, August 9, 2004
I am disappointed to keep reading the PR that pharmaceutical companies use to fight gray market activities in their products. Rather than using the business press to continually promote this problematic issue, they should be using relational, legal and ethical control systems to limit the "damage" of gray markets. All this arm waving accomplishes is to amuse the gray marketers.
The first fact is that while some may argue that gray markets are bad, the underlying causes of gray markets are actually good. That good element is the price differential between various geographic markets. I call this the "lift." When the lift exceeds the cost of cross shipping the product plus the risk of holding the inventory, gray markets will occur. Unfortunately, in pharmaceuticals, the lift often exceeds 60%.
Another factor to look at is the leverage – that is, the ratio of the size of the high-value markets (the US for example) compared to the size of the low-value markets. When the lift is large, as it is for many branded drugs, and the leverage is high, pharmaceutical firms are better off introducing lower-value flanking products or licensing generic producers to introducing those products. This way they protect the higher-value branded medications from being sold into the lower-value markets. In fact, in the case of some of the HIV drugs, the pharmaceutical companies made a classic mistake when, rather than giving away their drugs and donating medical assistance for clinics in South Africa, they offered the drugs at low prices and those prices caused the prices in the high-value markets to drop, thus undermining the higher volume, higher-value applications in their already developed markets.
Yes, gray markets are bitter pills for pharmaceutical firms to swallow. Maybe it's time for a dose of better pricing medicine. New Rules for B2B in Semiconductors
Commentary by Nelson Hyde
From "Intel Opens Design Centers for Developing World," C/Net News.com, July 31, 2005
Intel recently announced it is opening four design centers on three continents to "examine local conditions and economies and then try to design PCs, components, and software for the people who live there." There are two revolutionary trends hidden in that short statement, and they are closely related. The first issue is yet another example of the growing importance of emerging markets that are worth special attention in their own right – their own products, design, marketing, sourcing – rather than just being a dumping ground for products at the end of their product lifecycle in the developed world.a “Just because we are an emerging market doesn't mean we want an inferior product,” computer maker Novatium says about India.b Emerging markets' size and growth require attention, yet their diversity requires localization in real time.
The second issue is the huge impact this is having on the semiconductor B2B business model. Intel doesn’t sell PCs or software, it sells chips – but it is now designing PCs and software for the end user. Intel is normally one or two steps in the channel removed from the end-user – but it is now reaching all the way through the channel to design for the localized customer. Likewise, semiconductor maker AMD has moved beyond chips and down the value chain by providing an inexpensive but powerful Personal Internet Communicator – a fully integrated device for the end-user.
Why is reaching beyond the next step in he channel a good idea? Because it sharpens the chip makers' ability to provide new, differentiated value to discrete, high-growth segments. Chip makers are providing fuller solutions that create new value for their downstream channel partners. And because emerging markets will take up more and more of computers' growth, the chip makers have to get it right.
The shift will be extremely demanding. New skills are required – total solutions, not just chips any more. Localized products. Local sourcing to drive costs down. New channels to reach emerging customers. Competition with existing channels. But the rewards will also be real as the next half billion or so computers come increasingly from those harder to reach markets.
When It's Right to Lose a Customer
Commentary by Mike Lawson, from Iraq
From "Fire That Client!", Fortune, June 27, 2005
Every company has a relationship with at least one customer that is bittersweet. Maybe it's a large customer that brings in high revenue dollars. Or it could be that small client with a brand name you want to be associated with. While these may appear to be great customers due to the benefits of volume or image, do you truly understand how they impact your business? Chances are that you often live through more than just frustration and divert valuable resources to serve these customers at a high cost and lost profits.
The real question is whether these clients are really valuable to your business. The answer is ... it depends. The key is to understand the true cost to serve these customers, price accordingly and balance the results with the benefit. Although most costs are centered on actual dollars of providing the products, services and support, other intangibles must be considered. Consider a large customer that most likely negotiated the lowest price your company offers and they want you to be very flexible and service-oriented. Every requested change in production or delivery has a real cost associated with it, as well as the opportunity cost of serving other [often more profitable] customers. And the frustration alone of serving these customers can cause you to feel like a failure. On the other hand, you could have a small customer that may appear profitable, but the overall revenue they contribute to your company is incredibly low. So how do you determine what customers to serve and who to fire?
The answer is surprisingly simple – develop a variety of offerings to serve different types of customers so they can self-select what is truly valuable to them. As part of the process, develop other offerings designed to serve customers that are not your target customers (red flags for low profitability), but only if it is beneficial for you. For instance, you may have open capacity and can serve non-target customers opportunistically to keep operations running. At other times, potential customers could be turned away as you may not have an offering that suits their needs. This may force that customer to your competition along with the headaches of dealing with that customer, but it allows you to focus on your core competency and core customers. Auto-Industry Price War Fuels Sales
Commentary by Rachel Rae
From "Auto-Industry Price War Fuels Sales" by Sholnn Freeman. The Wall Street Journal, July 25, 2005
If you love a bargain, then now is a great time to buy a car. Ford, GM and DaimlerChrysler are all offering cars to the masses at drop-dead prices. GM led the industry by offering employee pricing to the general public. As demand increased for GM automobiles, Ford and DaimlerChrysler jumped on board with similar employee pricing programs. Due to the intensity of the price war, additional discounts are also available to buyers in the form of cash rebates. As an example, the new discounting schemes layered on top of each other resulted in a $5,000 discount off the standard ticket price for one particular truck.
While such pricing has driven U.S. auto retail sales up between 11% and 42%, manufacturer and dealer profitability is down. Such low margins are forcing dealers to act more like commodity distributors than value added service providers. In an effort to survive on increasingly tiny margins, dealers are acting like order takers and relying on backend marketing dollars to make ends meet. They are competing rigorously with each other to hit manufacturer-set quotas such as volume targets. Electronics distributors have similar business models with extremely low margins and survival based on manufacturer incentive dollars.
Low-margin order taker distributor models work well with commodities coupled with basic services such as on-time delivery, but car dealers and manufacturers would benefit from a business model that employs modest margins and differentiation. Most car buyers appreciate additional services from the dealer such as car owner seminars and free loaner cars. These services can not and will not be supported long term through a low-margin business model. U.S. auto makers should reconsider how their pricing deals affect the dealer-customer relationship. Price might motivate the initial customer sale, but a number of other factors, including dealer relations, build customer loyalty. Who knows, maybe dealers can use those high-value services as "flanking products" for the poker players we have all become when buying a car.
Marketers Get What They Pay for With Price Buyers: No Loyalty
Commentary by Dr. Reed Holden
From "BellSouth Net Falls on Cingular Deal" by Dionne Searcey, The Wall Street Journal, July 26, 2005
Price buyers have no loyalty. They don't want to be loyal, they actually like to switch – it's part of their individual and corporate DNA. They brag about the deals they get and subsequently walk away from. They work to prevent sellers from introducing switching costs into the mix. They know the game of sellers locking them in and then raising prices so they are careful not to let switching costs build. In fact, they have what I call "switching enjoyment." I don't understand why companies expect these basic rules of price-buyer behavior to change. BellSouth, in its infinite promotional wisdom, was surprised when they lost 35,000 customers who bought its DSL service for a six-month special promotional price of $9.95 per month. After the program was over, they split to someone else's special promotion. Go figure.
This fits right into my "you can try to teach a pig to sing" category. You can try all you want but you just end up annoying the pig and everyone around you. There are four basic buying behaviors, including price buyers. Loyal buyers will be loyal to you. Value buyers will switch for more value if it makes economic sense. Poker players try to act like price buyers. We've actually seen price buyers pay more to switch to another product so they can send a message to their suppliers not to charge more. Can you change the behavior of a price buyer – sure, but it takes a lot of time and the circumstances have to be right – for most sellers, they rarely are.
Strategy vs. Execution: Putting the Chicken Before the Egg | Rearranging the Deck Chairs on the Titanic? | When Business Gets Sour: Make Lemonade | Good Reading!
Strategy vs. Execution: Putting the Chicken Before the Egg
Commentary By Dr. Reed Holden
From "Rewiring Hewlett-Packard" and "Big Shift, Except in Strategy" by Pui-Wing Tam, The Wall Street Journal, July 20, 2005
Mangers (and consultants for that matter) often forget that without rock-solid execution, spending resources on strategy is a waste of time. Kudos to new HP CEO, Mark Hurd, for his simple approach to fixing the company and his focus on solving many of the problems, such as a non-competitive cost structure, that has plagued the company since the early 1990's. In his words "our objective is to create a simpler, nimbler HP." As part of his new drive, he has exorcised the company of consultants, because he feels that "consultants don't replace management." Amen!
When he found that salespeople can only spend a third of their time in front of customers due to the excessive paperwork, he recognized that this was a big piece of the problem – a creeping bureaucracy that needed to be fixed. All the strategy work in the world isn't going to fix that – it requires a focus on improving systems and processes to get things done.
How did he find these things? Beyond his series of meetings with operating divisions, he spent a lot of time traveling with salespeople and meeting with customers. While meeting with customers is highly important, he also recognized the great insights he could get from "windshield time" with salespeople. Senior people in an organization only know a small percentage of its real problems. People in the factory and in the street know all of the problems – that's where he spent his time.
Author John Le Carre once wrote: "A desk is a dangerous place from which to view the world." Mark Hurd knew that GOYA research is the best way to tune a CEO into the real problems, both internal and external. In the end, he also recognizes that it is his job to make the tough calls and move the organization to a better place. We both applaud him and wish him luck in his journey to restore the luster of one of the old stars of technology.
Rearranging the Deck Chairs on the Titanic?
Commentary be Mark Burton
From: "Oracle Shifts Multicore Licensing Model," CNET News.com July 14, 2005 and "Business’ Digital Black Cloud," The Economist, July 16, 2005
Well, we’re not above a little bit of “I told you so” every now and then. Oracle recently announced that it was lowering its licensing fees for customers running its database and middleware products on servers that use new multi-core processors from AMD and Intel. We smiled when we recalled our February newsletter prediction that Oracle would have to move off from a policy of charging twice as much for software running on dual core machines. The smile quickly disappeared when we read the article in The Economist and came to terms with the tectonic shifts that need to happen in the pricing of IT solutions.
The problem appears to be that the traditional pricing metrics enterprise software firms use – per processor or per seat – don’t hold up well in the face of advances in hardware technology that enable companies to get far more productivity out of the same piece of software. In reality, the problem is much deeper than that and it is one that virtually every industry will grapple with in the coming years. More and more customers want to buy and pay for “solutions” or more correctly stated “results.” Put another way, they want to pay according to the value that they actually derive from a particular solution. This puts companies that supply only components of the solution, perhaps even Oracle, in a very difficult spot as it is solutions integrators such as IBM who now offer the most compelling value proposition in this new world. They are the ones that can say to the customer, “Don’t worry so much about the underlying technology, let’s come to an agreement on results, and we’ll charge you a fair price.”
What is the parallel learning for companies outside of the traditional IT space? If there is money to be made, the IBM’s of the world are going to start coming after your largest and most sophisticated customers with the same value story. Those companies that embrace the development and deployment of complete but modular solutions that deliver compelling customer value will successfully manage this threat. Those that don’t have one of two choices to maintain pricing power: become a highly differentiated niche player or become the ultimate team player for those that want to integrate your products and services into bigger solutions.
When Business Gets Sour: Make Lemonade
Commentary By Dr. Reed Holden
From "Listen, Kid, You Have to Be Tough To Make It in This Business Today" by Julie Bick, The New York Times, Sunday, July 17, 2005
This is an article for kids who want to open up a lemonade stand. I was struck by the headline and it's relevance to management today – you have to be tough. You have to work hard and make some tough calls – it's not as easy as it was twenty (ok, maybe more like fifty) years ago. Too many times, managers expect business to be like it was in the last decade. In the words of Donnie Brasco: "Fahgedaboutit."
Making decisions about "pricing, product mix and location" are important whether you are selling lemonade and cookies or advanced technology semiconductors. If you don't understand your customers and what they really want, chances are you aren’t going to do well in either business.
In the end, I was struck by some of the recommendations to young entrepreneurs and how relevant they are to managers in today's fast-paced business:
Do:
Don't:
This is timely advice for kids and for managers. Maybe we worry too much about the problems in business today. That worry can be reflected in our decision making and management style – it teaches the front-line troops to be worrying when they should be executing. Me, I'd rather have them executing and having fun.
Standing on Your Own | Trench Warfare: Aligning Sales and Marketing | In the Heat of the Moment | Good Reading!
Commentary By Dr. Reed Holden From “HP's New Chief Separates PC Unit from Printer Arm,” by Pui-Wing Tam and “Ford Begins the Process of Shedding Hertz Unit,” by Avery Johnson
Spinning off divisions forces a piece of a business to stand on its own. The question is, when is it right and when is it wrong. We would argue that Mark Hurd's decision to spin off the printer unit is not an attempt at making the printer unit stand on its own" – it is an attempt to make the computer and services divisions stand on their own. And it should have happened a long time ago. In order for HP to compete with its arch nemesis Dell, they have to adopt a much leaner operating model. With the profits of the printer division, other divisions have been protected from doing that.
Ford's reason for spinning off its Hertz unit is akin to the "it's a fine fix you've got us in Ollie" – they need the money to support product research and to cover losses from the auto unit. I guess Ford's grand vision of a "green company" hit the harsh realities of a "competitive market." Also, having a rental car unit to take excess capacity works in the short term, but it won't work in the long term unless Hertz is able to make a reasonable business out of renting cars.
Using value discipline, managers are able to assess both the customer need for value and begin to match that need with the features of a particular product unit. Those features can be both product and services based. In all cases, the features need to be a match and provide some level of financial or psychological value (a Brand provides psychological value). The true test for any division “standing on its own” is the customer solution must be sold at a price higher than the cost, with an advantage better in certain ways than competitors.
Products, services and divisions must stand on their own. If corporate cover is needed to get established or to leverage other skills and resources, that's one thing. But too many times, weak divisions pull down the rest of the corporation and they do it for extended periods of time. That’s nuts! Yes, there is the reality of good times and bad times in any business and multiple divisions help smooth them out at earnings time. In our view, it is far better to force the divisions to stand on their own in internal reviews, as Jack Welch initiated at GE or in the world of the corporate IPO. Trench Warfare: Aligning Sales and Marketing
Commentary By Nelson Hyde
You’ve seen it all before. Marketers develop sales forecasts for each local market. Separately, the field sales team develops its own local quotas and the dollar gap between the two could fund a small country. Words are exchanged and salvoes are fired. Marketing accuses sales of “sandbagging” the figures to make commissions easier. Sales accuses marketing of being totally clueless about reality “in the trenches.” Both sides eventually negotiate a compromise figure – that is, if senior management hasn’t already “saved the day” and stepped in to mandate one.
The flaws are obvious. The two groups start with different assumptions about the market and different incentive situations. Results are determined by gaming behavior and bargaining instead of market realities. No one believes the final figures and no one owns them. The process is distracting, potentially destructive, and it chews up precious time.
If it were easy to change a process that occurs thousands of times a year, it would have been done already. Nonetheless we have worked with companies in a variety of settings to better align sales’ and marketing’s plans at the local market level. By changing how and why local market plans get developed, companies can get better results:
These won’t eliminate conflict or politics, but they can help better manage conflict toward a common end. Rather than just trying to come up with a number, they refocus the process toward the ultimate goal: finding the best ways to do business in each local market.
Commentary By Dr. Reed Holden
From “In the Heat of the Moment,” by Michael Useem, Fortune, June 27, 2005
This is more than an article about the deadly Storm King fire in 1994 that took the lives of 14 firefighters, it is about the good and bad decision making that led up to that tragedy. It is about how better adherence to existing and well known rules could have led to far better results. It is about the heroics that didn't need to happen. As a result of these lessons learned, the U.S. Forest Services have adopted much tighter rules around decision making that occur in forest fires. Further, they are now training their field leaders on how to avoid similar mistakes and make better decisions.
Is there an analogy in business? You bet. Too many times, managers make decisions without enough information and follow a path that leads to devastating results in lost profits and revenues for firms. Who is at fault? Like the conclusion of the Forestry Services, it is usually not the managers. It's the senior managers who don’t insist on systems that provide the information when it's needed and the processes that force decisions to go through a well-thought-out series of polices and procedures that inevitably lead to better results.
Like the Forestry Services, the FAA studies all crashes and develops policies and procedures which seek to minimize disasters. Business leaders could learn much from them. Study your disasters. Learn from them. Develop policies and procedures which limit the damage of uncontrolled price competition or dissatisfied customers. Don’t make the same mistakes over and over. If you don't think you can, maybe you're part of the problem. Work on becoming part of the solution.
Inside the Tornado: Marketing Strategies from Silicon Valley's Cutting Edge by Geoffrey A. Moore, 1995, Harper Collins Publishers, New York, NY. There are books that can be read and books that should be read – this is one that should be read by all marketers and product strategists. Moore's first book, Crossing the Chasm is a good introduction to product strategy. Think of this as the advanced text for those trying to introduce new products in various phases of the product life cycle. This book is essential for those introducing somewhat or radically new technology, thus starting a new life cycle. The common mistake is to a) go for too wide an audience and b) expect higher sales too quickly. In emerging technologies, the two watchwords are patience and focus.
Poor Pricing Prevents Proper Customer Proclivity| Will Yahoo’s Music Move Prompt a Price War? | Proper Pricing Provides Pools of Profits | Want Alignment? Create More Conflict | Good Reading!
Poor Pricing Prevents Proper Customer Proclivity
Commentary By Dr. Reed Holden
From "Deep Discounts by Drug Firms Draw Scrutiny" by Barbara Martinez, The Wall Street Journal, April 28, 2005, pp. B1
Merck & Co. has a customer loyalty program for certain drugs to give customers a high percentage of their respective prescriptions at a significantly greater discount. For example, Merck offers a 90% discount when a hospital gives 70% of a drug's prescription business to Merck and only a 30% discount if it goes under that share. In part, this is a reasonable approach as it rewards a customer for loyalty, but the government is upset because they want the same level of discount for Medicaid patients. Merck, of course, responded that if Medicaid gave 70% of their cholesterol lowering drug business to Merck, they could get that discount. A Merck attorney stated that "all of its pricing practices are consistent with the law."
The point is that just because it is legal doesn't mean that it's smart tactic. Customer satisfaction is critical to gain a long-term commitment to purchase products and services. Any time the discount for a product gets too deep, it results in "dumbbell pricing" – the imbalance between high and low prices. Dumbbell pricing is what bit the major airlines – they charged higher and higher prices to a shrinking pool of loyal customers at the same time they charged much cheaper prices to vacation travelers. This difference became so large that the loyal customers got angry and switched to the discount carriers, thus forcing the smart carriers like Continental and Delta to eliminate the practice.
On the surface, what Merck is doing is a good thing – giving discounts for a bigger share of a diagnostic treatment. The problem is that the difference range given for share leads to prices that are as much as 700% higher, thus leading to alienation among customers who either can't get the discount or lose it due to the prescribing behavior of their physician base. To pull that type of approach off, it is important to narrow the discount bands or it will, and has, lead to customer alienation. That's dumbbell pricing. Will Yahoo’s Music Move Prompt a Price War?
Commentary by Rachel Rae and Ellen Quackenbush
From “Will Yahoo’s music move prompt a price war?” by John Borland, CNetNews.com, May 10, 2005
Everyone likes a good bargain, but even this offer sounds too good to be true. Yahoo recently announced pricing for its new online music service; to say it is cheap is an understatement. Yahoo is offering music aficionados an “all you can download” price of $6.99 per month or $60 for one year to download an unlimited number of songs from the Yahoo site. Compared to a $15 monthly subscription fee from Napster or RealNetworks, the offer seems unbeatable. Wall Street agrees: both Napster’s and RealNetwork’s stock prices dropped on the news.
By announcing the details of its new online music service and pricing, Yahoo accomplished several things. This is a major shot across the bows of their competitors regarding their intent to win share in this expanding market and willingness to take a serious loss in order to do so. They are also speaking to the consumer market by indicating a readiness to drive increased traffic to its portal through the music service.
Equally impressive was Yahoo’s competitors public decry that there would be no price war. The competition clearly understands the costs involved in selling online music and realizes that Yahoo will only sustain negative profitability for a short period before it is forced to increase its prices. Competitors such as RealNetwork and Napster have been working diligently to become profitable with prices twice those of Yahoo. Their willingness to give short term share to Yahoo in order to protect long-term profitability for the industry should be complimented. There are several questions which will need to be answered. Is Yahoo’s entry too late? Will they be sufficiently successful that the increased volumes will permit them to be profitable at the lower price?
Meanwhile, Apple seems unaffected. At 99 cents per tune, a user only needs to download one CD per month before Yahoo (or any of the other subscription services) are cheaper. What’s really going on? As the subscription services duke it out, Apple has carefully defined its iTunes site as part of the iPod experience. Visiting the Yahoo Web site just does not compare. Sure, it could be cheaper, but Apple is using a psychological price driver called the difficult comparison effect to obscure the fact that its service is likely to cost more to its target buyer, the music aficionado. Also, the switching cost of clicking over to either the Yahoo, Napster or RealNetworks Web site might be too high. Until recently, downloads from the subscription sites were marooned on the user’s PC. New Microsoft software promises transferability to other “compatible portable devices.” Sounds good, but it is too complicated for the free and easy target iPod customer.
So as the subscription vendors are playing cat and mouse with pricing, Apple is the current winner. Increased competition just lends validity to its market play and doesn’t seem to be undermining its current position. Welcome to the party, Apple must be saying. Want Alignment? Create More Conflict
Commentary By Nelson Hyde
So – things are going well, the company is on track, but customers have been a little antsy lately, and competitors are starting to reposition their value. You’re ready to seize the initiative. You call a meeting to get some new ideas on the table. There are good insightful questions, some positive head-nodding, and it looks like there is some orderly progress toward new ideas. You start to sense some commitment to changes. But, after the meeting -- nothing happens.
Many managers make the mistake of assuming that agreement or consensus is a good yardstick for alignment in the management team. In truth, polite consensus is sometimes an indicator that people are not telling you what they really think. People are too polite. Objections don’t get out on the table where everyone can deal with them. Instead, they get put in the back of the mind and dealt with around the water cooler. It is a bad sign when no one asks hard, break-the-mold kinds of questions in a meeting. It’s death of initiative by nodding and grinning.
Real alignment and commitment rarely occur unless managers fight for it. That’s when they actually invest themselves in the issue. Wrestling creates ownership. It forces people to take an emotional stake. And it forces the naysayer to take a position too.
One CEO wraps up discussions by going around the room and asking each person what should be done. It sends the signal that constructive conflict and disagreement are not just important, but mandatory. Each participant has to take ownership over an idea and an action.
This is not about building consensus. It’s about encouraging discussion. The purpose of these approaches is to engage each individual fully, making sure they put their mark on the result. The goal should not be to have everyone cooperatively acquiesce, but to have a whole bunch of people running around screaming passionately for the goal. That’s alignment.
What does alignment really get you? More loyal customers. Customers don’t choose your company because you only did the things that 100% of your employees could agree on. Customers choose you because you take on the hard stuff that delivers higher value.
That means constantly pushing out of your comfort zone, getting contrarian ideas on the table, discussing them, and moving ahead with those that make sense. It takes a strong dose of conflict management skill to manage that. But, ironically, the end result is greater focus and faster execution – because people feel they were heard, they own the results, and they have a stake.
What do you do if people disagree – hear them out or shut them down? Professionals are more concerned with being heard than being right. Most of us are willing to agree to disagree and carry the company line forward but only if we have a chance to get our positions heard. How can companies manage conflict constructively? Here are some starting ideas:
What percent of the decisions at your company has secret objectors? What percent of the time do the objections or competing ideas get heard? Conflict in and of itself is not bad – as long as it is managed. The goal should not be to eliminate the conflict but to channel and direct it productively and to take advantage of, not stifle the collective insight of the team. Proper Pricing Provides Pools of Profits
Commentary By Dr. Reed Holden
From "P & G Net Rise; Consumers Accept Prices Increases", by Sarah Ellison
There is no better time to raise prices than when suppliers are raising their prices as Proctor and Gamble has recently re-discovered. Why? Because that's when customers expect you to raise prices and they are viewed as reasonable and fair. What better time to do that than when everyone is seeing increases in material and component parts. The question I ask is why more companies don't anticipate and take advantage of this since it is one of the biggest pricing “no brainer” plays in business.
Savvy managers need to anticipate coming changes in markets and develop action plans based on what they think those changes are going to mean from both a strategic and tactical sense to their markets. The issue to resolve is that the timing component price increases often follow times of over capacity and declining prices. Managers get focused on celebrating that prices are no longer declining rather than prepare for the time of actually raising them. If managers can learn to raise their heads above the current market situation and recognize what is coming down the road and prepare for that, they would be much more successful. Take a $100M company that, by proactive planning, is able to implement a 6% price increase three months earlier. The net result is an additional $2M to the bottom line – that's not small change. In fact, if the normal net profit margin is 5%, it would increase profitability by 40%!!
Viewers: “I Want My On-Demand” - Content Providers: “Just Say ‘No!’” | Lest We Forget: Operational Leverage | New Firm Launches New Product – The Right Way | Partner for Innovation | Invitation to PRICEX Conference | Good Reading!
Viewers: “I Want My On-Demand” - Content Providers: “Just Say ‘No!’”
Commentary By Mark Burton
From CNET, News.com, “Me TV, Finally You are in Control”
Here’s a Value DisciplineSM brain teaser for the 21ST century. What do you do when you have an innovation that your customers really want, but you can’t produce because a key partner thinks that it’s bad for business? This is a question that cable companies like Comcast are wrestling mightily with as they roll out on-demand viewing services. As firms focus on delivering complete solutions to their customers, they are becoming intertwined with the partners they engage to provide solutions. These networks of relationships are often called value ecosystems and their rise is driving exponential growth in the complexity of achieving a simple objective: create value for customers and capture your fair share.
The problem in this case is that broadcast networks are reluctant to supply content to Comcast’s On-Demand service, because they are unsure how they are going to get paid. One could make the argument that On-Demand viewers are more valuable. It has to do with a concept called involvement. If a customer goes out of their way to obtain your product, it’s likely they feel a strong affinity for it and will be more interested in anything related to it. This gives Comcast and the networks many options for getting paid. They include keeping the original advertising intact and disabling fast forward features or charging to view the show commercial-free as is done with first run movies. Networks could “double dip” as fans that watch the show at its scheduled time watch it again via On-Demand. This would allow the networks to increase advertising rates in the first case or pick up incremental revenue in the second.
Given the logic of this approach, why are the networks hesitating? Are they concerned with the power of their partner, Comcast? Effective management of value ecosystems requires a deep understanding of the drivers of power and control at all levels. Where Comcast was once considered a mere distribution channel by the networks, they now control access to the viewer. In the meantime, networks missed an opportunity to make more money for themselves and their downstream partners by responding to customer desires. Comcast wisely decided not to wait around and is now in the position of determining how revenues from the primary market get distributed back through the value chain. They understand where the leverage points are and have moved quickly to exploit them while the networks seem hopelessly stuck in the past. Lest We Forget: Operational Leverage
Commentary by Dr. Reed Holden
From Sony's Chubachi Sets His Sights on Cost Cutting, Phred Dvorak, The Wall Street Journal, March 25, 2005
The news is not that the new head of Sony's electronics division is cutting cost. The news is that it took them so long to realize the importance of doing that. The fact is that most firms went on drastic cost-cutting campaigns during the latest downturn. After years of frivolous investments in Hollywood, Sony is now doing the same thing. There are two problems with their approach. First, many of their competitors are way ahead of them - it is late. Second, it appears they view cost cutting as an event, not a continuous process.
Management theory in the 1990's focused on developing skills in either internal operational areas or external areas. Our feeling is that a limited focus in only one area is no longer enough for a firm to develop sustainable competitive advantage. In the current drive to focus on customers, firms must continually improve internal cost controls and efficiencies in leveraging the internal operation, as well as with key suppliers and partners. Managers need to think through not only the benefit of across the board improvements, but the synergy it creates for the customer. Certainly the smart competitor is doing this already.
At some point, most managers learn that truly superior companies do indeed have a relentless focus on the customer. That focus dictates a continuous revision of their value equation by adding quality and services that customers’ value. It is useless, however, without an equally determined mandate to do things better, faster, and more efficiently. That's what we call operational leverage. If managers don't focus on both the inside operations and outside relationships of the firm, they'll probably start the slow spiral while the better competitor gains market share and power. New Firm Launches New Product – The Right Way
Commentary by Mark Burton
From Azul's First-Generation Java Servers Go on Sale
Yet another yarn about a new tech company that is “going to change” the world? That’s what we thought when we first saw the story about Azul Systems and their launch of something called Java servers for something called network attached processing. That’s until we saw two additional pieces of data in the story: “$799,000” and “partnership with IBM global services.” The first is the price of their top-of-the line product – which by the way does not replace any existing customer equipment – a bodacious number to say the least. The second refers to the agreement that Azul has with IBM to provide global support, services, spare parts, and training.
So why do we think that Azul will be a successful launch, though they are an unknown selling extremely expensive equipment, all the while creating demand for a new product category? Because they understand what drives customer adoption of new technologies. Our research indicates that there are some fundamental drivers of adoption that a new company should focus on:
Managing these factors helps potential customers manage their risk and increases the likelihood that they will buy. To hit these points, Azul is doing a number of things right.
Successful introduction of new products is challenging, but there are some simple things that can be done to greatly improve your chances. More than anything, firms need to understand what its adoption ease means from the customer’s perspective – like Azul.
Commentary By Mike Lawson, reporting from Iraq
From “SAP CEO: Open To Acquisitions For Accelerating Growth”
Every market leader knows the power and challenges that come with size. Large companies can offer their customers the security and decreased risk of working with an industry leader. However, by their sheer size and complexity, these industry leaders can’t always deliver the most innovative and market-leading product and services. Small and mid-sized companies are more apt to have the flexibility to develop innovative solutions that meet customer needs and are necessary to drive industry evolution. SAP Chief Kagermann gets the challenge of market leadership and sees the importance of these small and mid-sized companies and is making them a vital part of SAP’s strategy through partnering.
Not all market leaders have the same vision. Oracle, for example, seems to be following the path of acquiring companies to grow and innovate. The risk of an acquisition-based strategy to assuring innovation is that the firm can become diverted from its core competency. SAP has chosen a different path, strengthening its core competency and using strategic partnering to bring innovative solutions to its customers. Companies like SAP have a unique problem – how do they continue to grow their core competency and support the smaller company with innovative platforms offering unique solutions to customers? By understanding what their customers need, SAP is able to complement the solutions developed by smaller vendors. SAP clearly understands their target market and ensures it has best-fit, high-quality solutions.
Companies that clearly identify and serve their target market are successful. They typically enjoy higher profits from the customers they serve although they may not have the highest market share in their industry. Continued success for SAP means continuing to identify their target market and to partner with and understand the capabilities of their smaller competitors. By doing this, SAP will continue to have a win-win relationship with their customers and a win-win relationship with their smaller partners—a relationship that can eventually lead to a marriage. Invitation from Heather Kalish at PRICEX
The Conference Team at the Pricing Institute cordially invites you to the 18th Annual PRICEX Conference. We have witnessed how “pricing” as a function has gone from a silo within organizations to top priority on the executive agenda. We have seen the explosion of new technologies and solutions for pricing excellence. And most importantly, we have watched the pricing community grow into a group of “change agents” striving to help their organizations capture value, competitive advantage and profitability through price.
For all of these reasons we are incredibly pleased to invite you to be a part of our PRICEX Conference scheduled for June 22-24, 2005 at The Embassy Suites in Chicago. More...
Dr. Reed Holden will be speaking June 23rd at 10:00am. His speech is entitled Moving Beyond the Pricing Silo to Better Customer Centricity. In this session he will discuss:
Generics Can be More than Me Too | Motorola Hits a Home Run with a Low Ball (Price!) | Changing the Tiger’s Stripes—Converting Price Buyers to Loyal Customers | Banks Draining Small Business Profit Pool | If You Can't Turn Your Business Around Start a Price War? | Good Reading!
Generics Can be More than Me Too
Commentary By Mike Lawson
Commentary to “Novartis's Big Bet On Drug Brand X,” The Wall Street Journal, February 22, 2005 We all know the problems facing Big Pharma today. Health insurers and the government are demanding lower drug costs. There are fewer drugs in the pipeline than those coming off patent in the next four years. And backlash against drug prices has forced patients and some state governments into Canada for prescriptions. So where is the real opportunity for aging pharma companies? Generics. As crazy as it sounds—generics.
Companies in any industry can choose one of two strategies to make their business succeed. They can either provide immense value to the consumer with high profit margins, or they can choose to be the low-cost provider. Whole Foods (an organic grocery chain) is an example of a company that provides huge value at a premium in a very competitive industry while Southwest Airlines is an example of a company that has perfected being the low-cost provider in their industry. Companies that try to use a combination of the two strategies generally fail; however, pharmaceutical companies are different.
Rather than choosing one or being stuck in the middle, Novartis has chosen to aggressively pursue the dual strategy, and my guess is they will be incredibly successful. Blockbuster drugs, which provide a high percentage of profits for pharma companies, are high value and remain so even after they come off patent as noted by Mick Kolassa in Pharmaceutical Pricing. However, generic drugs give pharma companies the opportunity to create cash cows when used as part of their overall strategy. Big Pharma companies that are first movers toward the dual strategy will be successful while those that are not will miss an opportunity. Generics, when used with branded drugs, also give pharma companies a way to have flanking products to offer the group purchasing organizations and protect the prices of the branded products. This would increase overall profits and market share after a drug has come off patent (some doctors and patients will still demand the branded drug).
But where does the real value lie? In cases where there is a combination therapy to treat illnesses, pharma companies can better utilize specialty retailers, prescribers and health insurers to increase profitability and deliver value. This is especially true when a branded drug must compete with another strong branded drug in its therapeutic class. Bundles of branded and generic drugs can both be prescribed and sold to influence behavior. In the case of specialty retailers, they can create bundles of drugs that may be otherwise frowned upon by the FDA and local governments to increase value and minimize costs for insurers, prescribers and patients.
The day of depending only on blockbuster drugs for pharma company profits is over. The new challenge is figuring out how to use the dual strategy to remain successful. Motorola Hits a Home Run with a Low Ball (Price!)
Commentary by Dr. Reed Holden
From "Motorola to Sell Cheap Phones" by Rueters News Wire, February 14, 2005 The best way to dominate markets, especially global ones, is to make sure you have products positioned at each of the main price points. As the wireless phone market has continued to develop, large percentages of populations in countries such as India and China are unable to afford the initial cost of the handset. For the market to reach it's true penetration potential, it's essential that some of the major players begin to introduce products designed for a lower price point.
Ron Garriques, head of Motorola's wireless phone group, recently announced that they expect to introduce a sub $30 phone sometime in 2006 and that they have been planning for this effort for over two years. By announcing the new price point early, Motorola is able to accomplish several things. First, they are able to get commitments from the wireless companies to purchase the product since they are currently the only game in town. They also send a major shot across the bows of various competitors in the space. This is especially important in their battle to gain share against #1 handset manufacturer Nokia – a firm that is still reeling from slow introduction of new designs. Motorola is also forcing Nokia to compete on more than just the design front and is doing it in a manner that will make it even more difficult for Nokia to catch up.
Add this announcement to their hot line of Razor phones, and we think that Motorola is not only hitting home runs with their phone strategy, we think this extends their drive to eventually take over the #1 spot they lost in the 1980's. Changing the Tiger’s Stripes—Converting Price Buyers to Loyal Customers
Commentary by Ellen Quackenbush and Rachel Rae
From “Creating Buyer Loyalty,” The Wall Street Journal, March 8, 2005
Internet selling is a two-edged sword. On one hand, the Web provides instant access to a global market, allowing even small companies to expand their market reach overnight. On the other hand, the ease of price and product comparisons via the Web brings a disproportionate number of bargain-hunters to your Web site. So how do savvy Internet sellers keep the price buyers at bay and maintain healthy margins?
We can all take a lesson from PC Universe, a computer reseller based in Boca Raton, Florida. Even when they were just a mail order operation, the company was onto the price buyer—the kind that began calling at 8:00 a.m. and, after a day of dialing for the lowest price, would call back at 8:00 p.m. with an order. When the Web accelerated this behavior, CEO Tom Livia was ready. To succeed, he instituted a two-pronged attack:
While we applaud PC Universe for thinking out of the box, we encourage them to go even further to restrict rebates to higher value-added products and services. For example, restrict rebates to PC bundles that include installation or support; or to volume purchases in which a portion of PCs are bought at full price. This way, PC Universe can drive volume and margins in the right direction and maximize profitable growth. Banks Draining Small Business Profit Pool
From "Banks Expand Services, Perks for Small Firms," The Wall Street Journal, March 8, 2005
You’d think that they would know better. After all, bankers are all about money. But here we go again. The Wall Street Journal details the extraordinary efforts that financial institutions of all types are making to attract customers in the latest, trendy segment. Banks everywhere have “discovered” that what used to be considered a niche segment, small businesses, is actually very profitable. Here’s the problem, it’s not going to stay that way for long. Already they are throwing the same tired old playbooks at small businesses that they have used for large commercial customers and consumers. Free checking? Of course! Tickets to the baseball game? Definitely! After all, banking is a relationship business. New services offered simply because the bank across town has them? Well, we’ve got those too!
How did a sector that you would expect to be thoughtful, analytical, and maybe even conservative become noted for their ability to trash profitable segments? Let’s start with a key element of the Value DisciplineSM – market analysis. The banking industry has invested heavily in CRM systems to analyze customer profitability. Problem is that virtually all such systems look at the customer’s value to the financial institution and not the financial institution’s value to the customer. As these systems came on line, bankers saw that if they looked at the total value of the small business relationship in a way that includes the assets of the entrepreneurs starting the businesses, then there is money to be made. Unfortunately this insight was arrived at simultaneously by the management of thousands of banks and laid the groundwork for a massive competitive battle based on a scramble for that magic combination of services and price that will get customers to stay around.
Which brings us to the second fundamental flaw in how banks are executing. Perhaps the most critical element of the Value DisciplineSM is understanding the financial value that you deliver to customers. From where we sit, it appears that some banks have researched what customers say they want – thus the proliferation of bundles and investments in personal service. Problem is (there’s that phrase again) that they have failed to tie delivery of these features to any meaningful financial value. Nor have they positioned offerings to show that value relative to competitive alternatives. Until this happens, the costs to serve small business customers will increase along with competitive intensity. Concurrently price erosion will further drain profits from this seemingly promising segment. Our advice to bankers? Be careful of diving into the shallow end of the pool! If You Can't Turn Your Business Around Start a Price War?????
Commentary by Dr. Reed Holden
From "HP to start a Printer Price War" by Rueters, February 17, 2005
OK, Carly Fiorina is only gone a week, and the craziness is already on the rise at beleaguered Hewlett Packard. HP announced that they were going to start a price war against Dell in inkjet printers.
Now, let's look at the wisdom of that. HP controls 48.1% of the market but is seeing declining share, revenues and profitability. Yet it does provide all of the profit for Hewlett Packard. Dell, working with Lexmark collectively control 23.1% of that market but that is up 6.1 percentage points in the past year. In fact, all the major competitors are gaining share in the global inkjet printer market.
The rule in price wars is that you don't start them in your most profitable market, you start them in someone else's. It seems that HP is doing just the opposite. Our prediction is that this will prolong the continued decline of one of the once-great companies in high tech. It's clear that Carly Fiorina couldn't solve their problems, but it is also clear that Carly wasn't the problem.
Ding-A-Lings in Telephone Land | Dual Core Chips Drive Dodge City-Style Duel over Prices
Ding-A-Lings in Telephone Land
Commentary By Dr. Reed Holden
From "Will Rewiring Nokia Spark Growth?" by Andy Reinhardt and Moon Ihlwan, Business Week, February 14, 2005, pp. 46 & 47
Ok, everybody drop what you're doing. Come on, I really mean it this time. Repeat after me: Competing on price in mature markets will kill profits. Ok, once more: competing on price in mature markets will kill profits. Got it this time? Good.
Nokia, the Finland-based manufacturer of cellular telephones and cellular networks had a rough year in 2004. Due to a slow down in introducing new handset designs and intense competition from competitive suppliers, their share dropped by 20% to 27%. Rather than wait until new designs were ready to go to market, they decided to fight back by dropping prices on some of their handsets by as much as 25%. The results were easy to predict: yes, they did get share back but at what cost? Revenue dropped 1% and profits dropped by almost $1 billion.
My guess is that if they had waited, sales would have taken a bigger hit and profits would have taken a smaller one. They would have improved both when the new models came out. Instead, they chose to participate in the grueling price war that continues to plague that industry. Ok, one more time to make sure we all get it: competing on price in mature markets will kill profits. Thanks. Dual Core Chips Drive Dodge City-Style Duel over Prices
Commentary by Nelson Hyde and Mark Burton
From “HP, Intel Tussle with Oracle over Dual-Core Chips”
In a scene reminiscent of the Main Street showdowns of the old West, some of the biggest, baddest gunslingers in Silicon Valley – Intel and HP on one side, Oracle on the other - are squaring off over a technology that brings significant benefits to the customers they mutually serve. The root causes? - Self-centered views of value to the customer and bad price metrics. The issue is the new servers powered by dual-core processors: new chips that have two processing engines - “cores” in industry lingo - where there only used to be one. Dual core processors have more computing power and can run 30-55% faster. The question no one can agree on is, “How much is that worth?”
At one end of Main Street are the microprocessor manufacturers like Intel and AMD. Each is asking for roughly a 30% premium over standard single core chips for new dual-core variations. 30%-55% improvement in speed – 30% price premium; that seems to make sense, right? Well take a look down the other end of Main Street where Oracle is willing to use their Colt .45’s to protect the value of their software. Their rationale also seems logical. Oracle prices its database licenses “per core”. On its face, that’s not unreasonable either. If a customer has a dual-core server, they have twice as much computing power to run their databases and will get twice the value from the system.
So what would drive seemingly clear-headed citizens into a showdown? Well, it ain’t horses, cattle, or women, pard’ner – it’s the almighty dollar and lots of ‘em. If Oracle doesn’t move off of its position, they will hurt the market for server upgrades. Why would a customer save a few thousand dollars installing a new dual-core server, if they are going to get hit with tens or hundreds of thousands of dollars in new software licensing fees? And without the added volume, the chip companies will see a slow-down in the return on the breathtaking capital investments that they have made in new factories to produce these chips. This is why Intel wants Oracle to change their pricing metric from “cores” to “sockets.” A dual-core processor still only uses one socket and by keeping software prices down, total solution costs go down, and the adoption of the new technology accelerates. Now that’s something worth grabbing your guns for.
This is not just semantics. It’s the difference in how you define value. Both camps are directionally right and tactically wrong. Both recognize the new chips’ added value and rightfully want to charge more for it. But each is trying to optimize its piece of the pie. To make the situation worse, Oracle also appears to be over-reaching by doubling the price of its software when the improvement in the performance of the dual-core chips is 30% - 55%. Lost in all of this is the customer’s perspective. The end-user doesn’t care about cores v. sockets - those are manufacturing units. Prices based on cores or sockets do not reflect the real value that customers get from doing business with Intel, AMD, HP, and Oracle. In the end, the value to customers is improved productivity resulting from the total solution. If price metrics were based on customer productivity gains instead of engineering units, then prices could move naturally to a level consistent with the solution’s delivered value.
Aligning pricing up and down the value chain is especially tricky. When there is not a common vision for how to define, deliver, and capture value through consistent pricing, solutions partners work independently of each other and it becomes a land-grab and everyone suffers. One of many steps to redirect partners toward “win-win-win” strategies is to establish pricing metrics that better reflect solution value for the customer - easy to say, but impossible to pull of without the cooperation of all parties. So who is going to win this gunfight? Our bet is that Oracle will saddle up and ride out of town without firing a shot. They can keep the currently dysfunctional pricing system functioning a little longer by discounting the license price for second core enough to keep their price levels in line with the value of the improvements in system capabilities. Fast Computing or Fast Road to Commoditization?
Commentary by Rachel Rae and Ellen Quackenbush
From “Sun Expands Its Plan to Market Utility-Style Computer Services”
To kick-start stalled hardware sales and attract new corporate users, Sun is renting its computers and data storage on a pay-as-you-use basis. Sun anticipates demand from compute-intensive industries such as energy and financial services where users would rather rent than buy to meet temporary needs or spikes in demand. And if the need involves multiple locations or partners, Sun will use “grid” computing to harness the compute power of each machine. Sun sees gold in such high-performance grids, and has optimized its upcoming operating system, Solaris 10, to operate grids.
While we applaud Sun for leading the charge, we wonder if its direction is not straight toward commoditization of its high-performance computing strength. We don’t mind utility-based pricing, but contend that Sun is going about it in the wrong way:
Hats Off to Red Hat | Pricing Technology: It Is the Best of Times and the Worst of Times New Whitepaper from Dr. Reed Holden
Hats Off to Red Hat: Finally Some Sensibility in the Software Space
Commentary By Dr. Reed Holden
From "Red Hat Pulls Out a Profit" by Stephen Shankland, c/net news.com, December 22, 2004
How many times have you felt the need to let prices drop in order to meet the quarter or year-end sales objectives? While the thought might be intoxicating, it usually leads to a dependence on a technique which eventually saps both profits and revenues from the firm. The software industry is rife with examples, many of them on the front page of The Wall Street Journal, reporting discounts as high as 85% to close deals at the end of the quarter. The problem is that customers quickly figure out the game and hold their orders to the end of the quarter so they don’t miss out on the big discounts.
Red Hat distributes Linux software that sells and services site licenses. The company recently reported 55% growth in revenue but missed the mark expected by analysts by 1.7%, causing a slight decline in the stock price. When questioned, Red Hat CEO Matt Szulik replied, "Red Hat wasn't willing to yield on price just to close a deal at the end of the quarter… Why do something economically foolish to satisfy a near-term metric for Wall Street."
Maybe sanity and good business practices are finally returning to the high tech industry. But we doubt that this will happen any time soon. At least not until a local chapter of DPA (Desperation Pricers Anonymous) opens on the west coast. Pricing Technology: It Is the Best of Times and the Worst of Times
Commentary by Dr. Reed Holden
From "HP Gains Applause as it Cedes PC Market Share to Dell," The Wall Street Journal, January 18, 2005
We continue to give kudos to both Dell and Red Hat for their outstanding approach to pricing in the technology space. Dell has the operational model to drive continued efficiencies in production, component costing, and inventory risk models. HP, on the other hand, continues to be the poster child for lousy pricing, having decided, once again, to switch from a "market-share at all cost" model to a "profit at all cost" model. Despite praise from the press for their recent move, HP’s recent move is unlikely to compensate for their declining share in the PC market, making it even harder to cover the fixed expenses of this $60B technology giant.
HP’s recent consolidation of their PC unit into their highly profitable Printer Division may help. Or maybe CEO Fiorina's attempt to paint Dell into a box by saying, "Dell is a company that believes innovation doesn't matter any more. They can't believe it matters, because they're a distributor of other people's products.” Yeah, Right! We just wonder when HP is going to recognize that the PC industry has changed and it's hard to respond to technology changes when your inventory is in a shipping container on the seven seas. Speed to market is everything, and Dell has the proven model for today’s market.
While we're on the subject, let's look at the marriage of Oracle and PeopleSoft. Ok, Oracle won this one and is performing its victory dance as it lays off 80% of PeopleSoft salespeople and 90% of its administrative staff. A look at PeopleSoft's books reveals the whole story. Court records indicate that PeopleSoft was closing 80% of its license revenue on the last day of the quarter, offering discounts of up to 80%. Those records also indicate that both companies offered this discount level. Oracle admits they are closing 40% of the business in the last month of a quarter. Our guess is that Oracle just spread its desperation over the whole quarter and will eventually view this marriage as just the swan song of two once great companies. Companies that, in their desperation to close business, turned highly-differentiated products into commodities in the minds of its management, salespeople, and customers. Customer Service: Cost Drain or Value Creator?
Commentary By Nelson Hyde
From “Texas Pacific Fights Skeptics of Utility Purchase,” The Wall Street Journal, January 11, 2005
There is a lot of talk about customer service being a competitive differentiator. But despite this, many companies don’t know what financial value their customer service actually creates for their bottom line. They tend to focus on controlling customer service’s costs, rather than trying to maximize its total value and returns. As a result, they can make poor investment decisions and can leave a lot of opportunity on the table.
One example of this dilemma is Portland General Electric (PGE), which Texas Pacific Group is proposing to buy from bankrupt Enron. With PGE already under margin pressure and with its customer service costs higher than the norm, Texas Pacific Group is eyeing big reductions in PGE’s customer service.
The danger of that approach is to miss the larger value that strong customer service can sometimes create and protect. Customer service decisions should be treated as investments in their own right - with their own ability to generate new revenue and their own ROI – and not just as cost centers. Customer service can create new economic value in any number of ways, such as:
Including these kinds of upside factors in the customer service equation provides a more complete ROI picture. The decision may still sometimes be to cut costs - but it will have considered customer service’s full financial impacts, value, and leverage. Pricing Power is More Than a Stake in the Ground
Commentary By Dr. Reed Holden
From "Dog Fight: Behind Slide in Boeing Orders: Weak Sales Team or Firm Prices?" by J. Lynn Lunsford
Whenever I hear a senior executive in a struggling business blame their sales force for pricing problems, I consider this to be an admission by the executive that he or she is in over their head. A sales force implements pricing strategy, they don't create it. That’s management’s job. More often than not, a company’s pricing problems stem from weak products, poor customer management, or arrogant approaches to negotiations. All of these shortcomings seem to apply to Boeing. No wonder Boeing is having pricing problems.
The airline industry has changed dramatically since September 11. To survive in today’s tough market, airlines must find lower cost solutions for their fleets. As a result, they are putting their current vendors under close scrutiny, especially if they detect that a vendor is delivering inferior value or is inflating the value that they do deliver.
Boeing doesn’t understand this new dynamic and continues to offer its 737 at low prices for some customers and higher prices for others. Do they think that the customers charged the higher price won't figure out that some of their competitors are being charged a lower one? Do they think that those customers will be happy about being put at a cost disadvantage vis-à-vis their competition? Customers are not dumb. And any time senior managers assume they can get away with inconsistent pricing, they should also assume that their customers will begin to shop around for alternative suppliers.
I'm tired of hearing that Airbus is beating Boeing because of subsidies from European governments. The fact is that Airbus is beating Boeing with better products, better account planning, and better account management. Boeing President, Alan Mulally has admitted that Boeing has become "more inwardly focused than we would have liked." Boeing’s management has clearly become disconnected from the realities of the market place. And that they are relying on salespeople to solve management’s shortcomings without giving them the tools to do it. Further, they are forcing deals that salespeople don't believe will be successful with customers. Maybe it's time for a house cleaning at the top at Boeing – certainly, it's time for some better management. The First Cut Isn’t Just the Deepest: It Can Be Fatal
Commentary By Mark Burton
From “The Price is Unfair! A Conceptual Framework of Price Perceptions” by Xia, Monroe, and Cox
We’ve all lived through this one. We work hard to gain entry into an account. We build relationships with all the right players. We tailor our offerings and sharpen our pitch. Our good work pays off, and we get a shot at some business. To ensure that nothing gets in the way, we offer special pricing to make it easy for our new favorite customer to say yes to our proposal. After all, if they like us now, they’ll love us later, and then we can take our prices up.
Recent research indicates that attempts to raise prices after a series of successful initial transactions can significantly damage customer relationships. Why? One word – trust. Let’s assume that you’ve done a great job on the first few orders and have built strong relationships within the account. Sounds like a good time to take prices up, right? Be careful, your good work may actually backfire on you! The authors put it this way: “For customers who believe that they have a close relationship with the seller, when the price is as expected or lower, they may perceive it as a benefit of the relationship. However, when loyal buyers pay a price that is higher than their comparative standard, they may judge the seller as having betrayed their good relationship, leading to a more unfair price perception.”
So how do you handle the seemingly conflicting challenges of penetrating an account and the potentially strong negative customer reactions when you’ve been successful and want to take prices up? In a word - carefully. Here are some guidelines.
The best strategy for new customers? Sell them with value not with price. Customer loyalty and trust are precious commodities, and all loyal customers were new once upon a time – remind yourself and your sales teams of that before cutting price to close a deal.
A Whitepaper By Dr. Reed Holden
In the eyes of many business clients, all banks look alike. Banking services are viewed by increasingly sophisticated business clients as a series of well-defined commodities that are available from a plethora of banks and financial services companies. Because banking service vendors have not updated their offering to meet the evolving needs of their business customers or communicated their unique value to each client, business customers have focused primarily on price in their acquisition process.
To avoid this commodity trap, bank managers must become adept at diagnosing their customers’ business problems, developing targeted solutions and, communicating this value to the client in terms relevant to their business. Simply stated, the client manager must become a trusted advisor to the customer, partnering with the customer to deliver greater and greater value to their business operations. Absent this relationship, customers will view low-cost as the only value delivered by their banking services provider and will be happy to let multiple vendors duke it out with low prices for smaller and smaller pieces of their business.
For read more and to request the whitepaper, click here.
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