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In this Issue Pricing Power: Dell Declines and Biogen Grows Like Bobbing for French Fries… Pricing Potpourri Pride is Not a Strategy Holden & Burton Blogs
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Pricing Power: Dell Declines and Biogen Grows By Reed Holden Biogen has seen revenues grow 10% due mostly to a 22% price increase in their MS drug Avonex. Now that's pricing power. They also report on the cost of making the drug–it is considerably higher than a traditional drug, since it is out of living cells. And yes, it took a lot of R & D dollars to make it. But despite the price increases, they have seen an 8% increase in users over just the past three months. Extend that with the price increase over a year and you get a hefty 66% growth in revenue for the drug in just one year. Compare that to Dell who is still struggling with the downturn. They're complaining about slowing demand and rising costs–a sure sign of declines in pricing power. With the increasing sales of higher-power servers and lower-value "netbooks," Dell is stuck in the middle of HP and Chinese outfits, who now hold the low-cost position. Dell doesn't have the profitable mix that HP does, which undermines their position even further. Our guess is that HP will do just fine as indicated by Intel's recent announcement of 12% increase in revenue for the last quarter. It will be interesting to see HP's results–they should be good. How's your pricing power? That power comes from brand, value, and competitive pressures. Even steel makers, typically a highly competitive industry, have built pricing power by not employing "bomb them back to the stone ages" pricing strategies during this downturn. Competitors that are not sharp can always short circuit a good strategy, but that takes some level of commoditization Too many times we see that the idea of commoditization comes more from theatrical purchasing agents than the real value users in the firm. If you are feeling like your products are commoditized, think about where those pressures are coming from. Most firms have more pricing power than they realize–it's just a question of understanding where it comes from. Like Bobbing for French Fries… Commentary By Mark Burton From “Restaurants Burned by Deep Discounts,” The Wall Street Journal, July 15, 2009 Here we go again. Leaders in yet another industry that should know better, panic and pull the price lever in a futile attempt to increase business. Guess what? It hurt performance. Several leading restaurant chains resorted to give-aways and discounts in an attempt to drive traffic. Now that second quarter earnings are starting to roll out, the damage done by this stratagem is becoming clear. An example is Pizza Hut, which saw same store sales fall by 8%, despite offering discounts for online orders and a variety of other deals. As we have said before, when demand is sidelined, there is rarely a price that is low enough to bring it back. Discounting key offerings in the vain hope that something good will happen not only destroys profits now, it also weakens brand perception and pricing power when things finally turn around. There are really only two approaches that will help now and set firms up for the future. The first is to simply hold the line on prices and aggressively manage costs. This is what Darden Restaurants, the owner of Red Lobster, Olive Garden, and The Capital Grille is doing. The second is to offer low-priced flanking products. This is what Quiznos has done with the introduction of the $4 Toasty Torpedo and $3 Toasty Bullet sandwiches. In the second week of the Torpedo’s launch, sales were up 26%. "It was a product designed to be sold at $4, which is different than taking an existing menu item and discounting it down," Quiznos Chief Executive Rick Schaden said in an interview. "Discounting items that weren't designed to be sold at lower prices isn't sustainable and will hurt earnings." Put another way, panic discounting is a lot like putting your face in the fryolator and bobbing for French fries; painful and futile. Pricing Potpourri By Reed Holden Comments on Selected Articles 1. "Cisco to Match HP ProCurve Pricing." This is more rumor than announcement by Cisco. Since they sell mostly through VARs, there is some indication that they are asking their intermediaries to get more aggressive in prices for high-speed switches and hubs. If the indication was that Cisco was going to beat HP’s pricing, it could signal a price war. Since the indication is to "match," it indicates that they want to go after HP on value. This is a good move, since a price war could be devastating to both companies. HP responded that they were pleased this was happening and felt that they were the "price performance leader." Good market place communications on both sides–balanced and fairly specific on the value stance. This is somewhat unusual in high tech, since you more often see a "bomb them back to the stone ages" approach in pricing and winning deals at any cost. Maybe it's getting a bit like the steel industry that has been able to raise prices even in a downturn even as producers are sitting on a ton (actually many tons) of capacity. It should be interesting to see if this value approach sticks in the network business if the downturn continues. 2. Should MGM Mirage renegotiate condo prices? In Las Vegas, condo sales are down over 90% from the highs in 2007. Prices have dropped by 64%. Here’s the question–should the condo sellers, like MGM's Mirage, offer discounts to those unfortunate people who bought the condos at the peak? Complex question. Since condo buyers are one-time customers, you might expect that the answer would be not to renegotiate prices. If they were repeat customers, you might want to lower prices and keep them happy. The problem is that the lower prices probably put MGM dramatically under water. The question is whether you want to force MGM into some level of bankruptcy. Also, since many people bought multiple units or just put deposits down on a unit, they may want to keep them happy and provide some level of relief. Would you rather have a half empty building to collect condo fees on or a full building? We will be watching for more news on this issue. 3. C F Martin Company makes medium- to high-priced guitars. Their regular strummers go for $2-3,000 and some of the better ones go for as much as $100,000. With a 20% drop in revenue, they had to RIF 50 people and were worried about having to let some of their highly-skilled employees. So they re-introduced a $1,000 unit they had produced in painful market during the 1930's.. The results have been promising. The new product made up for half of the drop and they sold out of inventory. In good times and especially in bad times, it's important to look for lower-value flanking products and services. It's a heck of a lot smarter and more sustainable than dramatically dropping prices on the higher-value offering. Pride is Not a Strategy Commentary By Mark Burton From “Weighing the Price and Value of Colleges,” The Wall Street Journal, July 16, 2009 Conventional wisdom holds that colleges and universities don’t compete on price. And on the surface this appears to be true. For as long as many of us can remember, college administrators have defined a peer group of other schools. They carefully monitor these peers and adopt a neutral pricing strategy by keeping tuition closely grouped. A neutral pricing strategy can be extremely difficult to maintain. It requires close monitoring of the competition and anticipation of how they might react to changes in market conditions. Since tuition information is publicly available, this would seem easy for higher education. If we dig a little deeper, we can see that is not the case. While colleges and universities don’t directly cut tuition, they do cut deals to attract particular students. Savvy students and their parents have learned how to play poker to earn scholarships, grants, financial aid. Let’s face it; these are just discounts with polite names. As the article describes, the pressure on prices is only increasing as financially stretched families question the value of a $50,000 per year education at a private college versus much more reasonably priced alternatives. We expect that the already weakened connection between “list prices” (tuition) and net prices (after “financial aid”) will continue to grow. This is how the price integrity of an apparently strong industry gets destroyed. Despite the obvious evidence that they have a problem, administrators have been reluctant to lower tuition. They don’t want to be seen as offering a cheaper product than their peers. Well, as the saying goes, price goeth before a fall. Instead of taking action, they are showing signs of getting hooked on the discounting habit. What is the alternative? Differentiate from peers, make the criteria for earning discounts clear, and restore the integrity of tuition levels. Will this happen? We’re not sure, but we hope so. It’s not an understatement to say that our national competitiveness may depend on it. Blogs Unsubscribe by clicking here and entering "unsubscribe" in the email subject.. |
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