No Pricing Power in this Economy?

I read an interesting comment in an Associated Press story this morning:

Inflation a no-show in July, likely to stay muted
By MARTIN CRUTSINGER (AP) – 18 hours ago

WASHINGTON — Inflation was a no-show in July and likely will stay away for months to come, giving the Federal Reserve room to keep invigorating the economy with record-low interest rates.

That was the message economists took from a report Tuesday that wholesale prices fell over the past 12 months by the sharpest amount in 62 years of record-keeping — the latest sign that inflation is posing no threat.

"In this economy, there really is no pricing power at all," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.

These sentiments were echoed in Bloomberg:

U.S. Consumer Prices Unchanged, Matching Forecasts
By Timothy R. Homan

Aug. 14 (Bloomberg) -- The cost of living in the U.S. was unchanged in July, and dropped by the most since 1950 from a year ago, as the recession sapped companies’ pricing power.

Do companies truly have no pricing power in the current economy? Perhaps not in the traditional sense, as the ability to increase prices is at present severely limited by both a reduction of consumer expendible income as well as a general consumer spending anxiety. But that does not mean pricers have no control over their destinies or bottom lines when it comes to pricing strategy. (The upcoming Q3 PPS Journal presents a timely, in-depth article from Hermann Simon, chairman emeritus of Simon-Kucher & Partners, which highlights several strategies pricers can implement to mute the effects of the current economy. I know you will enjoy it!)

Many companies are turning to price reductions and steep discounting as tactics for attracting penny pinching consumers. Rumor has it that Sony is finally letting go and dropping the price of the Play Station 3 to $299.00, making it a more accessible purchase to a wider audience than before. CNNMoney.com recently stated: "Wal-Mart has won market share during the recession by relentlessly lowering prices -- a strategy echoed in its advertising slogan, "Save Money. Live Better." Obviously companies as large as Wal Mart have an increased ability to withstand economic downturn than others. However, pricing is one of the most powerful tools companies can employ - especially in a down economy - to maintain liquidity, profitability and long-term sustainability.

Some companies still aren't afraid to raise their prices, as the Wall Street Journal recently highlighted:

"NEW YORK (Dow Jones)--Walt Disney Co. (DIS) raised admission prices between 2.5% and 5.3% at its largest theme park in Orlando, Fla., over the weekend, even as it offers other deals to spur demand from consumers cutting back spending on vacations amid the recession.

The uptick in admissions prices at Walt Disney World was smaller than similar increases the company has made in recent years, but the move still reflects confidence that Americans will continue to come to Florida in search of Disney magic even as job losses mount."

Disney's brand power is strong enough to give the company flexibility to price as they need. In response, Universal has raised their daily ticket prices as well. Pricing power? Seems a yes to me. What do other pricers think? Warmly, EM

Pricing for Product Managers

This economy is presenting both unprecedented challenges and exciting opportunities for pricers.

For those pricing professionals who can embrace the challenge, apply ingenuity and sound pricing strategies, and be agile enough to benefit for opportunities despite the obstacles that the business community as a whole is facing, they can build a foundation of success now that will catapult them ahead of the competition when the economy rebounds.

The Accidental Product Manager blog wrote a very interesting article covering this piece from the product manager perspective, citing the Wall Street Journal's recent coverage of how businesses are coping with the downturn:

"One thing that they’ve discovered is that when the economy tanks, this is a great time to prepare for the future by getting your customers to trade up. This sounds rather backwards right? I mean when times get tough, people tend to trade down. Even though the margins on your stripped down products are skinner, most product managers think that SOME sales are better than none.

"In emerging markets, product mangers have realized something much deeper. They get their customers to trade UP to premium products even though corporate budgets may be tight.

"The key to doing this successfully is to be very, very careful about how you set the prices for the different tiers of your product offerings. You can’t make the price differences between basics and premium products too much or else your budget constrained customers will get turned off.

"Instead, what you need to do is to accept a lower profit margin on your premium products - in fact, lower than most companies are normally willing to accept. However, we are not currently living in normal times. You want to signal to your buyers that your premium products are a good value.

"If you can signal to your customers that your premium brand is offering them more value for the money, then they will be both more willing to trade up to it as well as to stick with it during hard times."

The Wall Street Journal expands the perspective even further, examining how companies can learn survival strategies from companies in emerging markets who, despite the fact the current economic slump is global in scale, are taking the offensive as opposed to hunkering down and hoping the storm will pass.

"As Western companies struggle to navigate the worst economy in generations, here’s one piece of advice: Look at places where volatility is business as usual—emerging markets.

"In these countries, companies have learned they can’t just hunker down when bad times strike. They have to go on the offensive. In Eastern Europe, South Africa and Latin America, managers look at tumultuous times as a chance to implement bold, creative ideas, outflank rivals and boost their business.

"That means coming up with new ways to price their products. Or scrapping old marketing approaches. Or focusing on figuring out where the economy is heading next—and how to use that information to grab market share."

The article gives four tips for businesses seeking ways to survive and thrive in the current downturn:

1. When the economy is down, get customers to trade up.
2. Increase product and service visibility.
3. Rethink what customers value.
4. Look at new metrics.

Read the full article: "Surviving the Downturn: Lessons From Emerging Markets."

Pricing in an inflationary downturn

Continuing on our subject of pricing in a downturn and, more specifically, in an inflationary downturn, The McKinsey Quarterly (a great resource for pricing articles and research) released a great article to guide companies through pricing hurdles in this uncertain economy.

"In the current environment, costs are rising as price sensitivity increases. Six tactics can help companies get pricing right."

"Getting pricing right is always a challenge in an economic downturn, as decreasing demand, excess capacity, and greater price sensitivity all conspire to drive down prices. In most downturns, the cost of raw materials, feedstocks, and other upstream supplies—as well as the cost to serve customers (for delivering goods, for example)—tends to stabilize and even decrease as business activity slows. As a result, decreases in downstream prices are at least partially offset by lower upstream costs. But in the current environment, not only is weaker demand from the end user making it harder to maintain prices, but significantly higher and more volatile input costs mean that companies caught in the middle are getting hit from both sides.
What’s a business to do?"

• Watch for sudden shifts in price structure


• Monitor customer-level profitability


• Adjust to changing customer needs


• Update price sensitivity research


• Monitor your industry’s microeconomics


• Study your suppliers

Read the full article: "Pricing in an Inflationary Downturn" The PPS pricing article archives also have great resources, including "Coping with High Inflation" and "Navigating Inflation's Hazards", to name a few.

Consumers Want Low Prices, the Economy Needs Price Increases

Our continued economic woes and inability to restart the economy have led us to an interesting conundrum. The cost of goods and services is increasing beyond the level of high end goods. It is hitting consumers where it hurts - in everyday needs and expenses.

As a result, expendable income for many people is dwindling daily. Most consumers are severely tightening their budgets, saving what they can and seeking low prices where ever they can. Retailers and vendors, as we have seen, are responding with lower prices, demand pricing and more, doing their best to capture or re-capture what they can from the dwindling consumer pool. We have had many interesting discussion over the past couple of months about these various pricing strategies and how they are working in different industries.

As the LA Times recently reported: ("Shoppers are in the market for lower prices")

"Supervalu CEO Jeff Noddle discusses how the economy is affecting the grocery business."

"People are buying more private label products, they are using more coupons, buying cheaper cuts of meat and they are stocking up during promotions. Basically, shoppers are doing all you would expect them to do in a period of inflation and a down economy. This has probably cost us 1% of our sales.

"Last year was the biggest year for food inflation in nearly two decades. Energy and grain prices were blamed for the increases, but now that they have sagged can we expect manufacturers and food producers to lower their prices this year?

"I think we will see the rate of inflation go lower as the year progresses. In the interim, though, it's kind of a battleground with manufacturers right now. We are pressing for a reduction in prices. We are pushing hard.

"I don't think the economy has felt the whole impact of the job reductions and layoffs yet, and as it continues to soften the manufacturers will have to be more aggressive with prices or promotions."

Normally, cutting prices would be a good thing right? Cost of goods would be going down and consumers would be buying more. However, now economists fear the effects of record costs of goods coupled with price cuts and reduced spending. Further price cuts from struggling retailers, economists say, can at this point only do more harm than good.

As CNNMoney.com reports: ("Warning: Falling price zone ahead")

"Deflation has become the No. 1 fear of a growing number of economists, who worry that lower prices will further hurt the economy"

"Rarely has the potential for lower prices been so scary.

"While many cash-strapped Americans would welcome paying less for what they need to buy, many economists now say the possibility of deflation, or lower prices, is the greatest threat to the U.S. economy.

"And more deflation warning bells are ringing.

"On Thursday, the government reported that the Producer Price Index, which measures inflation on the wholesale level, fell on a year-over-year basis for the first time in five years.

"The Consumer Price Index, the government's key inflation reading, is due out Friday. Economists expect a decline in overall prices for the month of December.

"Some economists are forecasting the first year-over-year drop in the CPI since 1955. As recently as July, the CPI was up 5.5% over the previous 12-months.

"Economists worry about deflation because it is a sign of the ever-weakening demand for products. But it can also be a further drag on economic activity by cutting into the willingness of both businesses and consumers to start spending again.

"Businesses worried that the price of their products may continue to drop would be likely to cut back production. That can lead to additional plant closings and even more job losses. And even consumers who don't lose their jobs are likely to delay purchases, particularly of large-ticket items, if they think lower prices lay ahead."

So, what to do pricers? Further decrease prices and cut profits even more to try and capture what's left of a dwindling consumer spendable income pot? Of course retailers are going to do what they need to for survival. But can manufacturers continue to cut costs and keep their doors open? Even giants like Wal Mart are starting to feel the pinch and cut jobs. And how much more can the economy handle? What are the keys to pricing in a downturn? More commentary soon, EM