360 Pricing Issue Copy
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sSummer is coming and the race soon will be on.
Every year, as the special holidays such as Memorial
Day and July 4 approach, beverage companies,
snacks companies and retailers deeply discount their
products in anticipation of the picnic sales rush.
The same thing happens during the year-end holiday
gift-giving rush. The day after Thanksgiving, well-
established retailers hold highly advertised sales, with
substantial extra discounts announcing their intention
to be the most attractive place to shop. In so doing
they signal emphatically their intention to initiate a
game of aggressive pricing for the coming selling
season. The effect: other retail competitors feel
compelled to meet the aggressors' tactics with
similar price discounting to make sure they do not
miss the season's gold rush.
Is this a price war? If not, the dynamics are virtually
indistinguishable. A promising retail market plunges
headlong into irrational and unstable price
competition - due to euphoric competitive pricing.
IN THIS ISSUE PAGE
Euphoric Competitive Pricing
and the Irrational Rush for Sales
by Gerald Smith .................................... .....1-2
Adapting to Culture and Pricing
for Value in China
by Michael N. Hurwich ...............................3-4
Optimizing Price is a Beautiful Thing
by Rapt, Inc ................................... ............3-4
Insight and Execution:
The Keys to B2B Pricing
by Rafael Gonzalez Caloni..............................5
Pricing in Tough Economic Times
by George E. Cressman, Jr. and
Francois Delvaux ...................................... .....7
June 9-12, 2003
Radisson Hotel and Suites • Chicago, IL
www.iirusa.com/pricex
UPCOMING EVENTS
The Official Newsletter of the Pricing Institute
By Gerald Smith
www.aboutfoundation.com
This destructive behavior is closely related to a
familiar dynamic in game theory. Game theory
suggests that players are better off if they can
convince other competitive players to set higher
prices and share modest profits. But the risk of fail
is significant if some players defect: losers lose big
the low-price winners.
If competitors are "rational" in the early stages of th
season we should expect a favorable game in whic
all players are better off and all boats benefit from a
rising tide - growing seasonal demand and
inexperienced shoppers entering the market who d
not frequent stores or Internet shopping sites durin
other times of the year. These shoppers have little
time for price comparison shopping. Competitors
should be charging premium prices to buyers who
want to ensure they get the products they want at
convenient locations and times - the perfect holida
gift or the freshest picnic beverages, snacks or fooPricing professionals refer to this as priority pricing
resulting in healthy margins for players.
All of this should be true, but often it is not becaus
competitive euphoria undermines the market. Rath
than focusing on valuable product mixes, service a
inventory availability - and charging commensurate
prices - many retailers focus on winning the race to
win the most sales the fastest. They deeply discou
prices to attract customers - or to make sure
continues on pag
Euphoric Euphori c Competitive
Pricing and the
IrrationalRush for Sales
The Pricing Institute is a division of the
Institute for International Research
360° PricingIssue 1 • Volume 1 • May 20
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JOINT VENTURE WITH
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competitors do not steal customers from them.
They fall headlong into the well-known prisoner's
dilemma: rather than sharing modest profits with
other rational competitors in a stable market, they
share losses with irrational competitors in an
unstable market – all driven by the hope that by
moving first they will win big – or, more importantly,
that they will not lose big. Low-knowledge
investors and the media cheer from the sidelines,
keeping a daily vigil on same-day sales growthrelative to last year and affirming their belief that
retail revenue growth is a reliable indicator of
profitability.
We saw this mentality more broadly with the e-
tailing euphoria at the turn of the century, where
competitors tried to out-discount one another to
achieve rapid sales growth during the Internet gold
rush. In each case, the rush for immediate sales
overruled the common sense of building and
reaping the rewards of long-term customer value.
Why does widespread competitive price
aggression prevail in such promising growthmarkets?
First, there is a capacity effect. Each player stocks
up considerably for the anticipated sales rush,
knowing that every other player is doing the same.
There is a prevailing perception among
competitors that the market will be awash in
inventory capacity. At the end of the season no
player wants to get caught holding the bag of
excess inventory.
Second, the stakes are high since sales rush
periods are critical to broader sales and profits.
Many toy retailers, for example, rely on the year-
end holiday season for nearly half of annual
revenues.
Third, there is a demand effect. In the rush,
competitors make the implicit – and mistaken –
assumption that all customers demand the same
thing: great products at lowest prices. In fact,
many customers place price low on the priority list.
In holiday retailing, some customers want only the
best or the latest or the most stylish, while some
want absolute shopping convenience – to quickly
get in and out of a store or Internet site. Still others
want absolute assurance that they will be able to
get precisely the gift they want to give. Imagine thevalue that these customers realize when these
legitimate needs are met – and the folly of retailers
severely discounting to give it all away.
360° Pricing • May 20032
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It defies managerial pricing logic that these firms
spend their most valuable marketing resources
(advertising/promoting at the most opportune
market moment) appealing to the least valuable
customer segments – brand switchers and
discount buyers – and adopting the harmful
practices of irrational competitors. They train their
existing loyal buyers to focus on price, rather than
the important differentiating benefits the firm
spends the entire rest of the year developing. They
unwittingly unleash a negative framing effect on the
rest of the market by expanding the low end of the
market, which causes other buyers to adjust their
own price expectations downward. And by
packing their stores with discount shoppers, who
quickly deplete the best inventory, they depreciate
the value of the shopping experience for those
who prefer an unhurried experience in a store
prepared to meet their needs.
What is the solution to euphoric competitive
pricing?
First, it is essential to educate competitors about
its destructive effects and teach them how to
properly manage relationships with their
competitors. Retail associations, industry
conventions and Chambers of Commerce offer
forums to do this.
Second, players must play to their own
competitive advantage and signal other
competitive players of their intent to pursue non-
price strategies. Niche marketers, such as catalog
companies (Popcorn Factory, Coldwater Creek,
L.L. Bean) or some fashion retailers (American
Eagle Outfitters) do this well by offering tailored
and differentiated product mixes at full price.
Finally, strong gross margins are essential tosurvive euphoric competitive pricing. This was
especially evident in the Internet rush, where
companies with strong gross margins such as
eBay were much better able to weather the
intensity of euphoric price competition, while
others with weak margins (Garden.com, Value
America Inc. or eToys) struggled.
The lesson: survival and success go to the fittest
and the smartest, not the first to discount ever
earlier and deeper to win the next irrational rush for
sales. s
Dr. Gerald Smith is Associate Professor of Marketing
at Boston College and a consultant and lecturer on
competitive pricing strategy with the Strategic
Pricing Group, Boston.
Euphoric continues from page 1 ...
Don't miss the next issue of 360º Pricing which will feature an article by the
father of value-based pricing himself, Dan Nimer. A PRICEX trailblazer at this
year's event, Dan's article is titled On The Pricing of Mercedes, Joy
Perfume and Other "Stuff".
360° Pricing
EDITOR AND PUBLISHER Heather Kalish
ASSISTANT EDITOR Michael Hurwi
BUSINESS DEVELOPMENT Deborah Hatch
MARKETING MANAGER Adrienne Nich
www.pricinginstitute.com
Sneak Peek!
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T There's no secret about the benefit of optimizing price - a one
percent price improvement delivers eight percent of profitimprovement, according to McKinsey & Company. Yet many
companies have spent the past few years cutting costs
through workforce and COGS reductions and ERP
implementations – until there are few, if any, costs left to cut.
If optimizing price delivers better results, why have many
businesses spent so much time and effort cutting costs?
Simple: because until now it has been easier to cut costs than
to optimize prices in the face of uncertainty. There is much
uncertainty in business today, whether it is economic,
marketplace, competitor or other industry conditions. When
faced with all these variables, many companies focus on the
elements individually rather than taking a collaborative view of how the variables affect one another.
Companies seem to hold the misperception that price optimization is too complex and unwieldy to
generate true, rapid results. Pricing technologies, however, have emerged over the past decade as a
credible and reliable solution for companies to gain market share, increase revenue and improve profits.
Once predominately utilized in the retail and hospitality industry, today new approaches to price
optimization make it possible for high-technology manufacturers, semiconductor producers and even
media companies to recognize significant business improvements. Hewlett-Packard utilizes a Rapt price-
optimization solution that delivered revenue uplift of $15 million per quarter in their Unix NA Division.
Price optimization makes it possible to reduce the impact of uncertainty and create an environment of
improved predictability. By engaging advanced mathematics, in addition to spreadsheet arithmetic, critical
pricing tools are developed for dealing with uncertainty. This practice is not new; commodities traders have
M
May 2003 • 360° Pricing
Introducing:
It is with pleasure that we announce The Pricin
Institute’s Cross Industry Corporate
Practitioner Advisory Board. These
professionals have been chosen specifically to
represent their industry and to lend their
expertise as we grow the Pricing Institute and
work to establish PRICEX as the premier
PRICING industry event. Welcome Aboard!
Ken Levy, Director of Pricing
Roche Diagnostics
Anita Burrell, Global Health Economics
Aventis Pharmaceutical
Joseph Marigliano, Director of Pricing
Hagemeyer
Mitch Farber, Director, Business Development
Cingular
Steve Maguire, Director Business Analysis
Sears
Harold Peck, Sr. Pricing Manager
Best Buy
Bob Baker, General Manager, Strategic Pricing
Armstrong World Industries
Register Now!
Visit www.iirusa.com/pricex or call 888-670-
8200. Be sure to mention the code XMP-NEWS
No other event being offered today provides as
many best-in-class case studies from as many
corporate practitioners such as Alcan
Aluminum, Armstrong World Industries, Best
Buy, Dell Canada, Eastman Kodak Company,
Fed Ex Latin America, General Motors,
Hagemayer, Hewlett Packard, Livingston
International, Michelin, Roche Diagnostics,Rockwell Automation and more. Plus, don’t
miss the keynote speeches from:
• Don Soderquist, Former Senior Chairman
Walmart
• Kent McNeley, Vice President
Eastman Kodak
• Sanjay Dhar, Professor
University of Chicago GBS
My recent experience in China gave me an
opportunity shared by only a handful of pricing
consultants. I was invited to share my strategic-pricing knowledge and experiences with senior
executives and management from some of the
best-known corporations in and around China. The
participants represented industries such as
pharmaceuticals, tire manufacturers, flavorings and
fragrances, telephony, distribution and consumer
packaging.
I want to share my observations of how companies
conduct business in China and the pricing
knowledge I obtained from industry participants
and by watching an American negotiate a
purchase at a select Shanghai retailer.
There is enormous opportunity and competition in
China as companies race to capture as much
Adapting to Culture and
market share and profitable revenue growth in
their respective industries as is relevant and
attainable
China's Gross Domestic Product reached $1.21
trillion USD in 2002, an increase of 7.9 percent.
according to official estimates and is expected to
grow by another eight percent in 2003. While
there is controversy about the accuracy of the
official estimates, China's GDP growth has few
rivals. This success is partially based on China's
admission into the World Trade Organization in
late 2001 and the GDP growth and increases in
exports are expected to continue at a significant
rate.
Here are my personal pricing observations aboutthe strengths, weaknesses, opportunities and
threats of conducting business in China.
continues on page 4
continues on page 4
Pricing for Value in China
Optimizing Price Optimizing Price is a Beautiful Thing
By Rapt, Inc.
By Michael N. Hurwich
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360° Pricing • May 20034
1 As many of the delegates attending my
Strategic Pricing Workshops reminded me, the
Chinese have been in the merchandise and spice
trade for centuries. Value pricing, however, has
traditionally taken a back seat to ensuring market
share is retained and grown at all costs. As a
result, the Chinese are accustomed to negotiating
on price rather than the value propositions of the
product offerings.
2Many multi-national companies have failed
over the years by behaving in ways that
induced price wars in the Chinese marketplace. In
an effort to unseat the incumbent many foreign
companies have taken a pricing-penetration
approach to gaining market share and revenue,
only to find themselves immediately matched on
price by domestic competitors.
3 An environment controlled and managed by a
centralized government creates substantial
challenges for domestic and foreign competitors.
Many companies have failed, and continue to fail,
by adopting pricing strategies that providealternative approaches to varying customer,
regional segments and government interference.
For example, the government often requires that
certain pharmaceutical OTC drugs be priced lower
to reduce the financial burden for the government
and end-users. Branded pharmaceuticals usually
are given little time to adapt to such mandates. In
fact, the government encourages price
competition by providing little in the way of
penalties to generic pharmaceutical manufacturers
copying prescriptive drugs prior to their coming off
patent.
4 The new generation in China is adaptingquickly to western forms of capitalism,
especially in the larger cities and provinces. Higher
quality products and services are not only
appreciated but also expected. As product
proliferation is abundant in China, with new line
extensions competing for attention in a growing
market, one means of differentiation is for a
company to provide additional customer service
and price accordingly to capture the incremental
positive differentiation.
5
Companies must be able to execute on the
acronym MASDA (Meaningful and Sustainable
Differential Advantage) as coined by Dan Nimer of
The DNA Group Inc. China is effective and efficient
at duplicating products, services and images and
producers benefit from a murky legal system and
inadequate protection of intellectual property.
Companies must adopt a strategy that
differentiates them from the domestic competition.
More importantly, companies must quickly adapt
to ensure they have a differential advantage, even if
intellectual property is compromised. To combat
price transparency and rapid product duplication,
communicating value to the end-user plays an
important role in securing market share and
sustaining brand awareness.
6 The Chinese leave money on the table as they
have been so conditioned to negotiate on price
that they have failed to segment their customers
into categories, such as Price Sensitive,
Convenience, Loyal and Value Shoppers, to
capture additional revenue from the segments that
value quality and/or other non-price attributes.
In a well-known jewelry store, I watched a savvy American negotiate the purchase of several
necklaces to take back to the United States. The
salesperson was excited about selling several
necklaces to one person and offered a 50 percent
reduction from the list price. As a result, she
immediately compromised the integrity of the
pricing ceiling and opened the door to further price
concessions by unintentionally communicating that
she was selling on price rather than value.
By the time the negotiations ended the purchaser
had a 70 percent price concession. At one point,
he threatened to walk away from a 65 percent
reduction unless the salesperson capitulated. Laterthe customer admitted to me that he would have
accepted 65 percent but believed the
salesperson's hand was revealed when her boss
arrived and stood behind her for the balance of the
negotiation. He believed the boss was applying
pressure to close the sale, even though he did not
speak during the negotiation.
The market in Central China, particularly in large
cities is primarily high-net-worth or low-value
customers. Moving from a cost-based, price-
sensitive approach to value-based pricing involves
researching and segmenting customers and
understanding their decision selection criteria atboth ends of the pricing spectrum.
Companies should satisfy customers only to the
point where the incremental increase in customer
satisfaction that can be captured in the price
exceeds the incremental increase in the product
cost. Since a company cannot always create the
same value for all customers, value-based
marketing and pricing suggests that a company
should carefully select its customers. This involves
determining when to respond in kind to price or
price competition and when a non-price response
or no response is a pragmatic alternative.
China provides a significant and rapidly growing
market. Since China joined the WTO in 2001,
many domestic industries have been forced to
compete on the foundation of well-managed goals
and objectives. Joining the WTO has put
enormous pressure on the Chinese government to
reduce trade tariffs over the next five years on
many goods and services in numerous industries.
As a result, the situation is becoming fairer and
less restrictive for multi-national companies. As
well, the Chinese marketplace has come to
mastered the notion of providing predictability in
the face of uncertainty and have built a multi-bill
dollar business out of it. What is new is that thes
mathematic principles and philosophies can be
applied to price optimization.
Businesses today demand analytic applications
that deliver answers, not just access, as thestarting point of data analysis. From that point, t
price-optimization tool must deliver a dramatic a
favorable return on investment that can be
measured in days or weeks instead of months o
years.
A company seeking to implement price-
optimization technology should begin by selecti
an application that houses a strong analytic eng
that truly understands the specific structure of th
company's particular optimization model. In sho
the engine must be able to translate word
problems into mathematic terms and then ident
the right model for solving the price-optimizationpuzzle.
Comprehensive visibility across a company's en
operation is key for the success of any pricing
solution. By utilizing the science of price
optimization, companies can more precisely
predict the impact of their pricing decisions bas
on a fusion of demand, sales force execution,
customer willingness-to-pay and financial results
areas that every corporate stakeholder expects
be effective and efficient.
In today's world, organizations that welcome an
embrace uncertainty will prosper, whether in thebusiness of price optimization or in a particular
vertical or horizontal industry. In the face of
uncertain markets and economies, price
optimization can be deployed as a powerful,
strategic weapon. And there is no time like the
present to make that happen. s
For more information, contact Rapt, Inc.
Phone: (866) 999-1555
Web: http://www.rapt.com
Email: [email protected]
appreciate and value quality in many industries
such as electronics, hotels and hospitality, cars,
fast food and wireless technology.
Companies will succeed in this marketplace if
provisions are in place to develop a roadmap of
their management system for a value-based
pricing strategy and a method to deal with cultu
and organizational roadblocks that slow the valu
based pricing process. s
Michael N. Hurwich, Partner
Foundation Pricing Group
http://www.aboutfoundation.com
Optimizing continues from page 3 ...
Adapting continues from page 3 ...
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PPrice optimization has a reputation for generating
higher profits in industries such as retail, hospitality
and transportation. Optimization works well in
these industries because customers are price-
takers, numerous, self-select among different
offerings and engage in many individual
transactions.
Companies in these sectors can treat their markets
and customers as portfolios, where predictable
segments purchase offerings at price points thatgenerate optimal profits. Given the buzz generated
by optimization, it's no wonder other industries
want to jump on the bandwagon. But is
optimization the best way to go for
B2B?
Most B2B environments differ markedly
from retail, hospitality and
transportation. Perhaps the most
important distinction is that customers
are not price-takers. Indeed, customers
usually wield pricing power, much to the
dismay of sellers. An optimized price
rapidly loses its significance whencustomers constantly negotiate and
trade off every element of their business
relationship with the company.
To deliver higher margins from pricing in a
negotiated environment, companies must resist
the temptation simply to adopt proven retail
practices. Instead of focusing on optimizing prices,
they must think about managing price against this
backdrop:
s Profitability varies widely, even across similar
customers and deals
s Many negotiated price and non-price elements
contribute to this variability
s Companies lack visibility into, or effective
control over, this process
So how can a company optimize its margins in a
negotiated environment without resorting to the
tools that have been successful in retail? Two
words are key to pricing excellence: insight and
execution.
Let's begin with pricing insight. Many companies
are surprised to find that star customers may
actually be costing them money, while other, lessvisible, customers contribute solidly to the bottom
line. The same is true for some sales reps, who
may "blow away their numbers" and "blow" a hole
in margins. This also is true for product lines,
customer segments and channels. Figuring out
who's who does not require optimization, but it
does require tracking and understanding every
element on every transaction: list price, discounts,
invoice price, rebates, allowances, shipping
charges, services, net price, product costs and net
margin.
This detailed information can be used to look for
the outliers. What elements are driving lower
margins? Is discounting always justified? Are free
services to smaller customers hurting the bottom
line? Are some customers significantly more or less
profitable than their peers?
In analyzing business after business, the
surprisingly consistent conclusion is that similarly
situated customers, products and sales reps will
show anywhere from a 30 to 70 percentage point
difference in profitability and that many companieshave a significant amount of money-losing
business.1
Once companies have gained this insight, they
need to ensure consistent execution. Here again,
the answer is not to deliver an optimized price that
is negotiated away. At a minimum, companies
must provide the sales force with insight into how
every element of a negotiation affects the bottom
line. Ideally, sales forces have tools to negotiate
deals that meet the company's profitability goals.
Insight and execution are straightforward in
concept. In practice, however, they require
companies to develop and roll out tools to analyze
their pricing and empower consistent deal
negotiation. Companies traditionally have relied on
homegrown tools such as databases that capture
transactional data to conduct pricing analysis and
spreadsheets for sales reps to model deal
scenarios. This approach, while time-consuming
resource-intensive and inflexible, has provided a
significant step forward from the no-insight,
inconsistent-execution starting point.
As web-based enterprise applications have
matured, however, companies have begun to
adopt dedicated price-management solutions th
automate manual data capture and analytical
processes and add significant flexibility around
how deals can be structured, reviewed andapproved. The visibility these systems bring to t
entire pricing process reveals significant
opportunities to improve margins
by up to two percentage points.2
Early adopters of price-
management solutions stand to
gain a significant advantage by
bolstering their bottom line, just a
most competitors struggle to
protect, never mind grow, margin
in the current environment.
Ultimately, optimization's succes
retail and other sectors has serve
to awaken other industries to the
potential of price management fo
strengthening the bottom line. By gaining greate
insights into pricing variability across the busine
and improving front-line execution, companies in
negotiated-price environments can significantly
increase margins without raising prices or even
changing the underlying dynamic of the busines
where buyers and sellers will continue to develo
unique deals that meet both their needs. s
1 Vendavo analysis of diverse companies in process
and discrete manufacturing industries .
2 Vendavo customer experience.
Rafael Gonzalez Caloni is Vice President of Mark
Development for Vendavo. http://www.vendavo.co
May 2003 • 360° Pricing
Insight and Execution:
The Keys to
B2B Pricing
Did You Know... A gallon of water is more expensive than a gallon of gasoline?
The last time I checked, a gallon of water at the local convenience store was
around U.S. $2 while an equivalent amount of gasoline was approximately $1.06*.
Why is water costlier than gasoline? The answer has to do with utility and scarcity.
It appears that consumers find water more useful and scarce than gasoline and are
willing to pay for the convenience of ‘perceived’ good quality water.
So, the next time one of your colleagues says:“We can’t raise price, because we are selling a
commodity product,” remind him/her that mature products such as water can command a premium
price if the economic value can be created, captured and communicated to the right audience.
—Michael Hurwich, Partner, Foundation Pricing Group * Gasoline: Sales to End Users through Retail Outlets in the State of New York in/around January 2003 (National Energy Information Center)
If you have a thought-provoking statement/ fact/statistic related to pricing principles, send it to [email protected] with th
subject heading “Did you Know?” If chosen, yours will appear in the next issue of 360° Pricing!
By Rafael Gonzalez Caloni
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May 2003 • 360° Pricing
T This economy is tough! While it did not seem as if
things could get any worse, the first quarter of
2003 has left many managers longing for 2002.
The pressure for profit improvement is intensifying.
Because sales volume has declined for many
companies there is strong temptation to cut price,
grow share and regain some lost volume. Before
you do, however, read the caution: "Pricing
Professionals - Do Not Attempt This At Home."
Now is the time to think carefully about profitable
growth.
What's wrong with price discounting to grow share
and maintain volumes during tough times? Won't
customers respond to price cuts by ordering
more? Maybe ... but there are several problems
with this approach.
The first problem with aggressive price discounting
is that while customers welcome lower prices, this
may not result in higher sales for the company
initiating the price decrease. As shown in Table 1, a
company with a contribution margin of 25 percent
would require a 67 percent increase in sales to
offset a 10 percent price decrease.
Can the company sell more? Only if ultimate
demand goes up. If you cut price and there is no
change in ultimate market demand, customers can
bank your lower price and you won't benefit. This
lower price/same-demand environment is a no-win
game and one that is playing out in many markets
today. Demand curve gains? Forget it.
What about winning share away from acompetitor? Consider the competitor's situation:
their sales also are declining. And if they have high
levels of fixed cost, they have seen unit costs go
up as demand goes down – the same situation
you may be facing. Suppose you cut price to win
some additional volume. The losing competitor
sees demand decline even more and unit prices go
even higher. How are they likely to respond? By
cutting price to grow volume of course. The result?
A full-blown price war, with declining profitability for
all.
There's an additional problem. As companies cut
price in an attempt to grow volume, customersbegin to believe their suppliers can live with the
lower prices. Even worse: as prices are cut,
customers learn delivered value does not count.
It's all about price - low price.
Economies go through cycles over time. The
current challenge is that we seem to be in an
extended funk. But trust us - this economy will
start to improve. And when it does, companies will
regret their aggressive price discounting. Price
cutters will find it very difficult – perhaps impossible
– to improve prices. And if price discounting does
precipitate a price war, poor profitability will
continue to plague managers for years.
So what can managers do in a tough economy?
Here are the key priorities:
1. Assess the nature of declining demandDoes the problem arise from general economic
conditions or is it the result of aggressive
competitor moves? When the problem is the result
of slow economic growth, managers must adjust
their expectations. Even if customers get lower
prices, they will not take more - demand for their
products is down. When demand declines
because of problems in the macro-economy, the
first priority for managers is to adjust sales
forecasts and production to market realities.
Continuing to produce for higher levels of demand
means inventories will grow, increasing pressure to
"move the juice" while ignoring price implications. As inventory piles up, you will be tempted to price
for sales; the shorter-term pressure of inventory
builds will overwhelm concerns about longer-term
profitability. The antidote: adjust forecasts and
production to match the market.
2. Competitor actions must be addressed
Competitors may continue to produce and sell at
higher levels. Adjusting to market demand realities
only works when competitors also make
adjustments. An important management task in
declining economies is market communication
about the nature of the market and underlying
causes of demand shifts. The objective of this
market communication is to make sure all marketparticipants - customers and competitors -
understand changes in demand are caused by
economic trends not competitor opportunism. Of
course such communication doesn't guarantee
competitors will adjust their market activities. Our
experience, though, is that managers do not
always have accurate market intelligence and
respond slowly to changing market conditions.
Providing credible information about economic
shifts can go a long way in encouraging
reasonable market actions.
3. Customer communications and negotiatio
must be managed
The key to shorter and longer-term profitability is
management of customer value perceptions. In
tough economies managers often cut market
communication efforts to reduce costs. Reducin
market communications can have disastrousconsequences. Rather than reducing market
communication, tough times require increased
communication. Regardless of economic
conditions, customer communications should b
value based. Customers must understand the
economic impact - value - of what they get from
you and cannot get from your competitors. Valu
communication in tough economies does not ha
to create lots of extra cost: the sales force shou
be primed to frame value delivery in all sales cal
a good thing to do in all phases of the economy
As customer price pressure increases, the best
counter is accelerating value communication.4. Competitor interactions must be carefully
managed
As demand slows, managers will be strongly
tempted to chase volume – demand owned by
competitors. Taking a competitor's volume is be
done using a value-based approach against
competitors who have poor capability to respon
In tough economies, managers must carefully
evaluate every price move – especially those aim
at increasing demand. If the competitor can and
will retaliate, price wars are likely. Some volume
cannot be profitably won in either the short or th
long term.
Competing in tough economies is a challenge
many companies currently face. The situation is
frustrating and troublesome. While growth and
profit suffer in these markets, managing to
minimize the impact can be done. The key to
succeeding lies in careful management of
customer negotiations, competitive dynamics an
internal expectations. s
George E. Cressman, Jr. and Francois Delvaux ar
respectively, senior pricer and senior consultant at
Strategic Pricing Group.
http://www.strategicpricinggroup.com
Change in Sales Volume Required to Off-Set a Price Decrease
Assumes no change in incremental costs (fixed or variable)
%
Contribution
Margin
% Change in Price-5% -10% -15% -20%
20% 33% 100% 300%25% 25% 67% 150% 400%
30% 20% 50% 100% 200%
35% 17% 40% 75% 133%
40% 14% 33% 60% 100%
Pricing in Tough Economies By George E. Cressman, Jr. and Francois Delva
8/3/2019 360 Pricing Issue Copy
http://slidepdf.com/reader/full/360-pricing-issue-copy 8/8
360° Pricing
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Dear Pricing Professional,
360°
Pricing
Newsletter Presented By:
IN THIS ISSUE
• Euphoric Competitive Pricing and
the Irrational Rush for Sales
• Adapting to Culture and Pricing for
Value in China
• Optimizing Price is a Beautiful Thing
• Insight and Execution: The Keys to
B2B Pricing
• Pricing in Tough Economic Times
The Official Newsletter of the Pricing Institute