Monday, September 29, 2008

UK Retailers-Are they headed in the Wrong Pricing Direction?

The current economic situation isn't just affecting the U.S. Retailers in the UK are also facing sharply increasing costs including higher fuel and utility bills, as well as the sudden weakening of the pound and soaring cost increases from suppliers in Asia. In response, these retailers making gambles with their pricing strategies to attempt to pass some of these increased costs onto consumers. But will these strategies back fire and do more damage than good? Will this attempt to compensate cost only reduce volume from customers who are also feeling an economic pinch in their personal finances? The situation poses the question: "Is it more important to try and maintain sales levels with a slightly squeezed ... margin, or is it more important to have a better margin with a lower volume of sales?"

"British clothing retailers, facing sharp cost increases, are planning a gamble that could backfire by raising prices next year in what could be one of the worst consumer downturns in 30 years.

Top chains such as Marks & Spencer Group Plc, Next Plc, Debenhams Plc and Top Shop owner Arcadia are not only struggling with higher fuel and utility bills, but also the sudden weakening of the pound and soaring cost increases from suppliers in Asia.

The rising costs present retailers with a major problem.

If they cannot pass the increases on to shoppers -- in a market some analysts reckon could be as tough as the recession of the late 1970s -- their profit margins will be hit, and if they do pass them on their sales volumes will likely suffer."

Read the full article: UK clothing retailers' price gamble may backfire.

PPS Price Optimization Survey Highlighted in B2B Marketing Article

An effective pricing strategy can be one of the biggest influencers of profit margins for a company, yet it remains one of its most complex functions and one of the areas allocated with the fewest resources. Yet, according to one of our recent surveys, pricing strategies have gained a lot of attention from C-level executives, including purchasing and supply chain officers. This article from Industry Week references the Professional Pricing Society survey, and focuses on how more and more companies are turning to pricing technologies to increase profitability. Thanks to Zilliant for their participation in this study!

"One of the key points made in the survey was the growing focus on pricing among top-level management, as a vast majority of respondents (82%) cite "high" or "very high" levels of executive attention on the pricing function. According to Eric Mitchell, president of the Professional Pricing Society, pricing strategies have gained a lot of attention from C-level executives, including purchasing and supply chain officers."

Read the full article: Price Check on Manufacturing.

Friday, September 19, 2008

Update on the 99 Cents Store

Has Canada answered the 99 Cents Question with its $5 Store?
"First, five-and-dimes gave way to dollar stores. Now, inflation pressures are threatening to make the dollar store a thing of the past, too.

Dollarama Group LP, Canada's largest dollar store operator, is set to abandon its "all at $1" pricing strategy at its 536 stores in the new year, the company said yesterday.

After Feb. 1, Dollarama will introduce three new price levels - $1.25, $1.50 and $2 - though it says the majority of items will still sell for $1.

"After 16 years at a dollar, we've found in the last few years sourcing dollar products has become a little more difficult," Dollarama chief executive officer Larry Rossy said in a rare interview. "Meanwhile, during our recent buying trips [to Asia] we were consistently offered 'wow' items at the $1.50 to $2 price point."

Read the full article: Million-dollar question: Are $5 stores up next? Sounds like the the 4.99 idea is spot on. Thanks to our bloggers Per Sjofors and Rafi Mohammed for their thoughts

Pricing Science

Managing Automation recently posted an article discussing the importance of solid, scientifically based pricing strategies in the health and success of an organization:

For a long time now, the practice of product pricing has involved more art than science, with product managers and sales professionals governed mostly by what "felt right." In recent years, however, science has started to gain the upper hand, and the sun may be setting on the era of "pricing by the gut."

In manufacturers' never-ending quest to turn over every stone that may yield better profits and allay the pressures of a bustling global marketplace, the list of strategies is long and growing: business-spanning ERP systems, lean manufacturing, collaborative networks that tie in partners across the supply chain, and outsourced labor, to name a few. An item that only recently made the list is one that seems the most obvious, at least in retrospect: pricing science.

Many in the pricing field have agreed, asking the question:

Despite its direct impact on margins, price is easily the most neglected aspect of operational infrastructure. So why is price strategy and optimization all too often neglected?

Post your thoughts and weigh in your opinions about why pricing is often treated so casually, despite its importance to profitability, especially in economic conditions like we are currently facing.

Wednesday, September 17, 2008

Sunday, September 14, 2008

What Would You Do If...?

If You Were CEO if 99 Cents Only Stores?
As a new feature for our recently launched PPS blog, I invite you to participate and contribute your perspective, on some of today’s real world pricing issues.
Below is the first in this series of “What Would You Do If?
Eric Mitchell,
Founder and Chairman, the Professional Pricing Society.

Ninety-nine cents just doesn't go as far as it used to, and that's a problem for 99 Cents Only. Faced with rising inflation and soaring food prices, the large retailer ,founded in 1982 --- known for never selling anything for more than 99 cents — is re-evaluating its pricing strategy.

According to the LA Times (9/2/2008,) Chief Executive Eric Schiffer said "There's no question we're going to need to do something," said after the company reported its second consecutive quarterly loss. "When you are part of a family that comes up with a concept, sometimes you're the last to admit that it needs to be changed."

99 Cents Only, pioneered the single-price retail concept. It has expanded to 277 locations, mostly in California but also in Nevada, Arizona and Texas.
The deep-discount retailer sells groceries, household supplies, health and beauty products, and it remains one of the few true "dollar" stores.

Competitive Landscape

At discount chain Dollar General , current promotions include $8 backpacks and $2 for a box of Ziploc sandwich bags. Family Dollar Stores, a chain of more than 6,500 discount stores, currently is advertising Glad trash bags for $4.99 and Huggies diapers for $9.99. In fact, keeping prices at a buck or less was never part of the overall pricing scheme at Family Dollar, an large competitor based in NC.

99 Cents Only is able to offer such low prices because of a business model that is "not based on having every single variety of every product out there," said President Jeff Gold.

But lately, the company just can't get a wide-enough or attractive-enough selection of goods that it can turn around and sell for such a low price, Gold said. According to the Bureau of Labor Statistics' inflation calculator, 99 cents in 1982 has the same buying power as $2.26 in 2008.

By capping prices at 99 cents, the chain has had to play around with the quantity and size of its goods, which can confuse customers.

But "The number 99 is a magic number — deviating from that is something we absolutely are not taking lightly," said Gold, "I find significant discomfort emotionally about considering making the change."

OK Pricers ---What Would You Do ? -- If you suddenly were appointed as the CEO of 99 Cents Only.

Tuesday, September 2, 2008

One Laptop per Child: A Case of Action Pricing

This is one of my favorite Case studies from the Pricing Advisor Newsletter, Jan. 2008 EM

Tech-savvy people, as well as the socially conscious, have been intrigued by the idea of "one laptop per child" since it made a splash as a formal initiative in January 2005 at the World Economic Forum in Davos, Switzerland. It was proposed by Nicholas Negroponte, co-founder and chairman emeritus of the MIT Media Lab.

The time seemed ripe: The One Laptop per Child (OLPC) Foundation quickly signed up Google, News Corp., AMD, Brightstar, and Red Hat. Taiwan-based Quanta Computer Inc. agreed to manufacture the laptop.
On the technological front, OLPC tackled puzzles, such as creating a product both useful and fun for children of primary school age.
But despite its visionary goals and widespread public interest, OLPC has encountered more difficulty than anticipated in nudging governments from polite handshakes to cash commitments.

One problem: the price. Although originally envisioned as the "$100 PC," OLPC has struggled to bring the price below $175. And now it faces competition in its low-cost market from for-profit powerhouses such as Intel, Dell, and Lenovo.

Such wide-ranging issues are the focus of the case, coauthored by Harvard Business School (HBS) professor John Quelch and Carin-Isabel Knoop, executive director of the HBS Global Research Group.
The first countries to give the thumbs-up for their children were Libya, Uruguay, Rwanda, Peru, and Mexico. Of course, OLPC aspires to obtain many more commitments to fulfill its vision of "one laptop per child."
Herein, marketers find much food for thought.

According to Quelch, a HBS professor of marketing, the laptop’s creation and diffusion are special for several reasons. They form a perfect example of the evolution of "action pricing"—setting an audacious price goal and then "engineering backwards" the design of the product to meet it. The laptop typifies technological breakthroughs that influence the mainstream in ways that could have a large potential impact. The diffusion also suggests the stumbling blocks any company would encounter globally when carrying out such a worthy but ambitious goal.

The whole story further points to the personal challenges that face the originator of a cool nonprofit idea when "me-too" for-profit companies seek to compete for the same customers.

Action Pricing in ActionQuelch notes that action pricing has occasionally been used by consumer durables manufacturers (refrigerator makers, for example) when they decide to build a particular product priced very attractively for consumers.

With the XO laptop, action pricing met a new level of complexity. OLPC set a price goal, $100, which seemed challenging but doable based on the XO’s technological building blocks—such as its reliance on freely available open-source software. In addition, OLPC had to determine the right mix of attributes and features that would appeal to the target users, children. Design could not be an afterthought; the laptop had to be attractive enough so a young person would feel proud to own it.

The XO also required network capability to encourage collaborative tasks from writing assignments to playing digital instruments. At the same time it needed to address constraints such as the lack of electrical power in many remote rural areas—a problem the XO solves in several ways. Kids can recharge the battery by pulling a cord or attaching a solar panel, and the battery itself is long-lasting.

Breakthroughs and ImplementationThe XO laptop also illustrates how goal-setting can raise the bar in an industry.

"A number of technology breakthroughs were part and parcel of the development of this product. They could potentially be extended later to the benefit of users of all PCs," says Quelch. Unlike most laptops, its screen is easily readable even in bright sunlight. Users can save power by switching the screen from backlit color to self-reflecting monochrome.
"Using less power meant generating less heat, obviating the need for a power-consuming cooling fan," according to the case.

Despite these design and technological advances, the XO laptop has faced its biggest challenges in the realm of adoption and diffusion, says Quelch. Although it is set for distribution to kids in the above-named countries, its boosters have faced a long road to seal the deals, and a lot of work lies ahead.

"While on the surface it is a laudable vision to get one laptop to each child, and the motives are pristine, there are stumbling blocks in implementation," observes Quelch.

The conservative nature of governments, complex bureaucracy, and decision-making hurdles can all interfere with early public sector adoption of even the most worthy innovation, he says. This slower-than-expected adoption and diffusion may have surprised the leaders of OLPC.
"I think they may have underestimated the political roadblocks that could be put in the path of adoption. If you are a technology-centric person in the West you don’t think in terms of a computer replacing a teacher; but in a budget-strapped developing country environment, resources are so limited, there aren’t enough teachers. Should PCs absorb money that could pay for additional teachers?"

Hot Competition

Even as the OLPC experienced delays in securing orders, potential competitors were taking notice. The so-called bottom-of-the-pyramid market was now a focus of attention from mainstream PC makers facing maturation of their markets in developed countries.
According to the case, "In July 2007, PC maker Everex announced it would start selling its PCs at Wal-Mart for $298. Microsoft launched the $522 IQ PC aimed at children in India. Moreover, in August 2007, Lenovo, which manufactures a third of all computers sold in China, announced it would offer a laptop priced between $199 and $399 targeted at China’s rural population. The PCs would plug into TVs instead of monitors. Lenovo, based in China, planned to use its network of 5,000 dealers to sell the laptops."

It wasn’t just PC makers that were attracted to this new market. Chip giant Intel did not want to relinquish a potentially lucrative market to its key rival AMD, an early supporter of OLPC. Intel is promoting the low-cost Classmate PC, which retails at a price higher than, but is in the same ballpark as, the XO laptop. (Intel also joined the OLPC initiative in July 2007.)

As the case shows, Lenovo and Intel are established players "who saw the initiative, understood its significance, and then brought their commercial resources to bear on further developing their product lines to address the emerging need."

Quelch adds, this "must have been faintly depressing if you were the originator of the idea, now seeing your idea being imitated.
On the other hand, a socially responsible not-for-profit leader should surely be pleased when the commercial sector is motivated to bring its resources to bear on the problem at hand, and prospectively accelerate the distribution of low-cost personal computers to more people much faster than would have occurred otherwise."

The case challenges students to see entrepreneurship in a new light. It is the mark of an extraordinary entrepreneur, the originator of any breakthrough idea, to see beyond his or her own personal "ownership" of the concept and to let the solution to a problem take precedence—in this case, children the world over can access the educational aspects of computing.

OLPC has made a difference already because it changed the landscape in terms of dreams and expectations. Observers can see what makes the goal of one laptop per child difficult to achieve. Says Quelch, "When you envision something as powerful and transforming as this concept, it is exceptionally easy to identify so many implementation problems that you simply give up.

One key to new product development is to keep the ambition of the vision always front and center to motivate you to solve the many problems that you’re going to confront." One laptop at a time.