Pragmatic Competitive Intelligence for Pricing Precision

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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 came through at much better historical 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.

 

Deconstruct for Costs then Reconstruct for Value

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Value-based pricing is accepted as 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:

  1. Activities-based costing, at least for customer-supporting (and related) activities
  2. Find if any activities related to customer were outsourced where, directly or indirectly, your company in incurring cost
  3. 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.

 

Fewer Products: Is Less More?

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Protecting profits through inventory management is being mentioned 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 offering a vast product assortment.  It is no longer about adding clutter to store shelves with ongoing 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 could rationalize their product offering, they stand to gain better control of excess inventory, improve inventory turns hence cash flow, and in turn gain bargaining power to negotiate price and terms with 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:

  1. Develop lists of SKUs by category in descending order of sales and also margin
  2. 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.
  3. 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.
  4. 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, internal turf battles 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 which was likely to hurt the company even more.   Here are some questions to consider if your company is planning a product rationalization initiative:

  • How do I make sure that my product rationalization process is robust?
  • What if sourcing change, from multiple vendors to a sole vendor, fails to deliver quality or on time?
  • What about smaller customers if only product lines 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.

Why not Poetry

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In times of distress, it is natural to seek inspiration to reclaim a positive mental state. While the current economic woes are real, it is optimism that fuels the determination to overcome any problem including this recession. The haikus below are dedicated to affected workers and companies as we take measure of this shared experience in order 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