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Newsletter: November 14, 2008

Tough Times for Tough Pricers | Recession Busters | Stress-Based Pricing Strategies | The Pricing Pressure Cooker | Good Reading!

Tough Times for Tough Pricers

By Dr. Reed Holden

With the election over, we’re realizing that President-Elect Obama has a very difficult situation to manage, starting on January 20, and we’re all hoping that he hits the ground running. It reminded me of Michael Douglas in The American President when, after he’s been kicked around by his election opposition (Richard Dreyfuss), Douglas storms into the press briefing room and gives a terrific speech. Everyone smiles, his girlfriend (Annette Bening) comes back and all is right with the world. I don’t think it will be that easy this time but hope Mr. Obama can get the job done.  These are tough times, and it will take a tough President to get the job done.

The same is true today for pricing vice presidents, directors, and managers. We are clearly in a recession. Demand is down, job losses are rising, and it looks like this will continue for six to eighteen months, depending on which pundit is speaking. The problem that pricers are going to see during these times is the following:

With demand down, competition is going to increase and be more fierce, and worse, the pressure will be more intense to increase price discounts to stem the falling tide.

The real problem is that using discounts in a down market will encourage a price war, and the reduced prices will cause revenue to drop and profits to disappear. Proper controls and processes will be needed to make sure the discounts given truly provide a benefit to the company–a.k.a. profits. Without that, price discounts will lead to more job losses, making the problem worse.  It’s going to take a tough pricing manager to prevent the unwarranted discounting that senior leaders will favor.

There is going to be a natural tendency for senior leaders to want to reduce costs during the downturn. That’s OK in every area but pricing. Pricing is an area that needs resources, processes, and controls to protect whatever profits are available. Cut pricing people and systems now, and you’re going to see even less profits going forward. It’s going to take a tough pricing leader to fight for the pricing resources he/she needs to prevent that problem.

 
What about price increases? Watch out for dumbbell pricing. This phenomenon creates a price distribution that looks like a dumbbell–some high and some low. Worry about how the price increase will be applied. Some customers, usually the most loyal, will pay the increase, while others will demand to get bigger discounts. The net result of the exercise is that eventually the high-price customers learn what’s going on and end up getting the discount over time. When this happens, the price increase backfires, and chances are that it will lead to even greater discounts in the future.

To pull off a price increase now, you have to start by convincing your customers, salespeople, and competitors that it is reasonable and fair. Competitors need to follow your lead to make it work. In our book, Pricing with Confidence, we talk about “The Pricer’s Dilemma” – an exercise used to show people the fallacy of price competition in a mature/declining market. The exercise shows why it’s necessary to get your “constituents” to follow. If you don’t have the controls and the right communications program to let everyone know what you’re doing, it simply won’t work.

We know of one company that started this process over a year ago. The managers knew there was a problem on the horizon and wanted to get more discipline around a new system before the downturn hit. However, they were worried about the senior executives. So we put the senior execs through the Pricer’s Dilemma exercise, and after an hour, they began brainstorming how a price increase would play out in their market. Soon they were asking the PR people to begin making announcements about price increases to the marketplace. It took six months of deal analysis and “selective competitive response,” but the competitor finally increased prices, too. It took a tough pricing manager to get the job done, but she did it and got the senior execs to buy into the program.

I believe that it might be too late to execute a price increase now. Why? Because everyone knows that costs are starting to come down. The time to get price increases is when everyone believes the increases are reasonable things. With gas half the price of four months ago, steel coming down–as are other primary commodities–customers know that your costs are starting to come down, too. The time for the increase was six months ago. Dow Chemical, for example, got their increases communicated to the market in second quarter and have settled in to weather the storm.  They have tough pricing managers. How about you?

Recession Busters

By Nelson Hyde

Economists have predicted five out of the last two recessions, but this one is starting to look like the real deal. Unemployment is on the rise, lending is tight, retailers are bracing for slow holiday sales, and CEOs are making dire forecasts.
 
Yet in the middle of it all, some companies are reporting double digit profit growth this quarter, even in some very tough industries. They did not achieve this just by cutting costs. Rather, they successfully tapped into two key drivers of profit growth.

The first is innovation. If you want to be growing the business in bad times, you have to expand your product footprint. If you want that growth to be profitable, choose high-margin segments like Apple has. Its third quarter profit was up 26% on the strength of its iPhone, first sold 16 months ago.

The second source of strength in bad times? Raising prices. That’s right, raising them. Higher prices at Sara Lee converted what would have been a loss this quarter into a 20% profit increase.  Japan’s largest wireless carrier, DoCoMo, lowered its cell phone subsidies–a move that predictably slowed unit sales growth, but increased profits by 37%. On-line movie renter Netflix is taking a cue, too. Anticipating slower subscriber growth, it is raising prices $1 for some DVDs.

In raising your prices, demonstrate that the new prices are reasonable and justified–cite your cost increases and other benchmarks. Give your customers advance warning so they can pre-buy some at the old prices to ease in. Communicate your intent to the entire market, in public forums where competitors will hear it, too. If competitors try to undercut your new prices, take clear, targeted actions that hit them where it hurts to keep them in line.

Not everyone can duplicate this, but many who could, don’t even try. The problem with following conventional wisdom–“demand is weakening! lower prices!”–is that when the boat goes down, you go down with it. Some companies have created a few lifeboats of their own and set their own course instead.

Stress-Based Pricing Strategies

Commentary by Steve Haggett

From “Niche Companies Make The Most of The Crisis,” Robert Weisman, Boston Globe, October 21, 2008

In a recession, offerings that save customers money or reduce risk can yield a growth opportunity.  For many companies, a lower-value flanking offering can maintain revenues and help build new customer relationships, relationships that could be a source of growth during the rebound.

Another trend during a recession, and the resulting reduction in incomes, is an increase in stress and, sadly, divorce proceedings.
 
New England Divorce Solutions has rolled out a new flat-rate option for divorce services. Their fixed-price offering ($5,000 to $10,000) is targeted at customers who seek to “do away with billable hours,” says co-owner Tim McNamara. The service reduces the risk of major unpredictable costs during an economic period when customers see their own income as unpredictable. Since offering the new option, New England Divorce Solutions is fielding a high volume of calls for services.

The key to an effective flanking offering is ensuring that there is an identifiable distinction in features and services (but not quality) between the premium offering and the lower-value offering. Smart customers will pay for the lower-value option, and hope to receive the services from the higher-value alternative. If you are going to cap your prices to serve this market, you need an easy way to cap your services–and your costs.

There’s a decent chance that, if you are not considering an alternative like this, your competitors are.

The Pricing Pressure Cooker

By Alison Yama

While at the recent Pricing Society Conference in Miami, I heard a scenario played over and over again as people came by our booth or asked questions during the sessions. See if this sounds familiar. Sales people call you, the pricing director, on a daily basis saying that competitors are lowering prices to win business, and they need authority to discount their deals. Your costs, once high, are dropping, further fueling customers’ demand for lower prices. Your executive team is calling for revenue improvement as demand drops. You are caught in the middle. That whistling sound you hear is the steam coming out of your ears as the pressure mounts to help meet financial goals.

Over the decade that I have been in pricing, I have had the pleasure of working with some exceptional pricing people who had the ability to be successful in the face of this enormous pressure.  I want to share a few best practices from one pricing director to help other managers, directors, and vice presidents who are facing the pressure and looking for some relief.

1. Don’t be “Super Pricer” and try to accomplish everything at once: A pricing director from the chemical industry focused on not doing everything right, but rather, helped individual sales teams prepare for value-based negotiations. Those “small wins” added up to impressive incremental contribution that helped him gain credibility with sales and executives and helped the company meet financial goals.

2. Communicate the value of the wins: After each win, that same pricing director communicated to executives and other sales people the additional volume and price the successful sales team negotiated. The effect was two-fold: a) executives began to get their noses out of pricing as the trust in the pricing director increased, and b) sales people began to be more confident in their pricing.

3. Give sales the tools they need to be successful: As the pricing director worked with more and more sales teams, he was able to share tools, tips, and strategies across sales teams.

   • Value stories: “Our service is able to speed up your time to market by X Months…”

   • Negotiation tips: “If the customer wants a lower price, strip out our new product development service.”

   • Negotiation power: “If the customer demands a discount of 50%, we don’t want them as a customer. Walk away…”

You may have picked out an underlying theme of these three best practices–they all involved a relationship with sales–a good, working relationship, not an adversarial one. This relationship is the release valve needed to reduce some of the pressure on your pricing department. Pricing is not the “sales prevention department” of old.  Get out of the office, roll up your sleeves, and get to know your sales people.

Good Reading!

1. Double-Digit Growth: How Great Companies Achieve it–No Matter What by Michael Treacy, 2003, Penguin Books, New York, NY.  This book is well written, contains no fancy graphics, and has a lot of very good stories. His model is simple and high level.  The problem with any book which focuses on a few companies for stories, as authors Peters and Waterman discovered, is that some stumble subsequent to publishing (Dell and WaMu). Also, he tends to make extreme statements which aren't always true and some stories contradict.  But a worthwhile read.

2. Harvard Business Review on Pricing, 2008, Harvard Business School Publishing, Boston, MA. This book contains a collection of prior articles from the Harvard Business Review on pricing, including pricing new products, fighting a price war, Six Sigma Pricing–generally a good collection from some of the top authors in the field. 

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