Knowledge Is Power

Cost and Pricing Pressures Squeezing You?

Are higher commodity prices affecting your industry and can you pass them on? On Jan 28, 2008, Hershey’s announced a 13% increase in the prices of about 1/3 of its chocolate products because of higher costs for milk supplies and energy related costs. How will this price increase affect demand from consumers and its positioning vs. competitors?

Hershey is putting a positive spin on the increase by claiming it has more quality ingredients that competitors, "While we have no way of knowing what others are thinking, or what their cost situation is, we do know that within the category our products include far more pure milk chocolate and solid chocolate than our competitors," Hershey spokesman Kirk Saville told Associated Press in an article published on msn.com’s food section on Jan 28, 2008.

Will competitors Mars and Nestles respond and if they will, how? Confectionary vendors can effectively raise prices with other tactics besides the obvious. They can:
• Change cost structure for distributors; lower rebates, co-marketing funds, etc.
• Reduce the size of the product while maintaining the product price
• Increase the size of the product, but increase the price proportionately more
• Add value to the product; “new improved!”
• Introducing new products at higher price points

They can also maintain prices while seeking to lower costs to maintain margins:
• Switching to lower cost ingredients
• Changing sourcing or distribution practices
• Upgrade manufacturing technology

They can do one to all, of the above, but not all quickly and not all simultaneously since some would take years to implement.

What do you think Mars and Nestle will do, if anything, to respond to Hershey’s price increase, and the underlying cost pressures that must affect them also although not to the same level?

How Difference Are Prices Internationally?

Are professionals in South America, Europe, and Asia paying the same amount for computer equipment as your company? The answer may surprise you.

I managed a study some years ago of the pricing of computer gear by four vendors in twelve countries around the globe. We researched list prices, actual or “street” prices, discount levels, common negotiating techniques, buy vs. lease proportions, restrictions on imports, and other cultural factors.

When we finished and analyzed the findings, the bottom line was that actual or net prices were very similar around the globe. Countries with traditions of engaging in extensive negotiations prior to purchase had higher list prices and higher discounts. Conversely, countries where most purchases were made at set prices with little haggling had lower list prices and lower discounts.

This group of competitors was adjusting prices to suit the cultural norms and expectations of each country. Does your organization sell internationally and does it take attitudes towards negotiation and the perceived value of discounts into account? It should.

Love those Bankruptcy Filings!

SAP lowered its annual fees to Delta Airlines by 27% from $3,740,000 to $2,732,000 through 2009 subject to annual increases of 2% in 2007 and 4% in 2008 according to a Dec 13, 2006 article in InformationWeek, “SAP Agrees to a 27% Reduction in Software Fees Charged to Bankrupt Delta Airlines.”

Are you a competitor of SAP’s seeking pricing information? If so, obtain the full document to help understand how SAP prices for large customers. The filings may not lay out a complete picture of Delta’s SAP usage, but combined with other information, you’ll have great intelligence.

If Customers Think it is Competition, then it is!

Ask Sprint and Verizon if their new music download services to mobile phones really competes with Apple’s iTunes and they will probably respond “No.” But iTunes $.99 download fee set an expectation in music lovers’ minds about what a reasonable “download” price would be.

Market research firm Strategy Analytics studied the phone companies’ offerings and found that “Sprint charges $2.50 per song for over-the-air downloads, which is two-and-a-half times more than the cost of purchasing a song from Apple's iTunes online music store and downloading it to a desktop computer. Verizon Wireless' price for over-the-air downloads is slightly less and it offers even less-expensive prices when music is downloaded via a PC.

Both pricing schemes are far higher than end users are willing to pay, the study concluded.

‘Our research suggests that users are willing to pay a premium of around 35 percent for the convenience of downloading tracks to both their wireless devices and PCs -- subject to reliable network performance,’ Kevin Nolan, head of the research firm's Advanced Wireless Laboratory, said in a statement. ‘In our view, the current 100 to 150 percent premiums charged by the main operators make adoption of these services highly unlikely.’"

Competition, like beauty, is in the eyes of the beholder, i.e., customer.

“Cellular Music Offerings Doomed by High Prices” David Haskin, InformationWeek Daily 5/22/06

Your Competitor is Shrinking?

Great, you think. The organization must be having financial problems. Not so fast as the Boston Globe pointed out in an article on the shrinking size of most major league ballparks. (April 20, 2006). We Bostonians have been hearing the Red Sox management crying for years about the pathetically small Fenway ball park. Turns out less is more; less capacity is more money.

“Since 1995, average seating capacity at major league parks has fallen 11 percent, from 51,106 to 45,395. At the same time, average per-game attendance has jumped 22 percent, to 30,936. And as tickets have gotten scarcer, the prices have more than doubled, to an average ticket price this year of $22.21, according to Team Marketing Report.”

The perception of scarcer tickets drives season ticket sales, leaving fewer seats for individual games, which drives season ticket sales, and so forth. While a ball park in California does not compete directly with Boston’s Fenway Park, the principle is the same.

Has your competitor altered its capacity because of a change in pricing strategy, or because of a slowdown? Check it out since your competitive response will vary greatly depending upon the answer.

Mystery Shopping Becomes More Mysterious

The vast majority of my pricing research has been in the B2B sector, not consumer.  It’s been easy to hire mystery shoppers to visit retail outlets and check prices.  Not any more!

A recent study done by the Annenberg Public Policy Center of the University of Pennsylvania titled “Open to Exploitation” shows how much more variable consumer pricing has become.  (Copy of study available at www.annenbergpublicpolicycenter.org.)  We have all seen the signs in the grocery stores with two different prices; one for store card holders and one for non-holders.  Now the study hints at the extent to which online pricing varies by individual characteristics and behavior.

Researcher Joseph Turow cited examples in an article on CNN.com June 1 “Study:  Shoppers naïve about retail prices online.”  “First-time buyers at a retailer could see higher prices than a firm's repeat customers, and retailers may not offer discounts to consumers who buy the same brands regularly without even looking at alternative products on the same site.” And  “Turow found a retail photography Web site charging different prices for the same digital cameras and related equipment depending on whether shoppers had previously visited popular price-comparison sites.”

He points out that “Changing prices is generally lawful unless doing so discriminates against a consumer's race or gender or violates antitrust or price-fixing laws.”  And the study showed that “… 87 percent of people strongly objected to the practice of online stores charging people different prices for the same products based on information collected about their shopping habits.”

So not only should the buyer beware, but the competitors should too!

Pricing Should Be CI Priority

Why?  Because prioritizing pricing CI brings higher returns.  According to a McKinsey study completed two years ago, the average Standard & Poor 500 firm would leverage a one percent rise in prices into an eight percent increase in operating profit while the benefits from a one percent decrease in operating expenses were 50% lower.

Pricing is actually quite complex and a price increase is not necessarily an across-the-board rise in listed prices.  Other factors included in pricing for the ultimate buyer are shipping expenses, payment terms, return policies, volume breaks, promotional or trade allowances, segmentation pricing (as in fares requiring a Saturday night stay over vs. mid-week round trips), delivery times, and support such customization or installation.

The article “Top-Line Impact” in the

May 9, 2005

issue of InformationWeek discusses these issues while focusing on the question of purchasing and installing a six-figure pricing analysis package.  One in-page head line said “Find good data which to make price decisions can be hard.”  And the article only once mentions competitive information.  The discussion centered on internal sources of pricing data.  Even without a software package (which can very valuable), organizations should have a good understanding of how their pricing philosophy and structure compares to the competitions’.  Pricing research can be done legally—it just needs to be done carefully to avoid any appearance of illegal price collusion.