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Newsletter: August 20, 2010

The Battle is Far from Finished | Pricing an All-Electric Car – Chevrolet’s “Shocking” Sticker Price |

Concert Promoters: Packing Heat, Shooting Holes in Fee | Good Reading!

The Battle is Far from Finished

Commentary By Mark Burton

From:
“Rising Profits Are Good, but There’s a Catch,” The New York Times, August 13, 2010
“Focus on Prices and Spending,” The U.S. Bureau of Labor Statistics, August 2010

Here’s a statistic that might be surprising to some: profit margins for companies in the S&P 500 are now higher than they were before the recession began. While this is a welcome sign and ordinarily cause for optimism, there are a couple of other statistics that are stark reminders of how tough the pricing environment continues to be. The Producer Price Index for Finished Goods declined 0.9 percent from March to June after rising 1.6 percent in the previous 3-month period. And not surprisingly, the Producer Price Index for Intermediate Materials, Supplies, and Components increased just 0.3 percent in the 3-month period ending in June 2010 subsequent to a 2.4-percent advance in the 3-month period ending in March.
The implications are clear. Firms drive margins by cost-cutting and productivity improvements, but they have had little, if any, contribution from pricing.  Here’s what we recommend:

• Map Your Market and Define Pricing Opportunities–Get an internal team of sales, marketing, finance, and pricing together. Create a “competitive chessboard,” consisting of squares that represent each major segment, channel, and offering. In each, define your value relative to the competition, the size and growth of the opportunity, and competitive intensity. For each square, define an objective: defend, grow, static, or ignore. Adjust your offering, sales, and pricing strategies for the “defend and grow” segments to drive additional revenues–both through increased prices and incremental business.
• Get Real About Dealing With Procurement–We’ve been taking a hard look at procurement practices lately and have concluded that organizations are so unprepared that they are virtually defenseless against professional procurement teams. The best procurement teams will talk “value” to establish a false atmosphere of partnership and then use the calendar to make suppliers desperate and give up price in a vain attempt to move things along. Until your deal teams take the time to understand how procurement teams really operate and gain senior management support to hold the line when the sales cycle lengthens, every sale will be at a lower price than it should be.

It’s time for pricing professionals to step up to the plate and become value creators for their organizations. The last two years have been tough, frustrating, and exhausting, but the most important mountain has yet to be climbed. Many organizations have weathered the recession, by shrinking their way back to profitability, but they will not start to grow until we can do the hard work of restoring pricing power.

Commentary By Ellen Quackenbush

From:
“Chevrolet to Price Volt from $41,000,” The Wall Street Journal, July 28, 2010
“Chevy Volt vs. Nissan Leaf: The Electric Car Price War,” The Christian Science Monitor, July 12, 2010

Confusion reigns in the introductory pricing of the two entrants in the plug-in electric car market. The all-electric Nissan Leaf, which can go 100 miles on a single charge, is priced at $33,000. The GM Volt, whose 40-mile range battery is supplemented by a 1.4 litre engine, extending the Volt’s range to 320 miles, is priced at $41,000. GM justifies the $8,000 premium by claiming the Volt is “in a class by itself; an electrically-driven vehicle that can be your everyday car.”

If you look at operating costs, this premium doesn’t seem justified. I estimate that the Volt costs $.085 per mile, if used in extended range mode. But for day-to-day commuting, running on batteries, it costs the same as the Leaf ($.02/mile). Even the peace of mind of permitting an occasional lapse in the routine of plugging the Volt in overnight is hardly worth $8,000. Given GM CEO Ed Whitacre’s promise not to lose money on the Volt, it is likely that the $41,000 price tag is the result of a cost-plus approach. While the results seem to be out of line with the competition, given GM’s inglorious pricing history, we are simply happy that they put a stake in the ground.

But GM has gone one step further to reduce the total cost of ownership of the Volt. They recognize that a $10,000 battery pack and its unknown total cost of ownership are significant barriers to many buyers. Hence, they offered a 100,000-mile battery guarantee—which Nissan was forced to match—and set the Volt lease price at $350/month—the same level as the Leaf. Now this is beginning to make sense. Lease the Volt for 36 months, pay no more than the Leaf, and get the convenience of a back-up gasoline engine. Unless you are a diehard zero carbon footprint buyer, this sounds like a safe…and fair…bet. Now, if GM can just refrain from returning to their past discounting habits, they may achieve a foothold in an interesting new market.

Concert Promoters: Packing Heat, Shooting Holes in Feet

Commentary By Mark Burton

From “The End of the Road? Plus: A Guide to Discount Tickets,” The Wall Street Journal, July 9, 2010

Pricing is a tough profession. For those days when nothing seems to be going right, I have one piece of advice. Print out this article and put it in your desk drawer. When things get tough, pull it out and remind yourself how fortunate you are.
Knowing that I’m a music fan and frustrated musician, old friend Mick Kolassa put me onto this story. (In addition to sharing the same musical affliction as me, Mick is a top pharmaceutical pricing expert.) It seems that the once rock-solid music touring business is finally being hit by the lingering effects of the recession. The way that concert promoters have responded is a textbook case of how to use pricing to turn a sneeze into a full-blown case of pneumonia.

Faced with expensive tours and declining ticket sales, promoters have resorted to all manner of discounts and promotions to fill seats. While disgruntled fans complain that they are being penalized for buying early and paying full price, industry executives have responded with the rationalization that concert tickets are just like airplane tickets–you just can’t count on paying the same price as the person sitting next to you. Gee, that will make loyal customers feel better. Here’s the rest of the bill of particulars:

• In an attempt to maintain revenues, promoters have actually been increasing prices in the face of falling demand. This, in turn, leads to…
• Non-discounted prices, when tickets originally go on sale, and then a flurry of discounts, when sales begin to fall short, which then leads to…
• An increased likelihood of having to cancel shows as customers have quickly learned the game and are waiting until the last minute to get the best deal.

The genie is out of the bottle, and panicked promoters had better smarten up soon, or there is no chance that it’s going back in. So when things get tough, just remember to tell yourself, “It could be worse, I could be pricing concert tickets.”

Good Reading!

Reviews by Reed Holden

1. A Sense of Urgency by John P. Kotter, 2008, Harvard Business School Press.  This is a book about urgency; more than that, it's a book about change. And it's a good one. It's a simple, fast read with some great advice, if you are concerned about your department's or your firm's sense of urgency. It's also good if you feel that your people aren't seeing the need to change and it's there. In our work, we see a lot of companies that suffer from a "terminal internal focus" or "death by Powerpoint." This book is the antidote.
2. Practical Pricing: Translating Pricing Theory into Sustainable Profit Improvement by Michael Calogridis, 2009, Palgrave Macmillian. This books certainly gets the connection between new products, valued services, sales, and better pricing. It does miss important points on conjoint. Also, I can't understand why writers (and consulting firms) can't give credit to Mike Marn at McKinsey for developing waterfall analysis. There are interesting insights but some generalizations miss complexity in many areas. This is more of a check list than a how-to book. Also, it's thin in key areas, like strategy, and fails to deal with the frustrations of many pricing managers.
3. Marketing as Strategy: Understanding the CEO's Agenda for Driving Growth and Innovation by Nirmalya Kumar, 2004 Harvard Business School Publishing, Boston, MA. This is a good book for the senior level marketing executive. While I disagree with a few points (around what else–pricing), but it does have a good view of what strategic marketing is. There is a big focus on solution selling and how to put together solutions. I liked how he went beyond the techniques to discuss how to run a good business on relationships and trust. Bit of a BTC focus but good global stories.
4. Guerrilla Marketing: Easy and Inexpensive Strategies for Making Big Profits From Your Small Business by Jay Conrad Levinson, 2007, Houghton Mifflin Corp., New York, NY. This really is a book intended for the small to medium business. But I found quite of few nuggets of value, even for large firms. It has a number of creative approaches and ideas for business to try for their marketing activities. Also, the author does a terrific job of providing bottom line advice that is often needed to make even large campaigns more effective. A decent read.