Fewer Products: Is Less More?
Posted on | June 27, 2009 | No Comments
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.
Tags: customer value > Ecolab > good-better-best > inventory turns > Joann Fabrics > product arrays > product assortment > product rationalization > value differentiation > Xerox
Green Products Greener Profits
Posted on | April 22, 2009 | No Comments
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
Tags: green pricing > Green products > pricing of eco-friendly products
Why Not Poetry
Posted on | March 31, 2009 | No Comments
In times of distress, it is natural to seek inspiration and guidance to reclaim a positive mental and physical state. While the current economic woes are real, it is planned optimism that fuels a growing 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
The weathervane
Pointing to earth
– Micheal Dylan Welch
The earth quakes
Just enough
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
Plan Pricing Promotions For Survival and Profit
Posted on | February 28, 2009 | No Comments
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.
Tags: breakeven > circuit city > pricing dilution > pricing promotions
What We Do
Posted on | February 12, 2009 | No Comments
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: The Year of Making the Right Choices
Posted on | January 1, 2009 | No Comments
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.
Tags: Add new tag > Due Diligence > operational controls > price pressure > pricing roadmap > recession pricing > transaction pricing
What Six Sigma Pricing Is and Is Not
Posted on | December 14, 2008 | No Comments
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.
Tags: pricing capability > pricing execution > six sigma pricing
Luxury Goods Price Cuts
Posted on | November 14, 2008 | No Comments
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.”[1] 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.
[1] 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
Lesson from Luxury Goods Pricing
Posted on | October 27, 2008 | No Comments
In this gloomy economy there are pockets of unreal abundance where the sun continues to shine brightly. Consumers are reining in spending as the tightening credit puts pressure on prices of products and services. Yet producers of luxury brands continue to hold the line. And profit. There must be a lesson here for the rest of us.
European brands Hermes, and Gucci Tod’s all published earnings that topped or met market expectations on the back of impressive double-digit sales growth in the first half. This performance is striking coming against a strong euro that has hurt many European exporters amid rampant inflation in raw-material costs. And Hermes, whose handbags start at 1200 Euros (US$1750) but fetch up to 50,000 Euros, said there were shortages for certain items, such as crocodile-skin handbags, particularly in Asia. In fact, Chanel, is planning a 20% price increase starting Nov 1, 2008. For context, the Chanel Classic Caviar Jumbo Flap Bag that typically retails for $2850 will go up by $570.
Volkswagen-owned, Bentley, is staying away from “forcing sales of new cars up” while demand is low. According to UK’s Society of Motor Manufacturers and Traders, Bentley has sold less than 1400 new cars so far this year, down 23% compared to last year. September was particularly bad, with sales plummeting 48% year-on-year. Despite the slowdown, they are telling their network of dealers to offer used cars at competitive prices as a way of keeping the brand healthy during the downturn.
All these brands consistently pursue a luxury pricing strategy, which means high markups and limited availability. For instance, Louis Vuitton commonly shortened to LV competes with Gucci, Versace, Prada and other luxury brands but pricing strategy follows horizontal differentiation. They recognize that different consumers have distinct preferences for lifestyle reasons, brand and product attributes. Since bags are also a crucial product for them in retailing, LV offers different leathers in many styles and colors. They protect their brand fiercely and spend a lot of money and legal effort in going after knock-offs. LV, like most luxury brands, never has sales or discounts even during Christmas time for fear it would devalue the brand.
It is amusing to discuss pricing of luxury products and easy to not take the conversation seriously. So what should firms, say industrial manufacturers, do differently? As a Bentley spokesperson remarked and, perhaps, explained for all luxury goods manufacturers, the integrity and exclusivity of the brand are their two most potent assets. For companies that fall easily in the commodity trap, even during economic boom, the lesson is to differentiate and protect your brands. As for consumers who desire luxury but cannot afford it, do what I do, spend a dollar on a Powerball ticket every six months. The chance of hitting the jackpot is certainly greater than the possibility of getting lower prices from some the luxury brands any time soon.
Tags: Brand differentiation > Price Protection > Pricing of Luxury Goods > Pricing Strategy
Who Owns Pricing?
Posted on | September 16, 2008 | No Comments
The Pricing Czar is dead. He lies in state with other forgettable organizational models propounded by consultants and academics. The idea behind this model, an all-powerful person could enforce unquestionable discipline, simply does not fit with human nature. Historically, people have given in to autocracy but have always revolted against it to find themselves in better or worse shape. Companies play out their own version of the Russian revolution where heads roll, thankfully, without the blood and gore. As a new pricing manager, I had once aspired for czar-hood to centralize the pricing function for my employer. Thanks to painful experiences and good as well as bad advice, I learned that an institutional “democracy” is the only prudent but not the easiest path for a pricing professional. The ongoing challenge for pricers is how to organize multiple functions and layers into successful pricing institutions.
One reason pricing processes in a company are complex is that they involve almost everyone in the company, or at least that is what everyone in the company thinks. Having varied groups with different views and incentives, sets the stage for pricing processes to be different across different companies depending on where the pricing function is located and to who it reports – pricing, finance, sales, or product management. Since pricing involves the customer, it involves the front-line groups, sales and customer service. Then there is marketing, which itself is a big and diverse group including marketing communications, brand managers, product managers, and marketing managers. Moreover, the senior managers invariably tend to lean on the decision process when the prospective customer is large or even potentially large. IT is involved as a support role because they create and/or maintain the enabling systems and reporting. Also involved is the pricing administration group and possibly, a multi-function pricing strategy group. The clout and effectiveness of the pricing function depends on where the pricing group is within marketing, sales, finance, and strategy or if it is a standalone group and with a clear control role. Many companies demarcate pricing strategy from tactics by having marketing own list price and sales own the discounts and hence the net price to customers. Oversight or control of realized prices is the responsibility of the pricing or finance group. While this explains roles at a high level, most price-related actions generate emotion because roles and responsibilities remain unclear and get constantly re-defined in the what-who-when of action plans.
For pricing professionals who care for process improvement, turf battles should not be an agenda item. Instead, they should gain influence as “community organizers” who proactively look into pricing issues, identifying root causes, and supporting and getting support from different groups by showing evidence how they can gain from it. This sounds utopian yet quite practical within the scope of a full-time job. Even tenured employees in established organizations can map pricing processes and analyze data to understand pricing issues. My book, Six Sigma Pricing, has a tool-kit on how to frame issues and overcome them without alienating colleagues and customers. Collaborative actions to achieve shared goals align people with business strategies and pricing execution. The Pricing Czar is dead. Long live the Pricing Organizer!
Tags: Collaborative Pricing > Price Czar > Pricing Organizer > six sigma pricing
About the Author
Navdeep S. Sodhi founded Six Sigma Pricing, a consultancy based in Minneapolis and London. He is co-author of the first book on pricing operations, Six Sigma Pricing, as well as the seminal Harvard Business Review article.
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