More Price Cuts in the High End Market

We have been talking a great deal about how different industries are being affected by the current economic mire, especially industries driven by consumer spending. Another industry is beginning to cave quickly, following in the footsteps of consumer electronics and other non-essential commodities:

"Luxury handbag maker Coach Inc. is bowing to consumers’ stubborn refusal to spend, lowering its prices 10 percent to 15 percent and offering more handbags under $300, executives said Wednesday.

"The lower pricing has already begun and should be fully implemented by fiscal 2010, when Coach will also cut the number of new stores it plans to open in North America to 20 from 40 and halt retail store expansion.

"The moves show just how much luxury retailers are suffering after the weakest holiday season in decades."

Read the full article from the Associated Press: "Coach trims prices, new stores". Cruise lines are also slashing prices and introducing larger, grander ships in an effort to fill bookings and attract would be travelers. Despite the abysmal year many retailers are facing, the cruise line industry is actually optimistic about its prognosis for the year:

"Vacationers who hit the high seas this year will find a treasure-trove of bargains -- and that's not all. At least 14 new ships, including the world's biggest behemoth and two intimate luxury vessels, plus innovative facilities and more U.S. departures, are on the way."

"Unlike your stock portfolio and many businesses these days, cruising is a growing enterprise. Cruise Lines International Assn., the industry's largest North American organization, says its members expect to carry 13.5 million passengers this year, up from 13.2 million in 2008 and 12.6 million in 2007."

Read the full article: "Cruise lines introduce ships big and small, and drop prices". Although the article reports that cruisers may face higher prices in some areas, such as on-board activities, the cruise lines are introducing new pricing packages and models to keep the industry growing in 2009:

"Besides fare discounts, some sailings come with free airfare, cabin upgrades, onboard credit and other money-saving extras. Many lines have relaxed deposit and cancellation rules, making it easier to get a refund if you decide not to go.

"For the best deals, steer your shopping to older vessels, longer itineraries and distant destinations. New ships and departures from some U.S. ports can still command top dollar, said Mike Driscoll, editor of Cruise Week, an industry newsletter based in Brookfield, Ill."

Will consumers continue to spend money on vacations even though they are cutting spending in virtually every other area? We will watch as the year unfolds. Cruise lines, despite dropping prices, are making up for some of the costs in other areas, such as increased fees or by charging for on-board activities that would have previously been no charge. We will see how the year progresses for some of these travel powerhouses. More soon, EM

Domino's New Pricing Strategy

The economy is tough for everyone. Consumers are pinching pennies and seeking max value for their dollar not just in high end products, but in everything they purchase, as grocers and fast food chains are learning.

Domino's Pizza, for example, is looking to attract more value focused consumers and to recover many of the consumers it has lost due to recent price increases. Domino's told Forbes Magazine that it has lost the greatest number of consumers in the "single pizza customers" class, described as those who place an order for just one pie and are looking for a cheaper dinner alternative.

The article reports:

"Brandon said to bring those customers back to Domino's, the chain is now implementing a "barbell" pricing strategy. In that model, some products are priced lower to appeal to customers searching for a good deal while other more premium products cost more for those customers who are less price-sensitive.

"The company did not offer any specifics on whether it has lowered its prices on some of its menu items, but Brandon did say the chain's new hot sandwiches, which are priced at $4.99, are an example of the chain's new strategy.

"The burger guys have their 99 cent offering," he said. "We feel like we have to be in that space and in that game" by offering some lower-priced alternatives like the hot sandwiches."

Read the full article "Domino's Pizza implements new pricing strategy"

On the other side of the coin, this story focuses on how businesses are squeezing vendors on prices, especially in the realm of IT, software and technology upgrades. A recently released survey of CIO's reported the following:

"Chief information officers expect their 2009 technology budgets to fall roughly 2.3 percent but are spreading the pain: Executives expect better pricing from their key vendors.

"Bottom line: If you have budget–and are willing to spend it–deals abound, according to Citi’s quarterly CIO survey."

Read the full CIO Survey here. Isn't it interesting how pricing has come to the forefront in all industries? When the economy gets tough, pricing and business basics are the keys to survival. Warmly, EM

Commodity Pricing

The current economic turmoil is really creating a highly educational environment for new and experienced pricers to both observe the importance of pricing strategies in different business models and industries as well as to ...

Commodity retailers are looking at their pricing strategy as well. According to this report by the AP, commodity retailers raised prices last year to keep up with the costs of production and distribution materials, but are now having to cut prices again to maintain customer loyalty as an increasing number of consumers are in a financial crisis.

BusinessWeek and the Associated Press recently highlighted the example of Clorox:

"Price hikes on some consumer staples may be hitting their limit.

"Clorox's chief executive said Friday that the company had rescinded most of its planned price increases and that further cuts were possible.

"I think you'll see the industry backing off," CEO Don Knauss said in an interview with The Associated Press. "I think there's very little appetite for increases."

"As prices for oil, gas and plastics rose to unprecedented heights last year, most major consumer products companies raised prices for a range of staples, including pet food, toothpaste and toilet paper. Clorox, maker of its namesake bleach, sells a range of products from Hidden Valley Ranch salad dressing to Brita water filters and Fresh Step kitty litter.

"Now that commodity prices are easing up and consumers face a financial crisis, some companies are cutting prices to attract shoppers."

Read the full article: "CEO: Clorox rolls back prices, more cuts possible"

Retail Pricing - Customer Satisfaction Still Critical

Here is an interesting article from a retail industry blogger arguing that low prices are not the only key to retailer success and customer loyalty:

"While the retail industry has been hyperfocused on pricing, the retailers who have continued to focus on customer satisfaction, like Amazon and Apple, have emerged as the winners in a losing holiday season.

"The link between customer satisfaction and sales is not breaking news. The confirmation that overall customer satisfaction still matters in a price-conscious economy is definitely headline worthy. According to the "2008 Holiday Top 40 Online Retail Satisfaction Index" report from Foresee Results, the most satisfied customers still spend more, make more repeat purchases, and make recommendations to friends.

"...Retailers in all channels would do well to heed the warning. While pricing seems to be the main consideration for fearful consumers, it is still not the only consideration. A hyperfocus on pricing to the exclusion of other aspects of good retailing will result in a diminshed customer experience, decreased satisfaction, and eventually, the loss of reputation, the devaluation of brand, broken loyalties, and, as we will observe repeatedly in 2009, complete business failure."

PPS experts have been covering this aspect of pricing strategy for years and from all angles, and the recent economic hardships are doing a good job of bringing this fundamental principle of pricing back into focus.

At the end of the day, this principle applies across all businesses - low prices cannot make up for bad business practices or bad products. Smart pricers apply customer relationship strategies as part of their overall pricing strategies instead of using pricing as a stand alone - or in many cases this year - a last breath strategy.

Several more articles on this subject are available in the PPS archive, including "Applying Customer Relationship Valuation to Strategic Pricing Optimization," "Customer Value Driven Pricing to Enhance the Bottom Line," and much more.

In tough economic times, returning to foundational pricing principles is your best bet. Warmly, EM

Intuit's Pricing Gone Wrong

Although everyone is scrambling to find ways to increase profits in 2009 through creative marketing and pricing strategies, not all strategies are finding success.

From the Washington Post: "Intuit Finds Customer Complaints Too Taxing to Endure"

"I'd like to think that nobody's worrying about doing their 2008 taxes yet. But a lot of people do pay attention to that task this early--so many that their protests forced tax-prep-software vendor Intuit to back down from a controversial pricing change last week.

"The story began in November, when Intuit announced that the next release of its TurboTax software would charge an extra $9.95 for each return prepared after the first. Users noticed this change and were not amused."

Would Intuit have been smarter to develop a different strategy? After all, businesses are not the only ones experiencing difficult financial times. Consumers are becoming increasingly sensitive to prices, as I have been pointing out in recent posts, and an increase in price would be glaringly obvious when associated with something as distasteful and disturbing to many consumers as filing taxes.

The article goes on to say:

"For a while, Intuit seemed content to ride out the criticism. One Intuit publicist scoffed at Block's marketing strategy, Twittering that "Brands use price when they have nothing else.

"By Thursday, though, Intuit had evidently had enough. It said it would make additional returns free and refund any fees customers had already paid. The company has since released additional details about the change, explaining that an upcoming software update to TurboTax will remove any mention of the $9.95 additional-return fee."

Although pricing is a powerful tool for increasing profits, product penetration and overall success, sound pricing principles and market research need to be applied to any change in strategies, especially in uncertain economic times.

What do our pricing readers think about Intuit's strategies? What other strategies would you have recommended? Do you think Intuit will recover enough of its past users to turn a profit this year? It is going to be an interesting year for pricing! More to come. Warmly, EM

The Minimum Pricing Debate

The weak economy, as I mentioned in my last post, is encouraging cutthroat pricing wars between retailers trying to make the most of this slow year. However, manufacturers are hurting as well and trying to protect themselves with minimum pricing agreements.

This issue is currently gaining a lot of attention. As pricers we can see all sides of the issue, especially as most of these debates are centering mostly on commodity products rather that high value offerings.

As a pricer, where do you stand on the issue? How is this debate affecting your current pricing operations? More to come - Warmly, EM

The Wall Street Journal Reports:

"WASHINGTON -- Hoping to roll back a Supreme Court decision that allows manufacturers to set minimum prices on products, opponents launched a campaign that will include use of eBay Inc.'s popular Web site to garner consumer support.

At a closed-door meeting whose attendees included representatives of auctioneer eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law."

"Discounting, of course, remains a fixture on the retail landscape -- particularly in this year's holiday shopping season, due to the weak economy. MAP agreements don't cover all products and sometimes manufacturers grant exceptions. Typically the agreements apply to high-end goods, electronics and new product lines that manufacturers don't want to see tarnished by immediate discounting."

"Minimum-Price Foes to Use eBay in Effort"

"Manufacturers have been racing to enforce minimum-pricing policies since last year, when the Supreme Court ruled them to be legal, and not a violation of antitrust law. EBay and a group of other retailers and antitrust advocates are meeting Thursday in Washington to craft a strategy to overturn that ruling.

Manufacturers say minimum-pricing requirements are good because they protect a brand's image from being tarnished by discounting, while helping retailers make enough profit to pay for customer service. Consumer advocates argue that minimum-pricing deals hurt shoppers by keeping prices high and diminishing consumer choice."

"Discounters, Monitors Face Battle on Minimum Pricing"

Pilgrim’s Pride in Bankruptcy …. Amazingly “Bo” Pilgrim Still Doesn’t Get Pricing

Thanks to our contributing pricing expert, Tim Smith, PhD, for this enlightening guest post.

Cost of chicken feed is up, but the price of chicken is flat to down. What went wrong? Marshall's scissors alone would predict the current profit failures in chicken production.

Though branding and quality issues can provide price differentiation within the chicken market, the core price level of chicken is set by the willingness of producers to supply and consumers to buy. At some level, chicken is a commodity. Even where it is not, the price differential of "good" chicken to "acceptable" chicken may increase the price of the "good" chicken over "acceptable" chicken, but its total price of "good" chicken is dependent on the price of the "acceptable" chicken. The basic value approach to pricing dictates: the price of "good" chicken = price of "acceptable" chicken + price differential. Thus, if you increase supply of "acceptable" chicken while demand is flat, the market clearing price of most all chicken will go down.

Lower prices of chicken may not be all bad if the producers have sufficient economies of scale that increase with increasing production faster than prices fall with increases in supply, but such economies aren't sufficient for chicken producers today. Today, the cost of producing chickens is going up. Roughly two-thirds the price of chicken is derived from the cost of chicken feed, and during the past two years chicken feed went up from $2.40 a bushel to $7 a bushel before recently declining to a more modest level near $4 a bushel.

When marginal costs go up, prices need to increase. With increasing prices, supply will need to decrease. Simple application of Marshall's scissors.

But, instead of cutting back production, in all of Lonnie "Bo" Pilgrim's wisdom, he has decided to use the bankruptcy protection to maintain production. He seems to have an unbounded faith that somehow demand will increase and he will make a profit. He may have faith, but I will trust the science of economics – which predicts the market clearing price of chicken will continue to remain below marginal costs to produce until supply adjust appropriately to market demand. Thus, for now, Bo Pilgrim is "strategically" destroying profits.

Let's hope his bankers ask this octogenarian to step aside for someone who is using his brain intelligence rather than his faith intelligence. In the meantime, I feel bad for Tyson Foods, a competing chicken producer, as they have to deal with a nasty industry wide challenge. As is true for other industries, pricing power is subject to the actions of the stupidest competitor.

Tim Smith, PhD is an Adjunct Professor teaching Pricing at DePaul University and Managing Principal of Wiglaf Pricing. www.wiglafpricing.com.