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Posts Tagged ‘pricing’

A Sweet Victory – How Krackel took it to Nestle and won

June 23rd, 2011 Comments off

Candy MacroFrom the book, Killing Giants, here is an excerpt of how a small player, Krackel, took on the mighty Nestle Crunch bar and scored a significant blow by being strategic with pricing.  Krackel (owned by Hershey) utilized the vending machine retail channel as a battlefront to take on Crunch since most vending machine operators would only stock one of the two similar candy bars.

Mullen’s proposal to management was to give the vending distributors a 30 percent trade discount on Krackel where other brands hovered in the 5 to 10 percent range. This was understandably a bold move. “I originally took it to my boss and he choked on it. He said we couldn’t afford it. Giving away thirty points was a big deal. I said, ‘Think of the options. If Nestlé tries to match us, the dollar cost to them is huge. That, or we blow Krackel out in every vending machine in the country.’” With nothing to lose — and aiming at the brand that paid for so many of its chief competitor’s other brands — Krackel could play the role of spoiler. “My boss balked at it at first, but the more he looked at it, the more he got this smile on his face. He said this is a pretty evil plot. The big guy can’t win on this and we can’t lose.”

Read more at: A Sweet Victory

My Review of Pricing Books

December 22nd, 2010 Comments off

The concept of pricing and using it strategically has caught my fancy of late.  Enough that I read four books on the subject while on vacation in August and wrote up my analysis for the current issue of the MNCPA Footnote.  See my thoughts online at this link: A CPAs review of pricing books.

Categories: Blocher Ch 13, MNCPA Tags: ,

Supervalu in Pricing Vise

October 20th, 2010 Comments off

Today’s Wall Street Journal had a piece on a local giant, Supervalu, and the tricky balancing act they need to pull off to successfully set prices amid cost increases, strong price competetion, and a stagnant economy.  Given that we are talking about pricing in class right now this is especially timely and grocers are among the most price competitive businesses operating on razor-thin margins with many cost leaders vying for business.  In a way, food has become a commodity and people are looking for the lowest price in many (most?) cases.  We can argue whether or not food being commoditzed is in the best interest of our population and country, but it is the reality that Supervalu (amongst others inclusing Walmart) find themselves operating.  The pressure is intense to remain profitable while juggling the costs and prices…

Earnings: Supervalu in Pricing Vise. Timothy W. Martin, Paul Ziobro. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 20, 2010. pg. B.4

Nobody Prices Better Than Airlines

August 27th, 2010 Comments off

One of the first things frequent fliers learn is that the number of fares paid by each person a plane is nearly equal to the number of passengers.  Airlines aggressively price routes to try to maximize usage of capacity while also maximizing profits.  The end result is that airlines can and do change prices multiple times a day as they jockey themselves amid a sea of competitors to sell what has largely become a commodity, at least in the eyes of leisure travelers.  Simply put, too many people have grown accustomed to searching for flights based on price (because nearly every online search defaults to sorting with the lowest priced flights first) that airlines were unable to differentiate themselves effectively from competitors because when their fares were on screen 2 or 3 of the search they never got booked.

Realizing this (and realizing that not every company can compete solely on cost/price) we’ve seen the “unbundling” of items that used to be included in airfares.  Everything from checked-baggage fees to higher penalties for changing flights (and even carry-on baggage fees at Spirit Airlines) is now seen as a way to charge customers which, in turn, makes it hard for airline passengers to compare two prices because one needs to know all the fees that each airline can assess to make a valid comparison.

The Wall Street Journal today took a look at airline pricing (more from a consumer’s point-of-view than a scientific one as this appeared in the Personal Journal section) and asked some questions about why it is sometimes cheaper to fly overseas than to fly a few hundred miles.  The short answer? Because people are willing to pay more to fly to certain places and/or the competition is not as rigorous on certain (especially international) routes.

The price you pay for a ticket is driven by a number of variables: competition, types of passengers, the route and operating costs. But the biggest factor, by far, is whether discount airlines fly in a market. Low-cost carriers often set the price in markets because competitors feel compelled to match that price or risk losing customers and flying empty seats. And when they aren’t there, big airlines behave radically differently when setting prices.

Over a year ago when Southwest began serving MSP, I offered my own examples coupled with a Marketwatch article of the wide disparity in fares on routes where discount carriers are strong vs. those where they are absent.  The Wall Street Journal piece largely comes to the same conclusion.

And when there’s not low-fare competition, prices soar. The most-expensive average domestic ticket in the first quarter was $786 for round-trip flights between San Francisco and Philadelphia, according to the DOT. That 2,521-mile route is dominated by United and US Airways, who are competitors but also partners in the Star Alliance. Fly to Boston from San Francisco—183 miles farther by air than Philadelphia—and you paid an average $296 less round-trip in the first quarter, according to DOT. The difference: JetBlue Airways has 17% of the San Francisco-Boston market, but none of the San Francisco-Philadelphia market.

As you will discover in this course (and in life) the cost of something often has little to do with the price that is charged.  Does it really cost 100 times more to make a Coach bag that sells for $4,000 as it does to make the one at Target that goes for $40?  Of course not…yet many still fall into this trap with regard to their expectations about prices.

The Middle Seat: You Paid What for That Flight? — It Can Cost More to Fly to Hartford Than Barcelona; How Airlines Determine Ticket Prices. Scott McCartney. Wall Street Journal. (Eastern edition). New York, N.Y.: Aug 26, 2010. pg. D.1

E-Readers Go Mainstream As Pricing Model Changes

July 30th, 2010 Comments off

One of the most interesting pricing events we have playing out before our eyes right now is in the market of e-readers.  Several weeks ago, Barnes and Noble kicked of a mini-price war by dropping the price of their 3G Nook from $259 to $199 while pricing their wifi-only version at $149.  Within hours, Amazon had responded by undercutting the 3G Nook by selling their 3G Kindle for $189:

Barnes & Noble, the national bookseller, announced Monday that it was dropping the price of its six-month-old Nook e-reader to $199 from $259 and introducing a new version of the device, which connects to the Internet only over Wi-Fi networks, for $149.

Responding rapidly, Amazon.com then cut the price of its popular Kindle e-reader below the Nook, to $189 from $259.

In Price War, E-Readers Go Below $200. By Brad Stone. New York Times. June 21, 2010

As mentioned in the article above, some analysts chalked the price cuts up to the increased threat of the Apple iPad gaining a foothold as an e-book reader while Amazon, in particular, has downplayed that idea.

This week, though, things escalated a bit more.  Amazon announced the next generation of their hardware to be released August 27th.  They are keeping the 3G model at $189 but announced a new wifi-only model for $139; $10 less than the comparable Nook.

Amazon offers $139 wireless Kindle for mass appeal. By Alexandria Sage. Reuters.com. July 29, 2010 7:07pm EDT

Kindle to Go ‘Mass Market’ — Amazon Digs in Heels by Introducing New, Cheaper Version of E-Book Reader. Geoffrey A. Fowler. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 29, 2010. pg. B.6

While all of this has played out, an important shift has happened.  According to the NY Times article linked above, until recently Amazon and Barnes and Noble have sold e-books at a loss while making minimal profits on the hardware.  That has changed now, to where a WSJ piece speculates that the hardware is now selling at a loss with the idea being to make up the shortfall in volume by selling the e-books.  This is more like how printer and cellphones are sold with the “consumables” (ink or minutes, as the case may be) being the profitable item.

Amazon’s price-cutting won’t be cheap. The company said last year that its Kindle manufacturing costs were “significantly higher” than an estimate from iSuppli of $185.49. Costs likely have come down since then, and not offering cell-network access reduces costs as well. Still, it is a good bet the company is losing money at $139 a unit.

The High Cost of a Cheap Kindle. Martin Peers. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 30, 2010. pg. C.12

I’m guessing things will continue to evolve as we head to into the holiday season and some articles I’ve read predict a sub $100 e-reader by then.

I’ve finally made the plunge myself and opted for the $189 Kindle coming out on August 27th but I’m hopeful that even while I have it preordered the price may drop.  Looking at what has happened in the past 5 weeks makes it seem reasonable to expect some price cuts in the next 4, doesn’t it?  Stay tuned…

Alcoa Bets on Operating-Cost Cuts

June 25th, 2010 Comments off

Here is an article about Alcoa spending $1.5 billion to create a new low cost mine.  Sounds like an oxymoron, doesn’t it?  Imagine the analysis that goes into a decision like this…all of the information has to be boiled down to some of the basic things we have discussed including breakeven analysis, budgeting (including worst-case and best-case scenarios), pricing predictions, etc.

Alcoa Treks Into Jungle to Cut Costs. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 22, 2010. pg. B.1

Monsanto Restructures Roundup Business – WSJ.com

June 4th, 2010 Comments off

Another piece from the May 28th Wall Street Journal was one about Monsanto cutting prices on Roundup, a long-time cash cow for the chemical company.  In a move similar to brand-name prescription drugs moving over-the-counter once generics show up after patent protections expire, they have been forced to do this as low-price rivals have entered the marketplace.

The Roundup business “officially graduates to the background of our earnings profile today,” said Hugh Grant, Monsanto’s chairman and chief executive.

As discussed in several places during the semester, setting prices is a key element of implementing strategy.  I’m somewhat troubled by articles such as this that focus on pricing from the standpoint of investors and short-term returns because strategy is (or should mostly be) a long-term approach to maintaining a company’s competitiveness.  Too often these days the focus is only on the next quarter or what the stock will do when earnings are released…attitudes that are not necessarily in the best interest of the long-term viability of a company.

Monsanto Cuts Roundup Prices As Knockoffs Flood Farm Belt. Scott Kilman, Ian Berry. Wall Street Journal. (Eastern edition). New York, N.Y.: May 28, 2010. pg. B.1

In a related article from the front page of today’s paper, it seems like Monsanto would have been delaying the inevitable had it tried to hang on to Roundup being a key player in its strategy.  Farmers are increasingly turning to other chemicals to kill weeds as many weeds have developed resistance to Roundup.

Hardy superweeds immune to the Farm Belt’s most effective weedkiller are invading fields, prompting a counterattack from agribusiness that could leave farmers using greater amounts of harsh old-line herbicides.

The flagging weedkiller is Roundup. Its developer, Monsanto Co., also sells seeds for corn, soybean and cotton plants unaffected by the chemical, enabling farmers to spray it on freely without fear of harming their crops. Farmers now do so en masse, using “Roundup Ready” crop varieties for 90% of the soybeans and 80% of the corn grown across the U.S.

The rise of Roundup, more than a decade ago, sent older herbicides that damage both weeds and crops into deep eclipse. But now, as nasty invaders with names like pigweed, horseweed and Johnsongrass develop immunity to the mighty Roundup, chemical companies are dusting off the potent herbicides of old for an attack on the new superweeds.

Superweeds Hit Farm Belt, Triggering New Arms Race. Scott Kilman. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 4, 2010. pg. A.1

“Performance Pricing” Strategy to Avoid Cost Leader Pitfalls

May 27th, 2010 Comments off

As we discuss in class when contrasting cost leadership vs. product differentiation strategies, the cost leader is in a dangerous position.  All it takes to knock of a cost leader is for someone to be even cheaper…not that cost leaders can’t be successful (Costco, Walmart, etc.) but the majority of firms need to offer value that they can charge a fair price for without racing to the bottom to be the cheapest provider.

This article is for everybody else: those who choose not to compete on the basis of cost and low price. This article is for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices.

By competing on performance instead of price, you shift the battle to where your company’s strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

The Wall Street Journal on Monday had a feature section that contained many good articles related to management theory but the quote above came from a piece that suggested that more companies need to find their strengths, match those strengths to needs in the marketplace, and price their products/services accordingly (i.e. higher) to maximize profits.  There is an element of Value Chain cooperation at the end of the article as well.  Typically the way prices have been set has been a closely guarded secret but there are times when cooperating with customers and/or suppliers can result in two companies doing things together to lower costs, for example, that they would have been unable to do on their own.  This creates value for both participants and can tie together companies to work together in the future.

WSJ Executive Adviser (A Special Report): Pricing — Raise Your Prices! Face it: Most companies can’t compete on price; And the good news is they don’t have to. Frank V. Cespedes, Elliot B. Ross, Benson P. Shapiro. Wall Street Journal. (Eastern edition). New York, N.Y.: May 24, 2010. pg. R.8

Some colleges charge higher tuition for online classes

March 6th, 2010 Comments off

I mentioned in class a story I had heard on MPR about the pricing of online courses. I found it interesting that the main issue with the pricing of online courses higher their traditional counterparts seemed to be that nobody could adequately justify the pricing. The author of this pieces is looking through a cost-centric prism that misses a big factor in pricing.

Some colleges charge higher tuition for online classes | Minnesota Public Radio NewsQ.

Because they aren’t tracked, it’s hard to say how much the increased tuition is directly tied to higher expenses.

That bothers Travis Johnson, the vice president of the Minnesota State College Students Association. Johnson also takes classes online from Lake Superior Community College in Duluth.

“While the online piece creates more flexibility, the increased cost is an offsetting barrier. That’s just really a concerning to us,” Johnson said. “There’s campuses that don’t even charge a difference, and then there’s some that charge a lot more.”

How about supply & demand as an argument? Obviously people are willing pay more for an online course than they are for a classroom format. If this weren’t the case, the online courses wouldn’t have people enrolled in them. As long as the demand dictates it (the online section of Acct 320 is nearly always the first to fill) why shouldn’t colleges charge more?

Jan Doebbert, vice president of academic and student affairs at Alexandria Tech, has heard from students who’ve noticed the difference. But he said they’re getting more value — specifically extra technical support.

Mr. Doebbert accurately makes the case that students get more value. I find it debateable to think that the extra technical support creates the most value, though. I would guess that most online students choose that format for the flexibility it offers. They can work from home in their pajamas or from across the country on a business trip. If the roads are bad because of a blizzard they don’t need to risk their life to get to class. If they work inconsistent hours or have childcare concerns, the online format allows them to more easily take classes. Those should be the arguments to charging more for online courses.

As discussed in class, it doesn’t matter what the cost of something is to the company when it comes to setting the price. Cost is just one of many factors that enter into the pricing equation. If every company could just add up their costs and add 10% to top as a profit margin we would all be paying much more for goods/services than we do now.

When a Cost Leader Gets Squeezed

January 21st, 2010 Comments off

There was a story in today’s paper that caught my eye about the recent price cuts on mobile data/voice plans announced by AT&T and Verizon Wireless and the potential impact of these cuts on Sprint, a company that has been positioning itself as a cost leader.  As we discussed in class, a cost leader can only hold that position until someone else comes along and offers a lower price.  That hasn’t happened yet, but there is an argument that even though AT&T and Verizon Wireless are pricing their packages higher that Sprint still could be threatened.  It will ge interesting to watch Sprint’s response and how this plays out between the two market leaders and Sprint.  Stay tuned.

Sprint Squeezed by Rival Price Cuts — Carrier’s Lower-Price Lure May Be Undercut by Reductions at AT&T, Verizon. Niraj Sheth. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 21, 2010. pg. B.8

Corporate News: Verizon, AT&T Escalate Pricing War — Carriers Race to Drop Calling-Plan Prices, But Require More Customers to Pay for Data Services. Niraj Sheth. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 16, 2010. pg. B.5