More and more common and very damaging if you handle them wrong - interesting approach
Published on: Mar 4, 2016
Transcripts - Price Wars
THE VOL. I, NO. 3 NEWSLETTERPRICING AND SATISFYING CUSTOMERS —WELCOME TO THE 1990’SBack in the 1980’s, pricing was not a major issue for most manufacturers or serviceproviders and their customers. More often than not, annual (or more frequent) priceincreases were the norm, as companies often achieved their financial targets throughaggressive pricing activity. Prices were passed on down the trade channel and, while therewas occasional griping, the end-users ability to pay was rarely in question.So much for ‘the good old days’ - they are now long gone!Instead, the 1990’s have taught every business that pricing cannot be taken for granted.There is a global transformation, seen in industrial, business and consumer markets, towardsbuyers wanting - and demanding - better value. This trend of more discerning customersmeans that all elements of the buyer/seller interface (including price as a key component)are coming under scrutiny. For many companies, according to Fortune magazine, this means“giving customers all of what they’ll pay for – and none of what they won’t”. At The Advantage Group, we have seen first-hand from our WHAT’S INSIDE various measurement programs just how important customer 2-3 satisfaction has become, and how price perceptions have become FEATURE a key “satisfaction driver”. In recognition of this increasing HOW TO AVOID A attention on pricing issues and the inter-relationship with PRICE WAR customer service, we have expanded our own focus, with pricing THE 3 strategy consulting now being provided as an integral part of ADVANTAGE our practice. Paul Hunt has recently joined The Advantage Group PRICING to assist clients in this area; over the past eight years, Paul has SEMINARS done extensive work in strategic consulting and has advised 4 leading North American companies on pricing, channel management, and customer value issues. HAPPENINGS • AG/FAIRCHILD PUBLICATIONS: APPAREL INDUSTRY In the feature article for this issue, found on Pages 2-3, Paul INFORMATION BASE outlines one of the critical pricing issues that organizations face • FOODSERVICE TRACK in dealing with customers. We trust that you find this outline not 1995 REPORT only informative, but also usable for your organization to better GROUP INC. • JOINT VENTURE ON ECR deal with pricing issues in the “value decade” of the 1990’s. Helping clients build successful relationships • BENCHMARKING STUDY ON with their business CUSTOMER SATISFACTION customers • NEW BOOK TO BE RELEASED
THEHow to Avoid A P R ICE WA R A 1. BE CAREFUL ABOUT 2. SELECTIVELY s most business managers know, MISREADING YOUR COMMUNICATE YOUR pricing has a more COMPETITORS’ STRATEGY - significant impact on ACTIONS - By no means should an organization the bottom-line than Often price wars are started due to participate in collusive or predatoryany other item on a company’s misreading competitors’ actions or pricing. But there are situationsincome statement. For the intentions. The results can be a where companies should selectivelyaverage company, a 1% drop in downward spiral in prices that communicate their strategies toprice can slash operating profits ruins profitability. minimize the chances of a price war.by up to 12% - 15%. This createsa strong motivation to avoid In the packaged goods industry, a When Chrysler, for instance, wasprice wars. A price war is every company recently discovered the cost under the threat of a deluge of new of not having accurate information. minivan competitors entering themanager’s worst nightmare. It misread a 10% price cut by a market, the president made a speechWar is an appropriate word competitor by assuming that it was to its dealers covered by the businesssince, like conventional warfare, a long-term strategic repositioning press. In the speech he indicated thatit leaves lots of casualties and of its product, but that was not the Chrysler would be building a newrarely does anybody really win. case. In fact, the competitor was very low-priced minivan but he alsoThere are many ways in which a responding to an FDA requirement explained that it was something in theprice war can get started, but that all nutritional information desk drawer in case it was needed. To about packaged foods be reset to 6 make himself abundantly clear heoften managers from different oz. Hence, the competitor was only finished by saying “If it comes to acompanies will have different trying to get rid of its obsolete 6 1/2 price war in minivans, I’m convincedversions of what precipitated the oz package before launching the 6 oz we can win it.” By making Chrysler’sprice war. None of them started product. By misreading the intent of intentions to defend its market shareit, yet they’re all in it. the price cut, the company clear, Chrysler indicated to the comp- responded with its own deep price etition that they would lose a lot ofThe following guidelines on ways cut. If it had not done so, prices money by trying to build market shareyour company can successfully would have returned to normal in a through low pricing.avoid price wars and maintain month or so; instead, the result wasprofitability are based on our The value of communicating your a price war that destroyed industryexperience in helping clients strategy at times is that it forces com- profits for the year.deal with pricing challenges. petitors to take off the rose-colored glasses when preparing their forecasts, and hence dampens their enthusiasm for aggressive price competition.
3. HAVE GOOD A manufacturer of lighting products recently faced aggressive price •Are our competitors’ forecasts realistic? INFORMATION ABOUT YOUR CUSTOMERS’ competition and was slow to •How much industry capacity respond. By the time it did respond its is being added? LEVEL OF PRICE competitor had benefited substantially, •Can we diversify the use of SENSITIVITY – and decided to make another our capacity to minimize riskUnderstanding customer price sensit- when demand is down?ivity is essential to any effective pricing aggressive price move. This pattern •How significant a cost advan-strategy, but it becomes critical during continued until the company which tage will we have over ourtimes when new competitors enter the was slow to respond almost went out competitors?market place. of business. •Are there market niches that will support our require- A client in the packaged goods The lesson is, that if you want to ments for profitability? industry found this out when minimize price competition, then it suddenly faced a new private you must be willing to respond to By asking these questions you can label product that was positioned aggressive pricing moves consistently avoid some of the painful lessons directly against one of its flag- and quickly. This will minimize the learned by companies which have ship brands. The company was benefits which an aggressive com- not done so. unsure how to react in the face of petitor can accrue, and this sets the Price wars are detrimental to all this new threat. The horror stories of companies which did not stage for the understanding that deep involved. They destroy industry profits effectively respond to private labels discounting will not be to anyone’s and rarely lead to long-term advantage are industry legends, yet dropping advantage. for anyone. Even if a company does go prices substantially based on this fear bankrupt due to a price war, its capacity would cost millions. To respond rarely disappears, which is evident from strategically, the company knew it had to better understand the price 5. MANAGE YOUR the U.S. airline industry. Instead, the best approach is to apply these tips and tradeoffs customers would make with COMPANY’S CAPACITY this new private label brand in the CAREFULLY – minimize your chances of a price war. market. By undertaking pricing The single biggest cause of price wars research, the company was able to is industry over-capacity. Price wars Seminars on: forecast the short-term and long-term are almost unavoidable once there is “PRICE AS A STRATEGIC WEAPON” impact of alternative pricing strategies. What the company significant over-capacity, since everyone The Advantage Group is pleased to be conducting learned was that its brand was very is fighting to maintain critical mass. the following seminars on behalf of the Canadian strongly positioned and that it could Management Centre (Division of American af ford to charge a substantial Numerous industries have suffered Management Association). premium and still retain its chronic capacity problems – airlines, customers. The strategy chosen was to printed circuit boards (PCB’s), and 1995 Dates maintain the premium price, and to October 23-24 - Toronto (Sold Out) newsprint (until recently) are a few October 26-27 - Toronto “add value” to the brand which examples. Managing capacity correctly December 4-5 - Toronto (Sold Out) would further insulate it from price is a tricky issue that has many different December 7-8 - Toronto wars. strategic implications. However, companies often fail to account for 1996 Dates January 29-30 - Toronto the possibility of over-capacity. The March 25-26 - Montreal result is that they end up in a costly 4. BE CONSISTENT IN price war. May 27-28 August 12-13 - Toronto - Whistler, B. C. YOUR RESPONSE AND September 23-24 - Toronto Some questions to consider when November 25-26 - Toronto MOVE QUICKLY – assessing the ramifications of addingIf competitors perceive that they will capacity are as follows: For further information on these programs call thebenefit from making aggressive price CMC at (416) 214-5678 or Paul Hunt atmoves then they will do so. •Are our forecasts realistic? The Advantage Group, (416) 863-0685 Ext. 121.
AG AND FAIRCHILD AG HAPPENINGSDEVELOP APPAREL INDUSTRYINFORMATION BASE • The Foodservice Track 1995 program, the first ever industry-wideThe Advantage Group has been measurement of supplier performance among Canadian foodserviceselected by Fairchild Publications distributors, provided comprehensive benchmark information to suppliersto do a series of exclusive in-depth from senior personnel, buyers, marketers, sales managers and distributionapparel industry reports on critical managers at major foodservice distributors. Program expansion is alreadyissues. Fairchild’s flagship publications planned for 1997. Introduction into the United States is anticipated laterinclude Women’s Wear Daily and this year. Key among the findings of the 1995 study is that there are verySupermarket News. Initial topics for wide gaps between the views of senior personnel and line personnel withtrade survey research and reporting regards to supplier performance.are Globalization(recently published), • Kurt Salmon Associates and The Advantage Group Form JointRole of Brands and Private Label, Venture on ECR – The Advantage Group and Kurt Salmon AssociatesStrategic Alliances, Consumer Trends (KSA), based in Atlanta, Georgia are joining forces to market ECR- relatedand Non-Traditional Retail Formats. consulting services in Canada. This collaborative effort combines the extensive ECR experience of KSA with AG’s in-depth understanding of theHighlights from the special issue on Canadian grocery industry. Initially, this joint venture will focus on providingglobalization in apparel include the an ECR Readiness Assessment (ERA) process to assist Canadian groceryfollowing: distributors to manage the “ECR labyrinth”. This assessment program will • Globalization and regional provide a comprehensive, overall guide for charting an organization’s current alliances are viewed favorably position and progress on ECR. The benefit for Canadian distributors will be to • Less protection will raise avoid the ECR management pitfalls encountered by many U. S. organizations competitive requirements and thereby shorten the timelines for Canadian ECR implementation and • New forms of trade barriers capture of ECR-related savings. will emerge • AG Selected for Major Benchmarking Study on Customer • Specialized regional skills will Satisfaction – The Advantage Group is excited about having been selected be developed as competitive as an expert advisor for a major benchmarking study being conducted by the advantages prestigious American Productivity and Quality Center, based in Houston, • Globalization requires structural Texas. The study will define ‘best practices’ for customer satisfaction and strategic changes measurement, based on on-site fact-finding at leading U. S. organizations. • Different success determinants Although the study is currently in progress, opportunities to join the study exist for big and small companies sponsorship group are still available. For further information about the study, • Competitive advantages accrue contact Ron Pirie at (416) 863-0685 ext. 111. to home market experience • Soon to be Released – Don Belfall has just finished researching andThe report concluded that ultimately writing a book, due to be released in October this year, regarding industrythere is nothing foreign about global and professional associations in Canada. The book discusses how industrybusiness. “It is the difference between associations may increase the potential for their future impact and influence.managing the business by responding The areas reviewed include matters regarding member satisfaction andto opportunities from customers, and value perceptions, as well as the means by which trade associations mayorganizing the business to create become increasingly relevant to their members’ businesses. (Copies mayopportunities for customers.” be obtained through contacting the Canadian Society of Association Executives at 416-596-6433.)For further information contactDoug Rossiter at (614) 436-9575. LISTENING TO YOUR CUSTOMERS ... OR NOTDILBERT® UNITED FEATURE SYNDICATE THE ADVANTAGE FOR MORE INFORMATION about The Advantage Group or to provide comments or suggestions on this newsletter, please contact Joan Lavers (ext. 112) or Gren Norton GROUP INC. (ext. 113) at: (416) 863-0685 or fax us at (416) 863-0787 Printed on Tell us what you would like to hear about in recycled paper future Advantage issues!