Pricing with Confidence

My Mother is 85 years old.  A feisty 85.  She has never bought a car on her own before and the Ford was getting a little rickety so she decided she wanted to buy a Honda this time.  By my experience, Honda is pretty good about not negotiating too low–no longer.  Yes, I went in with her but she handled the conversation.  She went on the last afternoon of the quarter armed with the cost of the car.  She quickly found one she liked and said that her next stop was the Toyota dealer.  The salesman left and came back with a price that was $200 below his cost!  Now, that’s desperation pricing.  we would have paid probably $700 more than their asking price. 

Let’s look at what it took to get the price–she did her homework with the cost data, she went in at the end of the month, when the dealership was desperate for additional business so they would hit their goals.  And, she said that she was still shopping.  Three things–game, point , match.  When the senior citizens have this figured out, the car companies are toast.

A few simple question like: “have you thought about a budget for a car?” or “which Toyota are you looking at?” or “of the two brands, which do you really prefer?” would have been worth an additional $500-700 for the dealership.  When are these guys going to learn?

Oh well, Bunny is happy with her car and happy with her price–real happy.

Value Creation: The Power of Brand Equity by William Neal and Ron Strauss, 2008, Cengage Learning, Mason, Ohio.  I’m going to warn you right up front that the punch line of this book is using the author’s predictive model for improving the effectiveness of branding efforts.  Generally, you know I frown on consultants writing books where you have to use their services to get anything out of it.  Fortunately, this isn’t the case here.  It is a well written, well researched effort which ties the brand identity to not only the CEO but other constituencies in the firm–workers, customers and dealers.  I liked the way it connects brand results and satisfied customers with happy employees and draws well from the work of people like Fred Reiccheld along the way. This is both an introductory and a technical book but for those who use branding research, there is an excellent discussion of different

Jet Blue is going to charge $10-$20 more for an extra 4″ of leg room in their seats.  What a terrific idea.  I’m a little tired of getting shoved into a seat with no leg room.  Yes, it’s a great excuse for not working because I can’t get my computer out but on long flights it is a literal pain.  I’d be more than willing to pay more for the leg room–how about you?

 Jet Blue, like Southwest, continues to do a great job with their pricing.  They have promotional fares that represent a 50% discount over regular fares.  When they have a price difference it is based on something of value like distance, seat type and off-peak travel.  A recent check of their web site shows flights from $94 to $284 each way–similar to what Southwest has been doing.

 Contrast that to the legacy airlines, that use yield management techniques which extract every last penny from fliers based on their alleged price sensitivity.  The net result is price differences that are as much as 1,000%.  The result: alienated customers who start switching for better prices, eroding the base of loyal customers who used to pay the high prices.  It’s no wonder that most of the airlines continue to lose money.

 Here’s a question for you: for the same product or service, is the difference in prices charged to different customers big (over 100%) or is it small?  Further, is it defensible?  If it’s not, you are probably alienating your customers.  That makes them appear more price sensitive when, in fact, they’re just mad.  Think about it.

One of our readers wrote last week disagreeing with my point that we’re in a recession.  Ok, we’re not in a recession.  Technically we’re not.  A recession takes a longer period of actual overall decline than we’ve seen in recent months.

 That’s what the politicians and the economists want to focus on.  I want to focus on what is happening to real people that’s why we wrote about Sal, my barber.  He’s been in a recession for the past year.  He’s changed the way he spends money–fewer subs at the local grocery and more sandwiches from home among other things so he can survive the current downturn he’s seeing.

 In the book, Mark and I talk about a number of companies.  Several of them saw the downturn coming and did their own version of bringing in their lunch.  What did they do?  They cut back on expenditures, they hired fewer part time people, in some cases, they layed some people off (by the way, these are the guys who aren’t get their hair cut as much).

 But, the smartest thing they did was in pricing.  They didn’t use price to try to solve the problem.  They recognized that demand was down and they couldn’t fix demand with price.  They kept prices right where they are and let demand drop.  That way profits didn’t disappear.  In fact in one case, while demand dropped, profits actually increased by a couple of million dollars in one of the divisions.  They know that if they drop price to try to solve the problem, sales won’t increase because competitors will respond.  The net result is the profits will disappear. 

 I honestly believe that it’s going to get worse.  The subprime lending problem is going to get worse.  That is going to lead to more foreclosures and drops in the price of houses which in itself is going to lead to more foreclosures as people get upside down in their house financing.  Add to that the dramatically rising cost of fuel, heating those houses and driving to work is going to get more expensive. 

Business managers need to hope for the best and be prepared for the worst.  In pricing it works the same way.  You’ve got to use your head.  You’ve got to think before you drop price.  If it is bad and going to get worse, batten down your business hatches, trim your sales and most of all, don’t use price to solve the problem–it will just make it worse.

Well, I guess it was no surprise that once-mighty Motorola announced an 84% decline in net profits.  This comes not too long after CEO Ed Zander (the one who hates customers) resigned and his second in command, Greg Brown took over.  Poor Mr. Brown, paying for a lousy product strategy and lousy pricing.

All of this sounds like a replay of 20 years ago when they developed the first real flip phone.  The problem was that it was analog and competitors quickly moved past them with digital flip phones.  The same thing is happening with their Razor phone.  3 years ago, it was the talk of the town and selling like hot cakes.  The problem, once again, is that they were slow to innovate and let other competitors move ahead with lower priced phones (seems like we’ve been talking about this one for too long) and into the more functional multimedia phones.  Nokia, which seemed to be sputtering two years ago moved faster in both directions and now controls a lofty 40% share of the global market as Motorola slides down to 10%. 

To make matters worse, when they fell behind in technology, they tried to buy market share by dropping prices on their phones.  Unfortunately, the competitors dropped prices faster (go figure) and their “higher value” phones missed the consumer mark.  Hello?  Is anybody there? Remember: price for profits, innovate for growth!!!!!!

In recognition for their ability to “snatch defeat from the jaws of victory”, Carl Icahn is trying to break the company up.  According to Mr. Icahn, the value of their other two divisions which specialize in two way radios for public safety and set top cable boxes is actually more than the current value for the whole company.  Lots more at the new stock price of close to $10.  So the division which controls 2/3 of their revenue is actually a liability on the valuation.

We know that Mr. Brown has his work cut out for him.  But in addition to cutting costs, which he is trying to do, he would be well served to focus on two things.  First, get the innovation engine going again–innovate for growth.  Second, stop making stupid pricing decisions like trying to buy market share with poorly positioned product–price for profits.  It works.  Nokia’s valuation is two times revenue for their phone business–go figure.

Sal is my barber.  He’s been a barber for forty years and has seen it all.  Sal doesn’t think a recession is coming, he knows it’s here.  How does he know?  He sees customers taking longer to get their hair cut.  Someone who used to get it cut once a month is stretching it to  once every six weeks.  And, that’s happening with lots of his customers.  He hears them worry about meeting the mortgage, paying for food and paying for basic services like heat.  Sal is one of my early warnings of an economic downturn and he’s a good one.

Bill Zollars, CEO of YRC Worldwide, the newly expanded Yellow Freight, saw two things happening around Christmas time.  Customers were shipping fewer shipments and putting less things in each shipment.  What did he do?  He met with his senior managers and “reacted swiftly” to the problem.  They cut back on drivers by 10%, stopped renting trucks and put 10% of their current trucks in the parking lot.  He and his team got ahead of the problem.  They didn’t kid themselves, didn’t drive price down to meet suddenly unreasonable projections.  Instead they did what senior leaders are supposed to do–meet the problem head on.

Look at Ford Motor Company.  During a downturn, they would have traditionally kept building cars and pushing them out to dealers who would rely on massive price discounts to chase a shrinking base of consumers who wanted new cars.  For the first time in a long time, they have decided to reduce production to match the shrinking demand.  The result?  They are “the only one of the six biggest carmakers that did not raise (price) incentives in December”.  This is when they are losing ground and ranking to Toyota and sales are declining. 

Tough choices in tough times.  But Kudos to Ford and YRC for being willing to face the music and make the decisions that need to be made.  How about your company?  Are you still chasing unrealistic objectives.  Are you using price to fill the hopper when there is less business out there?  Know wonder your profits are down.  Listen to Sal, he knows what’s going on.