Last fall, the leaders of a mid-sized company were rather worried about an unusually aggressive competitive promotion. After analyzing their competitors ‘past promotions along with the company’s own volume and discount trends, I recommended that the company should forgo matching the promotion. The company saved over $2 million within a quarter and, thankfully, pent up demand from recent lean periods also came through at regular prices.
Another company was considering a significant price increase to protect margin from rising raw material costs but was unsure if their competitors would follow. Analysis of the competitor’s past price increase levels and timing revealed a pleasant surprise. While the analysis validated that the company’s price leader status it also revealed they were traditionally the first mover for price actions in their industry in North America. Their key competitor had always followed them. At my recommendation, the company announced a price increase and the competitors followed as expected.
The point of these two examples: Managers feel frustrated when the lack of reliable competitive information mars their ability to plan precise price actions. They try to find validation by sketching their competitors’ as irrational, opportunistic or short-sighted but that is hardly useful. Managers seeking dependable competitive intelligence should start by defining clear objectives prior to gathering competitive intelligence. The problem definition should determine requirements, where and how much competitive data to collect, how to analyze it, and how to share it within the organization.
In many companies, existing methods for gathering competitive data are flawed. Recent examples of low-ball pricing tend to influence critical price decisions leading to money being left on the table. Customers, the key source of competitive information, are likely to bluff or provide partial competitive data in expectation of concessions. Similarly, front-line employees also tend to share competitive sound bites somewhat selectively. The information gleaned from such data is understandably misleading. Even when quality data is forthcoming, the input is seldom analyzed sufficiently or relayed to the data providers hence leaving them unenthusiastic about contributing in the future. Also, competitive data collection tends to follow the problem-du-jour rather than an ongoing and consistent process. Few companies nominate a manager to coordinate and gather competitive information for addressing questions such as:
• Is the competitor a wild card across the country or can we spot consistent patterns?
• Do they price aggressively everywhere or only in specific sales regions or for certain customers or products?
• How does the competitive offering compare with our product features?
• Is the competitor irrational are just reacting to our aggressive behavior?
Intelligence gathering should be pragmatic rather than a wasteful collection of data. For instance, it is pointless to demand large amounts of detail from sales reps for tracking market share or to justify their quoted price levels. Instead, requesting concise data sets for pre-determined and well-explained needs is better suited to explain competitive behavior in a given context. As such, the objectives for competitive intelligence vary by industry and nature of problem. Retailers may use sophisticated software to track real-time prices and competitive promotions to stay in the ballpark. Industrial manufacturers typically estimate costs from competitive 10-Ks and elicit price points from sales reps, channel members or customers.
Careful review of past competitive actions can guide precise price planning for future actions. Useful competitive intelligence is mission critical but it should not drain scarce resources. The experience of the aforementioned companies exemplifies that small scale efforts for competitive analysis not only expedite planning and execution of price actions but also increase the certainty of success.
Value-based pricing is acknowledged to be the ideal scenario yet few companies have put it in practice. Most companies struggle with cost-plus pricing which simply requires charging a set margin over incurred costs. Companies also try other approaches, such as, competition-based pricing or willingness-to-pay, but without knowing their costs, these are equally or even more likely to lead to lower revenues and even losses.
But what does the cost pertain to? Depending on the industry, the physical costs can vary as a percentage of the total costs, as do the mix of its various cost components such as activities required to support the customer directly or indirectly.
To identify these activities, one approach is activity-based costing (ABC). Over time, costs of activities change for better or for worse. ABC uncovers many activities taken for granted but never priced because their cost is considered “negligible”. Then there are activities that may have been outsourced but now these are out-of-sight and out-of-mind for the purpose of costing (and pricing). There is also a “hidden factory” of activities such as rework that never attain visibility – and are therefore not priced — but nonetheless incur cost.
To figure out whether or not to price something we should first know all the costs and then figure out whether or not they need to be bundled. Consider the example of airline pricing. Many activities go into supporting a passenger and usually these are priced with the ticket. But some airlines are pushing the unbundling envelope by separately charging for even activities like the passenger’s use of toilets on the plane!
Consider the example of Ryanair. The carrier charges £30 to check in a bag, £10 to pay for flights with a debit or credit card, £60 to check in sports or music equipment, £15 for each kilo of excess baggage, £50 to change a flight and £100 to change the name on a ticket. It now plans to charge for £1 for using the toilet. All this to keep the ticket price competitive!
But before companies start charging customers for using the restrooms on their premises, they need understand the activities supporting different customers. This would require:
- Activities-based costing, at least for customer-supporting (and related) activities
- Find if any activities related to customer were outsourced where, directly or indirectly, your company in incurring cost
- Uncover the “hidden factory” of activities that are not “standard” in terms of ideal business processes but nonetheless occur and incur costs.
Whether the costs of these activities are bundled into the price or not, knowing these activities and their costs may reveal a clear competitive advantage that can be the source of confidence in explaining to your customers why your prices are what they are and where and how you add more value to them relative to competition. Now such a cost-plus approach supports competition-based pricing and even value-based pricing.
Deconstructing and identifying all the costs can make companies more competitive as they eliminate unnecessary activities to lower costs and focus on delivering value in line with their competitive advantage.
Protecting profits through inventory management is a popular topic on quarterly earnings calls whether the company is Xerox Corporation or Joann Fabrics. The article Ecolab: Fewer Products Greater Profits, is fairly representative of the manufacturing sector’s intention to reduce product arrays. Ecolab plans to cut its product offering by 50% within three years. The WSJ article Retailers Cut Back on Variety, Once the Spice of Marketing is about the retail sector making a u-turn from its historical approach to product assortment. It is no longer about adding clutter to store shelves with continued addition of product line variations. According to the article, major retailers are expected to reduce product assortment by 15% within the year. If manufacturers and retailers rationalize their product offering correctly, they would gain better controls on excess inventory, improve inventory turns hence cash flow, and be able to exert greater bargaining power in negotiating price and terms with their vendors.
Despite obvious gains, the traditional method of slicing product offering by simply purging items with the lowest dollar sales needs to be revisited. A senior manager at a major retailer discussed their current approach with me as follows:
- Develop lists of SKUs by category in descending order of sales and also margin
- Identify SKUs, including top sellers, which compete with each other with the intent of keeping the smallest number of items that will deliver at least the same sales and profits. For example, if two-three (or more) products from competing suppliers represent 100% of sales mix but fewer items can generate all of it, the rest are candidates for removal. The procurement teams negotiate price and extract further concessions from vendors in exchange of more shelf space.
- Check items with low sales carefully for several factors before chucking out any product. For example, consider keeping new items showing rapid sales growth and items that are part of a natural basket of goods so that a missing small piece does not hurt healthy incremental sales.
- Replace branded staples with private label products where viable
The process of product rationalization has its share of pitfalls hence the need for caution. Unless the execution is overseen by an influential senior manager in a well-laid out process, such projects tend to go haywire, for instance, because of turf battles between product managers within a company. For example, product teams at an industrial company would phase-out products to “make the numbers” but later add them to a list of custom manufactured products to even greater detriment of their company. Some questions to consider if your company is considering product rationalization:
- How do I make sure that my product rationalization process is not flawed?
- What if sourcing from a sole vendor fails to deliver on quality or time?
- What about customer choice if only major brands supported by deep pockets survive?
- Would customers move to competition to buy what they need?
The one-stop-shop concept gets unprofitable if a grocer stocks, say, ten competing products with cheddar flavored microwave popcorn or a manufacturer offers good-better-best variations of a product without differentiating them by value or price. Yet, manufacturers and retailers who understand customer value in the context of a complete shopping experience and set commensurate prices will survive the days of deep cuts.
My seven year old enquired about our plans for earth day before leaving for school this morning. One is obliged to listen closely to influential consumers even if they don’t generate income or make purchases. Environmental consciousness is getting notice from manufacturers and retailers as they prepare to tap the burgeoning demand with innovative products and services and also modify their value message to customers. After all, green initiatives hold the promise of gaining market share with customers who identify value with earth-friendliness. The good news is that green efforts can be quite profitable whether they entail reducing VOCs and waste, energy conservation, reducing packaging costs or charging a premium for eco-friendly products.
A fortune 500 manufacturing executive recently mentioned that his company is positioning and pricing their new green products based on well-researched real and perceived benefits. Here are a few more cases of opportunity and realized success:
- The Yale School of Forestry and Environmental Studies conducted the telephonic survey last summer to understand the environmental knowledge, attitudes, policy preferences, and behavior of the American people. Many said they are willing to pay more for “green” products. Half responded that they would “definitely” or “probably” pay 15% more for eco-friendly clothes detergent (51%) or an automobile (50%). Four in ten say they would spend 15% more on “green” computer printer paper (40%) or wood furniture (39%). Perhaps surprisingly, Americans who perceive their current financial situation as either “fair” or “poor” indicated they are just as willing as those more confident of their current finances to spend 15% more on detergent and wood furniture.
- According to Target Corporation’s ad insert with the last Sunday’s newspaper, they are installing ultra-low flow faucets which are 80% more efficient than traditional faucets, have eliminated 400,000 pounds of petroleum-based packaging, recycled 983 million pounds of cardboard, providing 10% energy savings using fewer bulbs without decreasing light, now offering 700 organic foods in SuperTarget stores, worked with other partners to save 1,370,920 tons of carbon dioxide emissions, and so forth. For a company invested heavily in the customer’s shopping experience but is constantly compared with rival Walmart on price, is this not the right step?
- GE launched Ecoimagination as a marketing and PR effort in May 2005 with a $90 million investment. In 2007, the company generated $12 billion in sales of ecomagination products, which include wind turbines, super-efficient jet engines and long-lasting light-bulbs. By 2010, GE wants to make $20 billion in sales of energy-efficient, environmentally friendly products and funnel $1.5 billion a year into related research.
- Reduce, reuse, recycle, waste-reduction, eco-friendly, organic, efficient, green, gentle on nature, clean environment, natural, Energy Star rating, eco-options, eco-conscious, clean technology, clean energy, environmental conservation, locally growth foods, green buildings
In times of distress, it is natural to seek inspiration for reclaiming a positive mental state. While the current economic woes are real, it is planned optimism that fuels the determination to overcome this recession. The haikus below are dedicated to affected workers and their companies as we all take measure of this shared experience in our resolve to end it.
After the quake
Pointing to earth
- Micheal Dylan Welch
The earth quakes
To remind us
- Steve Sanfield
When the spade turns
The earth in our garden
How different it is
- Ion Codrescu
Source: From anthology compiled by Jackie Handy, Haiku: Poetry Ancient & Modern, Tuttle Publishing
In this global recession, retailers and manufacturers are frantically trying to fire up demand with aggressive price promotions. But companies who fail to do adequate due diligence before launching promotions may find themselves pushed to the brink. The liquidation of Circuit City and bankruptcies of several other retailers after a single disappointing holiday season should be reason enough to preempt such outcomes. Companies aspiring for sustained profitability should plan price promotions carefully to avoid diluting their brands and sparring wastefully with competitors. Here are the steps which differentiate planning behavior of two real companies, an airline and an industrial manufacturer:
1. Review sales data for peaks and valleys to scope the opportunities: which products, which geography, and how much weakness to fix. The revenue managers at the airline routinely review bookings to identify weak routes and days of low demand before deciding on the number of seats to discount instead of dropping all fares for a flight. In contrast, the industrial manufacturer runs quarterly price promotions with most of their product-line. They have trained their customers to wait for lower prices which their major competitor matches or undercuts easily.
2. Project sales volume with and without promotional discounts as well as expected competitive response. Calculate breakeven volume to set goals for incremental sales and minimize dilution through targeted promotions. While this seems like too much homework, the airline has a standardized process involving pricing, marketing, sales, legal and IT requiring final sign-off from a senior marketing executive – all completed within two days. Whereas, it takes 2-3 weeks of excruciating conference calls to get a semblance of coordination – mainly to assure senior managers about the enthusiastic engagement of the sale force.
3. Target specific products and customers with specific start and end date. This helps avoid the impression of a permanently lowered price. The airline has traditionally used processes to track promotions, to provide advance notification and to train all stakeholders involved in the execution. The industrial manufacturer struggles with ongoing issues due to lack of coordination. Plus, their end customers and distributors simply stock extra product forcing the sales reps to offer lower prices for several extra weeks.
4. Check sales and margin results against the goals. The senior marketing executive at the airline requests post-analysis at the end of each promotion to check incremental sales and effect on yield (price per mile). The managers at the industrial manufacturer simply move to the next fire drill. Not long ago, they ignored data showing that close to 50% of “promotional” sales came from existing customers.
Let’s sincerely hope that any company with problems like our industrial manufacturer will find a way to solve them before it is too late.
Many companies have developed solid pricing strategies and sales services – but without equally good pricing operations, these actions cannot deliver to full potential. The goal of pricing operations is to consistently control price deviations in transactional pricing over time and across customer segments. This goal of ensuring the prices are not too low or too high lends itself perfectly to Six Sigma Pricing TM.
Our approach to profit growth is evidence-based process redesign for executing strategy to full potential. We combine statistical analysis, process assessment, strategic consulting, tailored training, and coaching to elevate your organization to its desired state of pricing capability. We don’t just leave you with “advice” but collaborate to reach the future state where your pricing goals are achieved.
Whether you are a business leader, strategist, manager, or Six Sigma specialist, we can help you and your company recover profits that have been slipping through the cracks. Using this breakthrough approach, you can systematically eliminate pricing-related revenue leaks and drive higher profits without alienating customers.
2009 may well be the year when executives and their pricing organizations choose to focus on due diligence and operational controls. As companies are grasping for straws in this tough economy, managers are scrutinizing their pricing and other business practices to fix problems and loopholes. After years of economic boom, the rapid downturn appeared like a typhoon at a beach party. Sadly though, most companies and individuals affected are not deserving of such financial turmoil.
Senior managers seldom get involved in transaction pricing but can easily choose to do so. A few years ago, a COO of a mid-size industrial manufacturer stayed close to all aspects of a critical price action launched by his company. He created the burning platform for team alignment and process improvement that brought unexpectedly high returns. However, the gains were washed away the following year when his successor proclaimed process controls were unnecessary. Inarguably, customers and competitors determine market prices but it is robust internal processes that are critical for survival (remember Countrywide Financial and Société Générale). Senior managers should take an inventory of known pricing problems and start by fixing their “internal controllables”. This can often be done with in-house resources without additional cost and risk. The benefits, both intended and unintended, will stabilize the company and are likely to start reversing the ill-effects of recession.
Pricing professionals have the opportunity to be more visible within their companies. The credibility of the pricing function literal rests at the inflexion point with the choice of next step leading up or down. Pricing managers (me included) often lament at conferences about the lack of support from executives and other functions within their organizations. Given the current price pressure and earnings focus, everyone is willing to defer to functional experts who can guide sensible pricing actions. Without dispute, pricers can claim the right to synthesize pre- and post-analysis of planned actions, track results, support other internal teams and get the best support in return.
Senior managers and pricing teams (marketing, finance, sales, IT – all combined) need to agree on a roadmap for improving pricing processes and stick to it. In an unforgiving economy, managers can avoid missteps and delays, by evaluating failure modes to mitigate risk. For example, an industrial company mandated changes in discounting process without explaining or testing procedures with their sales people. To the company’s detriment, front line personnel were dissatisfied and used every loophole to beat the process. Therefore, a detailed action roadmap with clear roles, goals, and feedback is a must.
These uneasy times will eventually pass, hopefully this year, but there is much to fix. Smart companies will emerge stronger than ever riding on sound business practices. Senior managers have the choice of setting the tone for greater due diligence and process focus. Pricing professionals have the choice to champion processes for improving the quality of revenues. If 2008 showed that financial success is never final, 2009 could prove that it is a matter of making the right choices.
How can six sigma apply to pricing strategy – Six Sigma is good only for repetitive processes?
How can quality tools change the way companies (should) look at their pricing organization which is often distributed in marketing, sales, supply chain, finance and other functions?
What is Six Sigma Pricing?
I look for the nearest soapbox whenever I get these questions. Actually in anticipation of such questions, I had included the section, What Six Sigma Pricing Is and Is Not, in the first chapter of my book. Everyone interested in pricing agrees with two points, a) the need to align business objectives, pricing strategy (as part of business strategy) and pricing execution, and b) that pricing depends on and affects other elements of the business. But most business people tend to think of pricing as one rather-complicated activity rather than as a series of steps or processes resulting in pricing strategy or execution. This simple fact is the key to answering the questions above and unraveling many pricing quandaries.
Pricing strategy involves senior managers who are typically unavailable to oversee the execution done by multi-functional and multiple-level teams. The frequency of reviews or follow-up for different pricing actions also varies, for example, operating plans are developed or reviewed annually or quarterly, sales/ reviews/ price reviews can occur weekly, while transactional discount requests are managed hourly. In essence, pricing operations, as is the nature of operations, are repeatable processes. For instance, processes for designing and running promotions, choosing contract terms by customer segment, designing price floors and corridors etc. are all repeatable processes. If these repeatable processes are executed by tightly-knit multi-functional teams who follow standardized steps in using analytical tools, following guidelines, and reporting results, the ensuing price discipline does not only help price realization, but also helps in making better-informed strategic decisions.
My consultancy, also named Six Sigma Pricing, helps companies in improving execution capabilities with evidence based redesign of pricing operations. Although we use six sigma and lean tools, some steps need to be adapted given the organizational complexity around pricing which does not exist in traditional six sigma projects. As we did in the book, we are the first to assert that Six Sigma is NOT for designing pricing strategy although I personally have substantial experience in designing pricing strategy.
My work with several companies and over a hundred green-belt projects supervised by my co-author, Dr. ManMohan Sodhi, prove that Six Sigma Pricing can help overcome organizational complexity through better alignment between people, processes and systems. Whether a company has in-house Six Sigma capabilities or not, this toolkit identifies problems as well as causes, prioritizes actions so managers know where to start picking low hanging fruit instead of going after impossible goals, enables ongoing round-table discussions between executives and organizational layers of various functions, and finally helps improve and track processes that ensure improvements become permanent.
A Wall Street Journal article reported today, “For the first time in recent memory, luxury goods makers are cutting prices on designer apparel, shoes and handbags in the U.S. market.” Just a few weeks ago, I felt so sure that luxury brands would hold prices despite weakness in the global economy. After all, isn’t price the primary indicator of premium brand positioning? But it seems times are a-changing certainly in terms of how European luxury companies operate in the US.
Upscale retailers Neiman Marcus and Saks Fifth Avenue have reported significant drops in same store sales as the big spenders are “starting to scrimp”. Last month, Chanel led with price cuts of 7-10% on most items and others, Dolce & Gabana, Versace and Chloé followed quickly. Its worth noting that European brands stand to make record profits with increased sales even with reduced prices given the recent strengthening of the dollar against the euro. The Chief Executive of Chloé says, “This is an unusual time. You have to be creative at this moment”. The managing director of finance and analysis at Hermés says they will decide in January whether to raise or lower prices in the U.S. and Japan. These statements are in stark contrast to the long held belief that luxury brands don’t ever go down in price.
Kurt Salmon, former CEO of Saks Fifth Avenue described the situation as a “pyrrhic victory” for retailers. One hopes he is right. A 7 percent drop for a $8000 suit or a $1665 pair of shoes is not loose change but is it enough to sway the purchase decision for most affluent people? If the dollar weakens, should the luxury companies worry about gray market that will seep profits from non-US markets? Logically, luxury companies could affect pricing in specific product lines much like the white goods companies, say, based on the customer’s need for exclusivity. Perhaps, that is why Chanel did not reduce prices for all its products. The financial results in coming months will show if these companies can execute the price drop carefully enough to be able to protect the the integrity and exclusivity of their brands.
 Rachel Dodes and Christina Passariello, “In Rare Move, Luxury-Goods Makers Trim Their Prices in U.S.”, The Wall Street Journal Nov 14, 2008, B1