A Target Rich Environment–Price Increases and Telsa Does it Right

Reading the WSJ this morning, I was reminded of Maverick’s classic line in Top Gun–”We have a target rich environment”.  Lots of things going on in business today–these are historic times and not the time to be using the wrong price strategy.

Two examples are Hertz and Whirlpool.  Both announced price increases today due to dramatically increased costs over the past year.  Here’s the problem—the time to do that was six months ago–that’s what Dow did and their increase stuck.  Doing it now, during a time of dramatic downturn in most markets, means that a) competitors are unlikely to follow and b) the move has no credibility with customers who are beginning to see some prices dramatically falling–especially fuel prices. 

Raising prices now will just alienate customers and cause you to loose business.  The time for increasing prices is in rising and/or stable demand with increasing costs.  The one exception to that is when markets are in a true decline (moving on to other technologies) and competitors have left.  That’s not the case here, most markets are mature and going through a decline in demand, not caused by new technologies but caused by less business–that demand will come back over the next year or so.  I would expect to see both companies back off this initiative when competitors don’t follow and customers react by switching business.  A far better tactic is to look for places to reduce discounting.  Oh, well, we’ll see what happens here.

I hammered GM several days ago–now I am sick because the domestic auto manufacturers are asking for $25B in bail out support.  For car loans?  Come on guys, let’s get serious about doing good business.

Kudo’s to Telsa, the new manufacturer of high performance electric cars.  Knowing that competitors are coming into their space, they had been trying to introduce a new lower cost model to flank the big guys.  The problem is that the credit crunch has hit their ability to finance and their demand is dropping just like the others.  How are they responding?  Cutting costs any where they can and conserving cash.  Smart things to do in a downturn when survival is critical.

It’s Too Late To Be Sick About General Motors

There was quite an article about General Motors in yesterday’s The New York Times.  You know how much I like to read but I just couldn’t bring myself to read it.  It’s sitting on my desk now .  Carolyn pointed to a number of points in the article–about the mistakes GM had made over the years and continues to make.  About the union contract that forces them to build a new plant for SUV’s at a time when demand is down and inventories of those beasts are at a breaking point.  I just couldn’t read it.  I’m sick about how they have frittered away a dominant franchise over the past thirty years.  I’m sick about what they’ve lost as a company and about the shape the people of Detroit and other automobile communities around the US are in–the lost jobs, the lost businesseses–I’m sick about everything.

In the early 1980’s, GM had an ad campaign called The Heartbeat of America–heart pounding music about “today’s Chevrolet”.  It was terrific.  But it was too late even then.  By then, their quality was lousy and they were getting beaten in the small vehicle categories by a couple of foreign upstarts by the names of Honda and Toyota. 

GM management was slow to respond to the threat.  There are some who argue that they didn’t think they had to.  They had dominant market share, having beaten Ford decades ago.  They had a new model program that just kept cranking out new cars that people just kept buying.  But they had lousy quality.  Every vehicle had a few quality problems.  The problem was they had also had lousy management of people.  In fact, they expected the unions to manage their people.  That had a direct impact on the quality of the car.  Management got lazy.  Maybe management just got worried about getting too big–about the Justice Department forcing them to break up–That’s what happenened in Telecom and almost to IBM. 

They celebrated their success too much and didn’t worry about the competition enough.  Management got high salaries and the workers got great labor contracts–cradle to grave health care and retirement.  The kind of contracts that currently add over $1,000 in costs to each car they sell to day.  You can’t compete with those types of contracts.  A better rule is that you give bonuses in the good times and never celebrate too much–that kind of thing always turns around and bites you when there is an inevitable downturn. 

In spite of juicy wages and great contracts, the labor problems resulted in poor quality.  Sure, the quality got better but the real target in the Japanese vehicles was getting better too–lots better.  When Toyota management took over GM’s Freemont California plant in the 1980’s, the one that had all the labor problems and produced the worst GM cars, the labor problems almost went away and they suddenly were producing one of the best quality in GM’s line.  You would have thought they would have woken up at that point.

But no, Toyota kept improving and while GM management kept trying, it was way too little, way too late.  They underfunded Saturn by 50% and didn’t let them come out with new models until it was too late.  They targetted the Japanese quality at a time when the Japanese were trying to become perfect–that was their target.  Six sigma?  Fahgedeaboutit.  They could have learned from world class manufacturers like GE but they didn’t.

What about price?  The committed the cardinal sin of pricing–they discounted to solve quality problems.  They discounted to move out inventory.  They discounted when demand went down.  They expected their dealers to do the same thing.  They overloaded their dealers with inventory and put in too many dealerships to make the price discounting problem even worse.  They forgot on of the key management mantras: innovate for growth, quality for satisfaction and price for profits.  (note, I’ve added one there)

Hey, I know that management of any company is hard.  Real hard.  Management of a big company is even harder.  There are lots of things you’ve got to worry about and manage.  But the bottom line is that these guys blew it thirty years ago and they kept blowing it by not moving fast enough.  And now the owners and the employees are going to pay the price.  Those managers should be ashamed of themselves. 

I’m just sick about General Motors, but it’s even too late for that.

Drawing a Line in the Sand: That’s What We’re Talking About

Ed Kless of the Verasage Institute asked a good question about last week’s writing on pricing in an economic downturn.  The issue was how to resolve the need to “not panic price” at the same time you use pricing to keep a continuing stream of contribution dollars coming in.  It really comes down to the issue of making sure you have a costing system which tracks the real incremental costs of dealing with a customer–one that doesn’t average costs and that tracks the real cost of selling and servicing the account.  It was a good question, now we have a great example of a company that did just this with dramatic results.

Incredible Foods of Pittsburgh, PA got lucky ten years ago, they landed the big one: Starbucks.  They only sold one product–crumb cake but that single product and Starbucks soon became their biggest customer–accounting for 48% of their business in 2005.  There was just one problem, they weren’t making any money.  In fact they were losing money.  Why?  Because the cost of servicing Starbucks exceeded the revenue they generated.   Suddenly, they had trucks going all over the place, two people had to handle the reporting headach and increased costs “made the whole thing completely unprofitable”.

So what did Incredible Food CEO Jim Christy do?  He drew a line in the sand.  He fired Starbucks, his biggest customer.  Gutsy move Maverick.  Did the sky fall in?  Nope, He had to shrink staff and cut costs (remember that recommendation last week?) but it worked.  Last year, profits rose 11% and he expects revenue to increase 22% this year.  Cristy said: “I can do half the business, make twice the money and have a tenth of the headaches”. 

It takes courage to fire any customer.  It takes extraordinary courage to fire your biggest one but if you’re losing money on them, it’s the wise thing to do.  Tough times call for tough choices but if you are interested in surviving in these economic times, that’s exactly what you need to do.

Thanks to Alison Yama for this great example of 1) knowing account level costs, 2) account level profitability and 3) knowing when to draw a line in the sand–even if it does mean firing your biggest customer.  And thanks to Ed for his continuing support and comments.

Fuel Surcharges–Are They a Good Way to Recover Costs?

We just got the bill for shutting down our lawn sprinkler system.  It included a $5 surcharge for fuel costs–that was on top of $85 for doing the work.  Here’s the question–was that a good way to recover increased costs?  The answer–as usual–it all depends.

When faced with dramatically increased costs–be they for components, assembly, delivery or service, you’ve got to at least try to pass them on to customers.  In times of cost increases, customers expect it and will usually accept the increases.  Sure, the price buyers and poker players may complain about the attempt but, most customers are struggling with the same issues and understand that when costs go up, prices have to go up.

Is that a vote for cost-based pricing?  Maybe.  But it certainly is a vote for cost based justification for price increases.  There is a difference.  Cost-based pricing ignores the value you create for your customers.  Cost based justification can leverage that value at the same time it can use an increase at a time when it is expected and justifiable to customers to protect and even possibly increase profits.

So here’s the question–when is it a problem?  It’s a problem when you are selling to loyal customers.  A loyal customer looks at the charge and might start feeling like they’re being “nickle and dimed”.  Will they change their loyalties?  Probably not.  But it might make them more price sensitive over time.  It will actually decrease their level of loyalty.  This is what the banks discovered thirty years ago when they tried to make money putting in higher service charges.  The freight companies learned that a few years ago and probably everyone is going to learn that now.

The problem is that without a high and low value offering, it is difficult to initiate those charges without the surcharge.  It’s easy to hide the surcharges in a bundled high value offering that might include sprinkler head inspections for example.  But not having the high value offering made it difficult to initiate the surchage in a way that wouldn’t alienate me.  So, the real vote is to make sure service companies have a high and low value package.  For the high value package–eat the surchage but continue to offer value added services.  For the low value offering, tack the surcharge on and everyone is happy.

Times of Turbulence: Bring Out the Panic Pricing Clowns

Times are tough.  The financial markets are an absolute mess.  The government bail out will take a long time to smooth things out–at least 12 – 18 months.  Just because the stock market spikes one day doesn’t mean things are solved, it’s going to bump along with dramatic swings for the next several months.   I do think we’ve hit the bottom, but we’re going to scrape along before the fundamentals begin to take hold and get the economy moving again.

For business, it’s going to be tough during those times.  Orders will slow, competition will increase and customers will get more price sensitive.  These are desperate times.  Desperate times bring out the Panic Pricing Clowns.  Panic Pricing what?  Panic Pricing Clowns.  These are the people, often senior managers in a company who will insist on using price discounts to solve the revenue problems.  These are the people who beat up the pricing department to forget all that fancy analysis about profits and trying to limit discounts, they want more discounts.  These are the people who beat up the salespeople to go out and close business whatever the cost to the firm.  This is panic pricing pure and simple.  It eliminates profits and puts companies and a decline they often can’t come out of.

All it takes is one of them to incite panic pricing in the firm.  The problem isn’t the salespeople or the pricing professionals, they know that it’s dumb.  I would also submit that the problem isn’t the Panic Pricing Clown–they’re scared.  They’re worried about their job.  They don’t know any better.  The real problem is the other senior executives, especially Presidents and CEO’s who should know better and don’t stop the Panic Pricing Clown’s nonsense.

One of my favorite CEO’s is from one of our clients.  When they saw the downturn coming last year, he sent the following message to his senior managers: “You can’t price your way out of a recession”.  You know what, they aren’t, but they are doing just fine.  They have improved their pricing performance and in spite of a recession, last quarter, sales were up 19% and profits were up 22%–that’s pricing leverage.  Bill Zollars, CEO of YRC Corp. (The old Yellow Freight) has done the same thing.  Last year, he began cutting back in several areas so they could weather the storm.

So if you have a few Panic Pricing Clowns, don’t hate them, pity them.  Try to send the message to other senior executives about the damage they’re doing and hope that someone will sit them down and get them straight–this is the time for pricing discipline, not panic pricing.

Good luck and be well, tough times for all but we’ll get through this.

The Economy, Parking Lots and Survival Pricing

I got up early this morning to catch up on comments from last night’s debate and was devastated to hear about the drop in Asian financial markets.  Japan, 10%, Indonesia in free fall, that’s an indication of what we have in store for us today and over the coming days.  The Fed made a mistake yesterday when they failed to drop interest rates.  That was the one thing that could have prevented what we are seeing and going to see today.  Not that they’re doing everything wrong–the move to purchase corporate financial paper directly is great because it finally admits that the traditional methods of pumping cash into banks isn’t working–the banks are hording the cash and not easing debt.  Just got a news flash that the central bank is dropping rates but it might be too late to stem the lowering tide.

In the past year, we’ve been talking about how pricing should be used during a recession.  Now, we’re going to talk about how pricing should be used during a depression.  But first, I want to talk about one of my core theories of pricing and business strategy: parking lots.  Over the years, I’ve developed a measure of corporate success.  Good businesses, well managed ones, have parking lots full of clean, relatively new cars.  Lousy businesses, poorly managed ones, have partially empty parking lots with somewhat dirty and older cars.  You can guess why.  During that time, I’ve seen too many of the empty ones.  These days, parking lots with cars–any cars are going to be better than parking lots with no cars.

Yesterday, a commentater said that this was the second worse economy in the history of the country–1929 was number one.  In 1933, 25% of the workforce was unemployed.  25% of the families didn’t have a breadwinner, had trouble putting food on the table, clothes on the kids and many lost their homes.  A pall hung over the land.  It was bracketed by two world wars that killed too many and those that returned had to deal the horrors of their experience.  I don’t think that we’re going to have to deal with two world wars, but there will be continuing regional ones.  And, unemployment is going to be worse than 2001 when it hit 10%.  We have yet to see the depths of where it will go–don’t kid yourself on that one.  This could be worse than 1933 because it is driven by the core of our economy–the availability of credit.

Times like this calls for Survival Pricing.  Survival Pricing focuses on doing the things that help businesses survive.  Parking lots will get emptier as workforces are trimmed and the cars are going to be older and dustier but there are things a business can do today to assure that the business will a) survive and b) keep as many cars as possible in the lot.  Key elements of Survival Pricing are:

1. Move to Incremental Cost Pricing–real incremental costs.  The job of pricing is to keep contribution dollars flowing into the system.  Any dollars are better than no dollars.  If you are in a value-based space, you’re lucky but don’t kid yourself, if demand starts slipping, a cost based approach will assure that your customers are getting the best possible prices.  They will need those prices to survive.
2. View labor as an incremental cost.  Yes, we want to protect the parking lot but you can cost yourself out of the market today.  Your job is to keep the engine going, not to keep everyone employed.  If you wait to long to deal with this, you may lead the company to bankruptcy and/or insolvency, meaning everyone loses their jobs.  Call the union guys in and get them involved with this. 
3. Eliminate all unecessary costs.  Forget the fancy retreats (AIG Execs–what were you thinking?).  Dump the jet and first class travel.  Senior execs–set the example for the rest of the team.  Close the executive dining hall and bring a sandwich–heresy yes, but it sure does set the example.  Eliminate all “corporate” and brand advertising and promotion.  Those are long term investments.  Instead, divert those budgets to sales effectiveness.  Do better with deal tracking, buying center analysis, customer level value propositions and dealing with RFP’s.
4. Continue to look for valued services that will keep customer costs low.  Look for things like faster and more reliable delivery that keeps customer costs low, better training and on-line support that improves efficiency, improved packaging.  Don’t cut those services, instead offer them to the customers that will pay for them at a reasonable price–even based on the costs.
5. If price buyers and poker players want “bare to the bone” pricing, give it to them but take away the value services.  If they scream, that’s a good thing. 
6. Execute brutal fences around those valued services.  You can’t afford to give them to price buyers any more so don’t.
7. Determine the true cost to serve a customer and if you’re losing money, dump them.  Let the competition serve them.  If you really, really, really know your true cost for serving a customer and your prices are below those costs, you can’t afford to serve them any more.  Get over it.  No more BS justification.  Just do it and do it fast.
8. Change your pricing strategies, especially if they are either skim or penetration.  In downturns, customer demand is inelastic so eliminate penetration pricing to build volume or share.  Don’t get sucked into price wars.  Skim strategies might leave you very vulnerable to competitors.
9. Have a steady hand on the tiller.  This is not the time to panic, it is the time to be strong and confident.  Show people that confidence.  Be honest with them but you want them to have confidence in you.  Especially over pricing.  You can’t let business conditions rattle you or your people.  If you don’t do the things on this list, you may very well fail.
10. Become a value leader in the firm.  For pricing?  You betcha.  Confidence in value leads to confidence in pricing.  Confidence in pricing leads to survival during these difficult times.

There will be much more coming on this.  Probably too much.  Good luck and let me know how you’re doing.

Columbia Professor Re-Writes Textbook Pricing Rules

Noel Capon is one of the leading marketing professors in the world–he’s written a dozen books on marketing and managing global accounts, a Distinguished Professor of International Marketing at Columbia and a good friend.   I’ll review his latest book Managing Marketing in the 21st Century in the coming weeks but I wanted to talk about what he’s done with its pricing.

The book is selling for $88.50 at Amazon.  But it is available for FREE online at www.mm21c.com  yes, that was for free!!!!!!  Rule number two of pricing and business is TANSTAAFL (There ain’t no suth thing as a free lunch), but in this case, at the end of the semester, Prof. Capon will ask his students to pay him what they think the book is worth. 

Wow, gutsy move.  For those of you who are unaware and don’t have a kid in or ready to go to college, you’ve got to understand that college textbooks have been a “price high and prosper” world for publishers for decades.  Professors adopt books they’ve already taught with so they don’t have to redo class preparation and generally don’t care about price because students and their parents pay the bill.  Noel is challenging that strategy with a one that we usually see only rarely in trendy restuarants.  In those cases, owners have found out that customers generally pay more than would be charged traditionally.  That’s because they feel better about the experience and want to reward the unique approach. 

In this case, with the audience being students, I wonder how it will work.  At the end of the semester, they’re usually broke, worrying about exams, jobs and the last fling on campus before summer/winter break hits.  Will this approach yield significantly less than the traditional approach?  We’ll wait and see.  Maybe the trick will be to have them pay before final grades go out.  Expect more on this in December when we see the results.