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Newsletters Q2 '09: June | May | April
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
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.
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.
Are Competitors Chipping Away at Your Edges? | Globalization and the Implications of Cheap and Ubiquitous | Building Credibility as a Pricing Manager (Director or VP!) | Price Signals Drive Investment Decisions | Good Reading!
Are Competitors Chipping Away at Your Edges?
By Dr. Reed Holden
In good economic times, marketers need to be constantly aware of the competitive forces that put pressure on revenue, share, prices, and profits. That only gets worse in downturns. Sellers need to monitor competitors’ movements and prepare appropriate responses. 3Com builds, among other things, network switches. That puts them right up against mighty Cisco. Fortunately, 3Com's switches are built in partnership with a Chinese firm and are much less expensive than Cisco models.
Since customers are under tremendous cost pressure, 3Com President, Ron Sege, sees the current downturn as an opportunity to sell more of their cheaper switches. He knows that cost-conscious customers will be more willing to try 3Com's offering. And once they see that the quality is good, they will keep buying them, even after the current recession turns around.
Here is a company that is going to benefit from having an offering positioned at the low end of a market, and their timing appears to be good. The question I'd like to focus on is what should Cisco be doing about another competitor "nibbling at the edges" of their market dominance?
First, Cisco is aggressively innovating in areas such as video conferencing to both grow their business and expand their presence in the technology space. This fits right with our "innovate for growth" concept. They have and will continue to rely on both internal R & D and acquisitions to accomplish that objective. Cisco has and continues to do this quite well.
Second, and of equal importance, Cisco managers need to make a conscious and strategic decision of how they want to meet 3Com's move closer to their space. One thing they don't want to do is discount higher value products, since that would undermine the high-value position that they dominate. They do need to decide if they want to ignore 3Com–that will be determined by the relative shares that each holds in the lower-value segment and the risk that the higher-value segments can deteriorate to lower-value offerings. At some level of share and deterioration, there is a "tipping point" that will show if there is a need for Cisco to develop a specific product in response. Several years ago, Cisco acquired Linksys to expand their position in low-end routers. The big question is whether this will be enough to blunt 3Com's move. It certainly says that the guys at Cisco are paying attention to the right things.
The important point is that successful competitors need to a) continually assess where that inflection point is, b) determine when a segment is there, and c) proactively have products and services ready to introduce when they reach it. Having competitors "nibbling at the edge" of your business is a fact of life in both good and bad times. The real risk is in the decision of how to respond. It is rarely a good move to respond solely will price. It is a good move to be constantly assessing when and how to respond to a "nibbling" competitor, and it is usually with a flanking product. Globalization and the Implications of Cheap and Ubiquitous
Commentary by Mark Burton
From “Good Times for Cheap Cell Phones and What the Nano Means to India,” BusinessWeek, May 11, 2009
As if developing and managing a coherent product line and pricing strategy were difficult enough these days, here comes another game-changer. It’s embodied by a simple phrase: “cheap and ubiquitous.” As local firms in developing economies hone their abilities to produce goods of acceptable quality at low prices that drive adoption by the less affluent masses, they are developing the capabilities that will make them formidable competitors in wealthier markets such as North America and Europe. And just like when the Japanese broke into markets from automobiles to copiers, many American companies are going to be unprepared.
A quick browse through a recent issue of BusinessWeek loudly brought this point home. On page 28, one can read how local Chinese telecom equipment manufacturer ZTE “has come out of nowhere to become the world’s number 6 maker of cell phones.” While focusing on the low end for their local market, ZTE has built enough marketing power to start attacking more established markets. At the same time, long-time leaders, such as Motorola and Sony Ericsson, have imploded, leaving a huge opportunity for ZTE to leverage its low-cost position to become a real threat.
On page 60 of the very same issue, we read about how Tata’s cheap and ubiquitous $2,000 car, the Nano, has generated such excitement that customers have to enter a lottery just for the right to buy one. While the Nano is certainly unacceptable for western markets, it will only be a matter of time before Tata too leverages its developing capabilities to attack entrenched competitors in established markets.
The moral of the story? Most companies are genuinely afraid of developing low-cost flanking products that better enable them to compete for the business of price-sensitive customers. The rationale is usually some combination of fear of cannibalizing existing products and concerns about not meeting corporate margin targets. Here’s the problem–the age of ubiquitous and cheap is coming in everything from to consumer and industrial goods to electricity, and the firms that aren’t prepared will suffer mightily. As I wrote in my blog, one firm that seems to get this is General Electric. Their healthcare business just announced a $3 billion dollar investment to develop low-cost medical imaging and diagnostic equipment. They are clearly preparing for the world of cheap and ubiquitous. Is your firm doing the same? Or will you look back five years from now and wonder what the heck happened? Building Credibility as a Pricing Manager (Director or VP!)
By Reed Holden
Over the past few months, we've spoken to a number of pricing managers who are really struggling to improve the profits in their respective firms. They are frustrated and feel like they're "beating their heads against the wall." Yet in many cases, it appears they're doing the right things. They're putting in better pricing controls, and they're working with the sales force on better value positioning, to mention just a few activities. Yet, for some reason, it doesn't seem to be working.
We've also spoken to a number of pricing managers who seem to be getting the job done. They've gotten ahead of the need to develop positioning statements for the sales force, and they've worked with sales and marketing to make sure that excessive goals aren't driving pricing and profits down. They've worked with senior executives to make sure they aren't falling prey to desperation pricing–especially at the end of the quarter.
It struck me that what distinguished between those two groups of managers is that the effective pricing managers have credibility in the organization. When they spoke, people listened. They were viewed as effective managers who could drive better pricing practices throughout the firm. No, they weren't viewed as perfect, but they were viewed by senior and junior executives alike as someone who should be taken seriously, for the good of the firm.
Pricing managers who aren't credible are frustrated that people don't listen to them. This gets in the way of executing effective pricing. That's too, bad because effective pricing is what saves jobs during a recession. Effective pricing focuses on holding on to each an every profit dollar that can be eked out of this struggling global market. It makes sure we aren't sacrificing profit dollars for a sales- or market-share goal. It makes sure salespeople are selling rather than discounting, and it makes sure that our costs are in line and are being viewed properly when it comes to setting price.
That leads me to five bits of advice for pricing managers who are frustrated by their lack of credibility:
This is not a complete or exhaustive list but it is a start of things to think about to get the focus you need outside of pricing function to get the profit job done in the firm. Unfortunately, it doesn't happen overnight. The credible pricing managers we know have taken years to develop the credibility they need to get the job done. If you already have credibility, go for it–think big and bold. If you don't, try a few of these ideas, and you'll be on the same road that the ones who already have credibility have walked. It took them time and patience, but it did and does work. Good luck. Price Signals Drive Investment Decisions
By Mark Burton
At the recent World Business Summit on Climate Change, more than 500 business leaders called for certainty on targets for emissions of greenhouse gases. While this development is interesting in and of itself, what is most interesting for pricing professionals is the reasoning behind this call. Business leaders want government actions that will lead to a “clear price signal” and thus enable investment in innovative technologies to boost energy efficiency, reduce CO2 emissions, and enable the growth of new industries.
Separate and apart from the issue of climate change, think about what these business leaders are saying about the importance of pricing. First, they are trying to get a fix on the price of the competitive alternative–in this case, carbon-based energy sources. Second, they are saying that environments marked by pricing volatility increase business risk–and decrease their willingness to invest in new products and services.
What they are talking about is the linkage between pricing strategy and execution and business strategy. The problem is that many executives either don’t understand this linkage and/or don’t know how to run a business that maintains it. This is where pricing professionals come in. If you aren’t on a personal mission to make strong management of firm and industry pricing performance an essential element in business strategy formulation, you are literally limiting the capacity of your organization to grow and develop new businesses. Too often, pricing managers get frustrated, because they don’t get a say in major decisions that have huge implications for pricing. Yet the strongest do. They get an audience because they are effective in communicating about concepts like market price signals and their linkage to strategic options.
Truer Words Were Never Spoken | Pricing Strategy Should Be Easy | The Revenge of the Brands | The (Da Vinci) Code For Better Pricing | Good Reading!
Commentary By Mark Burton
From “The Customer Doesn’t Know Best; You Do,” Adage.com – CMO Strategy, Anne-Marie Fink, April 9, 2009
It is often tempting to blame the pressures that “The Street” puts on CEOs for short-term results as a principle driver of short-term and foolhardy pricing decisions. The flaw in this logic is that it’s not always Wall Street that’s the problem–it’s the way executives manage and/or react to The Street’s expectations. Desperation discounting to hit a quarterly number sounds like investors are pressuring the helpless management team to do something unreasonable. In many cases, this is not true. The real issue is how the number got set to begin with–not that the investment community takes a firm’s pronouncements seriously. Executives put out unreasonable numbers, use discounts to try to hit them, and then get whacked by The Street for messing up. The problem is self-inflicted.
So when a Vice President at JP Morgan publicly takes companies to task for not resisting the pressure to discount, we can say, “Maybe, just maybe, there is a (pricing) God.” Anne-Marie Fink of JP Morgan gives the following advice.
What is she really saying to the executives of the companies that she invests in? “Ladies and gentlemen, run your businesses carefully and like adults, and I will invest.” She is also astute enough to know how important an indicator of a well-run business price is. There is a (pricing) God–really! Pricing Strategy Should Be Easy
By Dr. Reed Holden
Perhaps you have noticed that Mark Burton and I have been writing more about pricing strategy these days. That's because managers, pricing or otherwise, continue to focus on developing better pricing tactics through software, systems, and analytics. There is nothing wrong with these activities, but they do need to rest on the foundation of good pricing strategy. This is critical to ensure that the tactical work is being put in the right places–where there is the most effective return for the firm. Without good strategy, the tactical work can go to waste, leaving a lot of money on the table. We're both concerned that there isn't enough focus on the strategic issues of price.
An example of good pricing strategy is what Microsoft is doing with the introduction of Windows 7 in the fall. Its top features will be simplicity and ease of use and won't contain "new bells and whistles." Priced at $15, a fraction of the full-featured version, Windows 7 will not support fancier monitors and will support only a limited number of programs at once. It is intended for the fast-growing sub-$500 market of laptops. This market has been controlled by Linux. Microsoft's 2008 share of this market was a paltry 10%. Since then, Windows has picked their share up to 95%, and the Windows 7 introduction will extend that dominance. The $15 price helps them expand the "footprint" of the firm into lower-priced, faster-growing segments, without upsetting their current cash machine of the $70 product in the above $500 PC segment.
If users want to expand to the full-featured version, they just put in their credit card number. There is some concern that this will alienate some users. We think it will be better to have a dominant share and risk some level of alienation than having a small share and not alienate people. It's really a no-brainer. We have to give kudos to Microsoft on this one for the following reasons:
The analysts might ping them on some of the problems that's just nit-picking. The bottom line is that this one is a clear recipe for success.
Commentary By Mark Burton
From “Death to Discounts? The Designers Rebel”The Wall Street Journal, April 16, 2009
Managing pricing through your own sales organization is challenging, but when you rely on distributors, many of whom are known brands in their own right, it can seem like a hopeless task. It is a hopeless task, unless you realize that effective management of distribution systems is a game of power and control–and until you are willing to exercise leadership in playing that game.
This past winter, in the midst of an absolute bloodbath of a holiday season, many leading retailers resorted to extreme discounts in order to clear inventory out of their overloaded stores. Perhaps the most notorious was Saks Fifth Avenue, which did more to destroy its own brand in four weeks with massive markdowns and once posh stores that took on the look of the Bazaar with floors crowded with racks of discounted merchandise. Consumers took notice. They scooped up some great bargains and have rewarded the retailers with hardening resolve against paying full price ever again.
If you own one of the brands that got caught up in the slaughter, what could you do, other than sit there and watch your distributors (retailers are distributors) take you down with them? Not so fast. High-end clothing suppliers like Eileen Fisher are fighting back. They are looking to gain control over their brands by discussing renting space from the retailers and handing responsibility for sales over to their own, trained employees. They are also refusing to participate is suicidal sales. Finally, many are starting to open more of their own stores. Doing this provides an immediate threat to department stores that don’t toe the line–mess with us, and we’ll take the customers away from you.
Eileen Fisher may look like your typical, waif-like fashionista, but when it comes to playing hardball with the channel to save her brand’s value and pricing, she punches several classes above her weight. The (Da Vinci) Code For Better Pricing
Commentary By Reed Holden
From Discounts Plot Against 'Da Vinci' Novel, By Jeffrey A. Trachtenberg
Dan Brown, author of The Da Vinci Code, has a new book coming out in the fall. The Lost Symbol is a follow-on story to the original book which sold 81 million copies and led to a blockbuster movie. So, the expectation is that the new book will sell quite a few copies. Now, here's the rub. Given the expected popularity of the book, book stores are saying that they are going to sell it at a discount of over 40%. The Wall Street Journal is questioning the wisdom of that move–after all, why sell a book for little or no profit?
On the surface, it doesn't sound like a smart move. After all, those 81+ million of us who read the first book are going to want to buy the new book, whatever the cost. Therefore, we are price insensitive for the purchase of the book. The bookstores appear to be leaving a lot of money on the table with a penetration pricing strategy.
But wait. While we are price insensitive for the purchase of the book, we are price sensitive for where we purchase it. The list price is $28.95. But why pay that when I can buy it at Barnes and Noble for $15.63? Actually, I'll save the trip and buy it at Amazon. They'll ship it for free and still only charge $15.63 (notice how quickly they matched the Barnes and Noble price?). So, for the bookstores that can afford to trade the volume for lower profits, the increased demand will probably lead to higher total profitability.
Further, consider that most people who go to Barnes & Noble or Borders for the book are going to end up purchasing a bunch of other books at a higher profit margin. The total benefit of getting people to come to their store for a book is actually quite large. This is one case where the large bookstores will make lots of profits by selling one item at a lower price.
The watchword of good pricing is: price for profits. A little analysis shows that this is a good move for the big bookstores. It gets them press coverage, and it gets them profits. What about Dan Brown? He smiles all the way to the bank.
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