Are You Commoditizing Your Products?

 We were at a new client’s offices recently meeting with their senior executives.  One of them was talking about how their existing offering was a commodity.  I remarked that if toilet paper isn’t a commodity (it isn’t), then their offering certainly wasn’t one either.  It has extremely high value to their users and their method of delivery and support added value as well.  He agreed and assured us yesterday that he no longer uses the term in his company.

 There is a lesson in that discussion for all of us.  The term “commodity” is something used by purchasing agents and procurement professionals to undermine a seller’s pricing power.  Their agenda is to short-circuit any discussions about the value of your products and services.  It is an act that is intentionally designed to make you think that your products and services have no value.

The problem is that salespeople hear the term commodity so much that they start believing it.  Then the customer services people believe it and eventually the senior executives believe it.  When everyone believes that your products and services are commodities, you have no pricing power. 

 How about you?  Do you use the term “commodity” freely in your discussions with your people?  If you do, you’re undermining your pricing power.

Here’s a bit of advice: STOP USING THE WORD COMMODITY!!!!

People use your products and services because they value them.  They don’t think they are commodities because they have chosen to use them.  That is a fundamental fact of doing business.  Just because a buyer who has an agenda to get a lower price uses a term like commodity doesn’t mean they are right.  In fact, we find that in most cases they are wrong.

If you need to, go out and talk to your real users and find out what they like about your company.  Find out how they value the things you do.  They’ll tell you.  They’ll be glad you asked.  Then, go back and make other executives stop using the word too.  When anyone—ANYONE—uses the word commodity, stop and tell them that a) your products and services create high value for your customers and b) using the word commodity to describe them undermines perceptions of value with your salespeople and your customers.

In Pricing with Confidence, we use the example of how the executives from a dirt company realized that they weren’t selling a commodity.  We use that example because if dirt isn’t a commodity then virtually nothing is.  We use that example because too often we hear the term commodity from high value technology, software, medical equipment and financial services executives.  The sad part is they honestly believe that commodity really does describe their products and services.

So, start being a value leader in your firm.  Stop using the term commodity.  When other people use it, tell them why they are wrong.  If that doesn’t work, go to the local pet store and get one of those shock collars and start making some of the senior executives wear them–that will work.

Pricing Kudos to Two Industries

Last week was a travel week for some family business.  So, this morning is “writing catch up”.  There were quite a few pricing articles in The Wall Street Journal and there are two that are worthy of a brief mention.

In Recession Specials, Small Firms Revise Pricing points out that “discounts and lower-end offerings” improve the performance of small firms.   What the article really talks about is that small businesses have flourished even in a downturn when they continually innovate their offering and look for ways to offer low value flanking products.  One example was a limousine company that expanding their offering to include larger capacity vans–smart move?  Yes.  But that is an offering move more than a pricing move.

Small firms can move fast, even in a downturn.  But, even big companies can learn from them.  Continually evolving the offering (remember–Innovate for Growth?) provides the revenue and profits needed to survive in a downturn and flourish in an upturn.  Don’t be afraid that you’ll canibalize your offering–be afraid that other firms will.   What the large firms need to do is to constantly anticipate the need to evolve so that they can move fast when they have to.   Failure to do this leads to the pricing death spiral that we see so many firms in today.

Fixed Costs Chafe at Steel Mills talks about how stainless steel makers have finally learned that price discounting in a downturn doesn’t work–it just chews up profits and doesn’t provide more revenue.  And, it leads to going out of business.  The six primary players have moved in lock step with price increases during the downturn.  Customers have accepted the price increases because they have heard about the high cost structure and the need for lots of process improvements in their suppliers.

This is a great example of the major players in an industry recognizing that price competition would be devestating for all.  And that not competing on price would be good for all.  To support that end, the major competitors spend a lot of time communicating about how their costs are going up.  When they increase prices, they pre-announce the move so others can follow.  It’s a great example of an ideal point for pricing communications systems that we talk about in Rule 7 of our book Pricing With Confidence.   The intent of such a system is to be able to better accomodate the need for smart pricing moves and pricing communications in highly competitive industries–especially ones that are going through dramatic downturns.  This article is a great example of firms that are doing just that and are using the press to signal both their concerns and their moves.  I should point out that while it is illegal to “conspire” to fix prices with competitors, it is perfectly legal to communicate your pricing intentions to a market which includes competitors. 

My guess is that the Justice Department will look at this one since uniform moves like this, also called conscious parallelism, is often an indication that illegal activities might be taking place.  My hope is that there isn’t and that this is just a great example of good competitive pricing strategy.  Thanks to Dave Phillips for forwarding this article.

A Great Value Story

Jeff Kaplan is President of Thinkstrategies ; his blog tells a great value story about software provider Concerro.  Concerro uses a SaaS solution to “reduce the amount of monies spent on premium labor” for its client hospitals. 

Kaplan points to key areas where the Concerro solution saves the hospitals money and provides not only the total dollar savings but also the six month ROI for the investment required for the solution. 

We call this Case ROI–that is a return on investment tool that provides specific case-by-case returns on investment for client investments in software, service or product costs.   Since it deals with a specific customer’s investment and return, it has more credibility than traditional “static” approaches.  We remember talking with one software company that had done more than forty of the static approaches (they were cheaper to build) and wondered why the salespeople never used them! 

Building a case-by-case approach takes time to build out the questions and the spreadsheet for salespeople to use but it is worth the effort because it drives sales at a higher price.  You can get a copy of Mark Burton’s article on Case ROI from our website.

I’m a bit tired of hearing that doing this is too complex and time consuming–as Jeff proves, it really isn’t   Plus, it works because it helps close sales at a much higher profit.  Go figure!

Pricing in the Press

I have a number of articles sitting on my desk that are worth a comment:

Time Warner CEO hints at online fees:  Time Warner is thinking about charging people for on-line content in their magazines.  Well, it’s about time.  Publishers seem to keep making a critical error in classifying their business.  They think they are in the printing business where you charge for a printed document.  The problem is that they are  in the knowledge business where they give people information.   That difference leads to a huge gap in the business models for publishers.  Just look at a huge success: The Wall Street Journal: they’ve spent the past five years developing their on-line content and have a successful business model for both sides.  And, they’ve developed adequate fences and pricing models so that one side doesn’t cut into the other–instead each side supports the other.

Printing is slowly by surely dying as a business.  It is inefficient.  It spends lots of resources distributing content rather than developing it.   In today’s world, more and more people want their content electronically.  Failure to make content available to people when and how they want it at a reasonable price leads to a competitive disadavantage.  I look at our Boston Globe, which is on the brink of closure.  They just raised their rates 33% and they don’t have a business model (aside from advertising) on the electronic side.  Even an old dog like me is thinking of drinking his morning cawfee in front of the computer screen.

P & G Looks Beyond Premium Goods:  Mighty Proctor and Gamble is getting beat up with the economic downturn just like the rest of us.  Their premium brands are slipping.  Fortunately, they had already introduced lower value flanking products in detergents (Gain) and diapers (Luvs).  The net result is that growth is still predicted to be 2-3% this year and while lower than expected, profits are still healthy.  Bottom line: when we say to “innovate for growth”, in a downturn it means that you’ve got to introduce lower value flanking products.

Xilinx Loses in Ruling:   Chip maker Xilinx has been embroiled in a battle with the IRS on how they cost their products and allocate expenses to various subsidiaries.  The IRS is taking the position that cost allocations have to relate to a “standard”.  The issue seems to be that the standard has to be consistent across all costs–in this case, R & D costs and the cost of options for workers.  Clearly the IRS is trying to keep profits in the US when they can.  The question I have is whether this will therefore limit a company’s ability to offer lower value flanking products within the legal limits of what costs are.  Should be a fun one to watch–the law of unintended consequences could be that this could make companies more competitive abroad but less competitive domestically.  Since this is the larger market–that could be a long term bad thing for global competitiveness for US companys.

Are Competitors Chipping Away at Your Edges?

In good economic times, marketers need to be constantly aware of the competitive forces that put pressure on revenue, share, prices and profits.  That only gets worse in downturns like the current one.  Sellers need to constantly monitor what competitors are doing to and prepare appropriate responses.  3Com builds, among other things, network switches.  That puts them right up against mighty Cisco.  Fortunately, 3Com’s switches are built in partnership with a Chinese firm and are cheaper than Cisco’s. 

 Since customers are under tremendous cost pressure, 3Com President, Ron Sege sees the current downturn as an opportunity to sell more of their cheaper switches.  He knows that cost conscious customers will be more willing to try 3Com’s offering.  And, once they see that the quality is good, they will keep buying them, even after the current recession turns around. 

 Here is a company that is going to benefit from having an offering positioned at the low end of a market and their timing appears to be good.  Mark Burton has spoken about these firms in his blog and in our upcoming newsletter.  The question I’d like to hit on is what should Cisco be doing about another competitor “nibbling at the edges” of their market dominance.

 

First, Cisco is aggressively innovating in areas such as video conferencing to both grow their business and expand their presence in the technology space.  This fits right with our “innovate for growth” concept.  They have and will continue to rely on both internal R & D and acquisitions to accomplish that objective.  Cisco has and continues to do this quite well.

 

Second, and of equal importance, Cisco managers need to make a conscious and strategic decision of how they want to meet 3Com’s move closer to their space.  One thing that they don’t want to do is discount higher value products since that would undermine the higher value position that they dominate.  They do need to decide if they want to ignore 3Com—that will be determined by the relative shares that each holds in the lower value segment and the risk that the higher value segments can deteriorate to lower value offerings.  At some level of share and deterioration, there is a “tipping point” that will show the need for Cisco to develop their own lower value flanking offering.

 

The important point is that successful competitors need to a) continually assess where that point is, b) determine when a segment is there and b) proactively have products and services ready to introduce when they reach it.  Having competitors “nibbling at the edge” of your business is a fact of life in both good and bad times.  The real risk is in the decision how to respond.  It is rarely a good move to respond solely will price.  It is always a good move to be constantly assessing when and how to respond to a “nibbling” competitor and it is usually with a flanking product.

Building Credibility as a Pricing Manager (Director or VP!)

Credibility is a key to success for any manager.  If you aren’t viewed as credible, you won’t be taken seriously and will suffer from a lack of power and control.  You won’t get the resources you need to get the job done.  This is a serious problem if you are a pricing manager.  To execute good pricing strategy and tactics, you’ve got to work across the other functions of the firm.  You’ve got to interact with sales, marketing, product marketing and finance to get the job done.  Without credibility, managers in those functions won’t do the things that need to be done to make pricing a profit powerhouse. 

What breaks my heart about the current economic situation is the number of pricing managers we’ve spoken to who are struggling to improve the profits in their respective firms.  We’ve also spoken to a number of pricing managers who seem to be getting the job done.  They’ve gotten ahead of the need to develop positioning statements for the sales force, they’ve worked with sales and marketing to make sure that excessive goals aren’t driving pricing and profits down.  They’ve worked with senior executives to make sure they aren’t falling prey to desperation pricing–especially at the end of the quarter. 

Pricing managers that aren’t credible are frustrated that people don’t listen to them.  This gets in the way of executing effective pricing.  That’s too bad because effective pricing is what saves jobs during a recession.  Effective pricing focuses on holding on to each an every profit dollar that can be eked out of this struggling global market.  It makes sure we aren’t sacrificing profit dollars for a sales or market share goal.  It makes sure salespeople are selling rather than discounting and it makes sure that our costs are in line and are being viewed properly when it comes to setting price. 

It struck me that what distinguished between those two groups of managers is that the effective pricing managers had credibility in the organization.  When they spoke, people listened.  They were viewed as effective managers who could drive better pricing practices throughout the firm.  No, they weren’t viewed as perfect, but they were viewed by senior and junior executives alike as someone who should be taken seriously for the good of the firm. 

So, that leads me to five bits of advice for pricing managers who are frustrated by your lack of credibility: 

1. Be willing to start small: If you don’t have credibility, you’ll never get the big projects approved.  So, pick something small to do.  And, make sure you do it well and get it done on time.  Work on a better pricing matrix, simplify pricing policies so salespeople understand them, work with a sales team on a big negotiation, or even a small negotiation.  Credibility rests on assurances that you know what you’re doing and can get the job done.  Be willing to start small and grow your successes over time.
2. Work at strategic and tactical levels.  Yes, you need better pricing strategy but without better tactical execution, strategy will never yield benefits for the firm.  So, pick and choose your battles but be willing to pick the fruit of profits where you can reach the branches.  You may need to prove yourself with better execution and tactics before you tackle the larger strategic projects. 
3. Take responsibility for your work and the work of your team.  A lot of managers think that this undermines your power but it actually builds it.  Good leaders take the hits and do better.  It takes a good leader to build a firm’s pricing capabilities.  So, take responsibility for both the problems and the results.
4. Track and talk about small successes.  Don’t expect others to “notice” the results you achieve.  Document your wins and use the insights from those wins to build the “burning platform” for the firm.  If you helped a sales team close a more profitable order, put it on a spreadsheet and report the results to senior executives.  Be willing to start with anecdotes as you build the data for a more compelling story.
5. Speak their language.  As pricing has gotten more specialized, the words we use are getting bigger and more specialized.  Talk about value, beta’s and correlations won’t get you anywhere with salespeople or senior executives.  Salespeople want to know how to close better deals. Senior executives want to know how they are going to get more profits and revenue.  Listen and use the words they use and you’ll become more credible and more effective.

 This is not a complete or exhaustive list but it is a start of things to think about to get the focus you need outside of pricing to get the profit job done in the firm.  Unfortunately, it doesn’t happen over night either.  The credible pricing managers we know have taken years to develop the credibility they need to get the job done.  If you already have credibility, go for it–think big and bold.  If you don’t, try a few of these ideas and you’ll be on the same road that the ones who already have credibility have walked.  It took them time and patience but it did and does work.  Good luck

New Pricing Models in the Clouds

With these turbulent times, most managers are hunkered down, trying to keep costs low and close whatever orders might be available to them.  There’s one more thing to think about—fine-tuning your offering and subsequent pricing model.

There are subtle shifts going on in several industries that point to the need to do that.  The first is in the computing industry.  The move to “cloud computing”.  Cloud computing combines the concept of software as a service–where you purchase the use of the software on a monthly basis rather than as a unique product and computing time versus purchasing the machine.

The recent battle between Oracle and IBM to purchase Sun Microsystems (Oracle won by the way) is the sign that software and computers as a products that are purchased in large chunks might be going the way of the horse and buggy.  The reliability and ubiquity of the internet provides businesses with an opportunity to offload a peripheral piece of the business on companies that can better provide the data, customer contact and infrastructure services.  And, they can get it done for a monthly fee rather than having to invest in the buildings, equipment and application services that they do now.  This is what Ross Perot started back in the 1950’s but now it’s taking the next step to better leverage the internet.

With the new offering of cloud computing, companies will have to adopt new pricing metrics–based on use and application of the computing/software services being provided and identify new value levers to fill out their price sheets.  Without the proper set up of the offering and analysis of the subsequent value, cloud computing will get commoditized.  But with good analysis and execution, cloud computing can be a benefit to sellers and buyers alike as increased efficiencies and broader scale adds lower cost to infrastructures that can only be imagined today.

At the other end of the spectrum but with the same set of issues, I’ve loved looking at what’s happening to the publishing business.  The downturn has tipped many struggling newspapers over the edge.  Those papers have been slow to realize that what they really offer is content not newsprint.  By focusing on the paper rather than the content, the daily rags have destined themselves to the technological scrap heap.  They’ve been slow to evolve their delivery mechanism to take advantage of today’s technology and lifestyles of people.  The exception has been The Wall Street Journal which offers high quality electronic content along with the newspaper.  It gives people a set of alternatives at a reasonable price so they can make the choice based on convenience and value. 

Look also at the book publishing business.  Amazon has broken out ahead of the pack in e-books and is continuing their dominance with improvements to their Kindle which seem to please users.  Yes, their pricing model still doesn’t reflect the increased efficiency of electronic content but give them time and they’ll figure it out.  Compare that to the textbook publishers that continue to ignore that technology has changed the way people want to consume words–especially younger people.  Instead, the publishers focus on writers and big presses (read that as big costs too) when readers increasingly want easy access to cheap and easy to search content.  The publishers that have figured that one out are finding that they are selling 3-4 times as many e-books as they thought and are making a bunch more money.

Now is a great time for struggling managers to start thinking outside the box.  Think about how your customers are changing.  Think about how your delivery methods can change.  Think about how your offering and it’s value can evolve to better meet the needs of the people and the times.  Then, you can spend some time thinking about how to price it all.

It Was Better Pricing That Helped Qwest

This morning, The Wall Street Journal reported that Qwest Communications saw it’s profits increase by 37%.  The title indicated that the result came from cutting costs.  But what they really did was to cut customers.   They were “willing to loose lower-end customers to boost earnings”.

The problem most executives have in a downturn and in a stable market is they assume that if they grow revenue, profits will grow as well.  That might be true in a growing market due to market elasticity.  But in mature and troubled markets like we have now, profits, not revenue should be the focus.  Why?  Because in the pursuit of revenue, profits, the lifeblood of the firm, decline.  In the pursuit of profits, however, revenue can decline but who cares? We’re making more money.

What CEO Edward Mueller did was to kick the discounting habit–something we talk about in our article in the Journal of Business Strategy (click away to get a copy).  Profits are more important than revenue–always.  There are times when price discounts can be used to increase profits–but not now. 

In these difficult times, the best activity of all executives is to focus on stoping the profit leakage.  Fire customers who don’t cover their cost to serve.  Draw a line in the sand and say you aren’t going to take it any more.

Even if you take a revenue hit, you’ll be better off.  Sure Qwest dropped revenue 6.6% but the 37% increase in profit pushed up the stock price over 3% when it was announced and up almost 100% off the lows of the year.

I was speaking with a company recently about strategic pricing initiatives and made the point that they really needed to focus on cutting the losses of bad pricing at accounts.  The manager thought I was being too tactical–yup, I was.  Here’s the point–if you can’t kick the discounting habit, all the strategy in the world isn’t going to help.  That’s was Qwest and other smart companies have figured out.

The “Da Vinci Code” for Better Pricing

Dan Brown, author of The Da Vinci Code has a new book coming out in the fall.  The Lost Symbol is a follow-on story to the original book which sold 81 million copies and led to a blockbuster movie.  So, the expectation is that the new book will sell quite a few copies.  Now, here’s the rub, given the expected popularity of the book, book stores are saying that they are going to sell it at a discount of over 40%.  The Wall Street Journal is questioning the wisdom of that move—after all, why sell a book for little or no profit?

 

On the surface, it doesn’t sound like a smart move.  After all, for those 81+ million of us who read the first book, we’re going to want to buy the new book whatever the cost.  Therefore, we are price insensitive for the purchase of the book.  The bookstores appear to be leaving a lot of money on the table with a penetration pricing strategy.

 

But wait.  While we are price insensitive for the purchase of the book, we are price sensitive for where we purchase it.  The list price is $28.95.  But why pay that when I can buy it at Barnes and Noble for $15,63?  Actually, I’ll save the trip and buy it at Amazon.  They’ll ship it for free and still only charge $15.63 (notice how quickly they matched the Barnes and Noble price?).  So, for the bookstores that can afford to trade the volume for lower profits, the increased demand will probably lead to higher total profitability.

 

Further, consider that most people who go to Barnes and Nobel or Borders for the book are going to end up purchasing a bunch of other books at a higher profit margin.  The total benefit of getting people to come to their store for a book is actually quite large.  This is one case where the large bookstores will make lots of profits by selling one item at a lower price. 

 

The watchword of good pricing is: price for profits.  A little analysis shows that this is a good move for the big bookstores.  It gets them press coverage, and it gets them profits.  What about Dan Brown?  He smiles all the way to the bank.

Pricing Strategy Should Be Easy

If you haven’t noticed, Mark Burton and I have been writing more about pricing strategy these days.  That’s because managers, pricing or otherwise, continue to focus on developing better pricing tactics through software, systems and analytics.  There is nothing wrong with that but those activities need to rest on the foundation of good pricing strategy and supported with an infrastructure of disciplined execution.  Without those two, the tactical work will usually go to waste and you’ll end up leaving a lot of money on the table.  We’re both concerned that not there isn’t enough focus on the strategic issues of price.

 

An example of good pricing strategy is what Microsoft is doing with the introduction of Windows 7 in the fall.  It’s primary features will be simplicity and ease of use and won’t contain “new bells and whistles”.  Priced at $15, a fraction of the full featured version, Window’s 7 will not support fancier monitors and supports a limited number of programs at once.  It is intended for the fast growing sub-$500 market of laptops.  This market has been controlled by Linux and Microsoft’s 2008 share of this market was a paltry 10%.  Since then, Windows has picked their share up to 95% and the Windows 7 introduction will extend that dominance.

 

If users want to expand to the full featured version (currently priced at $70), will just have to put in their credit card number.  There is some concern that this will alienate some users.  We think it will be better to have a dominant share and risk some level of alienation than having a small share and not alienate people.  It’s really a no-brainer.

 

We’ve got to give kudo’s to Microsoft on this one for the following reasons:

• Their CEO has told everyone what the strategy is (penetration priced lower value product).  He was clear what the objective is (dominance),
• has provided customers with a clear path to upgrade the product (good fences),
• it’s simple and everyone in the company agrees with it. 

 

The analysts might ping them on some of the problems that’s just nit-picking.  The bottom line that this one is a clear recipe for success.