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Newsletter: June 19, 2009

Pricing Kudos to Two Industries | Apple Takes a Bite Out of Pricing | Are You Commoditizing Your Products? | A Great Value Story | Good Reading!

Pricing Kudos to Two Industries

By Dr. Reed Holden

The Wall Street Journal article “In Recession Specials, Small Firms Revise Pricing” points out that "discounts and lower-end offerings" improve the performance of small firms. What the article really talks about is that small businesses have flourished, even in a downturn, when they continually innovate their offering and look for ways to offer low-value flanking products. One example was a limousine company that expanded their offering to include larger capacity vans. Smart move? Yes. But that is an offering move more than a pricing move.

Small firms can move fast, even in a downturn, and big companies can learn from them. Continually evolving the offering (remember Innovate for Growth?) provides the revenue and profits needed to survive in a downturn and flourish in an upturn. Don't be afraid that you'll cannibalize your offering–be afraid that other firms will. What the large firms need to do is constantly anticipate the need to evolve, so that they can move fast when they have to. Failure to do this leads to the pricing death spiral that we see so many firms in today.

The Wall Street Journal article “Fixed Costs Chafe at Steel Mills” talks about how stainless steel makers have finally learned that price discounting in a downturn doesn't work–it just chews up profits and doesn't provide more revenue. It also leads to going out of business. The six primary players have moved in lock step with price increases during the downturn. Customers have accepted the price increases, because they have heard about the high-cost structure and the need for lots of process improvements in their suppliers.

This is a great example of the major players in an industry recognizing that price competition would be devastating for all, and that not competing on price would be good for all. To support that end, the major competitors spend a lot of time communicating about how their costs are going up. When they increase prices, they pre-announce the move so others can follow.  It's a great example of an ideal point for pricing communications systems that we talk about in Rule 7 of our book Pricing with Confidence. The intent of such a system is to be able to better accommodate the need for smart pricing moves and pricing communications in highly competitive industries–especially ones that are going through dramatic downturns. This article is a great example of firms that are doing just that and are using the press to signal both their concerns and their moves. I should point out that while it is illegal to "conspire" to fix prices with competitors, it is perfectly legal to communicate your pricing intentions to a market that includes competitors. 

My guess is that the Justice Department will look at this one, since uniform moves like this, also called conscious parallelism, are often an indication that illegal activities might be taking place. My hope is that there isn't and that this is just a great example of good competitive pricing strategy. 

Thanks to Dave Phillips for forwarding this article.

Apple Takes a Bite Out of Pricing

Commentary by Mark Burton

From “MacBook Price Cuts Highlight Tough Choices for Apple as Growth Slows,” Wired.com, June 11, 2009

As we discuss in Pricing with Confidence, there are two things about pricing strategy that are really difficult–establishing a pricing strategy and making necessary adjustments to your strategy to reflect changes in market conditions. For many companies, just establishing a pricing strategy that everyone can agree to and support is too big of a hill to climb. This is extraordinarily unfortunate, since firms that do manage to make this transition often have adjectives like “market leader” appear just in front of their names.

For a prime example, look no further than Apple. With their line of computers, they are well-known for pursuing a skim pricing strategy by maintaining prices that are at the high end of the range for each performance level in their offers. Their willingness to stick to this strategy, even as the economy weakened, opened them up for much criticism from analysts and even in a recent advertising campaign from rival Microsoft.

Well, Apple isn’t as blind or pig-headed as they have been portrayed. They have lost some share over the past few quarters, particularly because of the emergence of low-cost netbook computers. As a result, they have responded the way great pricing organizations do–systematically and in a way that is consistent with their purpose for price.

To maintain competitive position, they recently announced price cuts on their MacBook notebooks. There are a couple of important things to note about how they did it. First, they maintained their entry-level price point of $1,000.  Second, the cuts are skewed towards their premium products, thus highlighting that they don’t view netbooks as direct competition. Finally, they left plenty of margin in the price, each model demonstrating their purpose–to maximize unit margins. This is why a skim pricing strategy was and still is appropriate. It all fits together–if you have a leadership that understands how to meld competitive, marketing, and pricing strategies into a cohesive whole.

Are You Commoditizing Your Products?

By Dr. Reed Holden

We were at a client's office recently meeting with their senior executives. One of them was talking about how their existing offering was a commodity. I remarked that if toilet paper isn't a commodity (it isn't), then their offering certainly wasn't one either. It has extremely high value to their users and their method of delivery and support added value as well. He agreed and has quite quickly dropped the use of the term.

There is a lesson in that discussion for all of us. The term "commodity" is something used by purchasing agents and procurement professionals to undermine a seller's pricing power. Their agenda is to short-circuit any discussions about the value of your products and services. It is an act that is intentionally designed to make you think that your products and services have no value.

The problem is that salespeople hear the term commodity so much that they start believing it. Then the customer service people believe it and eventually the senior executives believe it. When everyone believes that your products and services are commodities, you have no pricing power. 

How about you? Do you use the term "commodity" freely in your discussions with your people? If you do, you're undermining your pricing power.

Here's a bit of advice: STOP USING THE WORD COMMODITY!!!!

People use your products and services because they value them. They don't think they are commodities, because they have chosen to use them. That is a fundamental fact of doing business. Just because a buyer who has an agenda to get a lower price uses a term like commodity doesn't mean they are right. In fact, we find that in most cases, they are wrong.

If you need to, go out and talk to your real users and find out what they like about your company. Find out how they value the things you do. They'll tell you. They will be glad you asked. Then, go back and insist other executives stop using the word, too.  When anyone–ANYONE–uses the word commodity, stop and tell them that a) your products and services create high value for your customers and b) using the word commodity to describe them undermines perceptions of value with your salespeople and your customers.

In the book Pricing with Confidence, we use the example of how the executives from a dirt company realized that they weren't selling a commodity. We use that example because if dirt isn't a commodity, then virtually nothing is. We use that example because too often we hear the term commodity from high-value technology, software, medical equipment, and financial services executives. The sad part is they honestly believe that commodity really does describe their products and services.

So start being a value leader in your firm. Stop using the term commodity. When other people use it, tell them why they are wrong. If that doesn't work, go to the local pet store and get one of those shock collars and start making some of the senior executives wear them–that will work.

A Great Value Story

By Dr. Reed Holden

Jeff Kaplan, Managing Director of Thinkstrategies,  has a recent blog that tells a great value story about software provider Concerro. Concerro uses a SaaS solution to "reduce the amount of monies spent on premium labor" for its client hospitals. 

Kaplan points to key areas where the Concerro solution saves the hospitals money and provides not only the total dollar savings but also the six-month ROI for the investment required for the solution. 

We call this Case ROI–that is a return on investment tool that provides specific case-by-case returns on investment for client investments in software, service, or product costs. Since it deals with a specific customer's investment and return, it has more credibility than traditional "static" approaches. We remember talking with one software company that had done more than forty of the static approaches (they were cheaper to build) and wondered why the salespeople never used them! 

Building a case-by-case approach takes time to build out the questions and the spreadsheet for salespeople to use, but it is worth the effort, because it drives sales at a higher price. You can get a copy of Mark Burton's article on “Case ROI” from our website.

I'm disappointed when I hear that doing this is too complex and time consuming–as Jeff proves, it really isn't. Plus, it works.  It helps close sales at a much higher profit..

Good Reading!

1. Mastering the Rockefeller Habits: What You Must Do to Increase the Value of Your Growing Firm, by Verne Harnish, 2002, SelectBooks, New York, NY.  Verne Harnish is a frequent writer for Fortune and focuses his consulting expertise on small businesses in the $10-200M range. This book is a terrific list of models and things to think about for business managers in all sizes of business. He writes about how to identify and focus on what's important and how to make sure everyone on your team does the same. It is a book for managers who want results. Don't we all?