Plan Pricing Promotions For Survival and Profit
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.
Six Sigma Pricing