Tag Archives: Pricing Strategy

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.

 

What Six Sigma Pricing Is and Is Not

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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.


Lessons from Luxury Goods Pricing

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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.