The Price is Right

In response to my Partner Ken and his post “Raising Prices – Are You Nuts?” I think he’s not certifiable but may be pushing the envelope. The topic of pricing is one of the least quantifiable functions management deals with due to the large number of open-ended variables involved, many of which are unknowable.

As a game show, guessing the right price is fun and rewarding. In business, guessing wrong about the impact pricing has on trade and consumer behavior has major influence over a company’s business viability. Have you ever been in meetings where the pricing strategy discussion includes debates about cost plus, matching competition, or pricing to customer benefit are all central to the topic of correct pricing? Have you tried to estimate competitive response to price changes? Have you argued pricing structure across different classes of trade, such as retail and Internet?

Bad guesses have major consequences. But the key to increasing prices, once a company has settled on a corporate pricing strategy, is to combine multiple objectives from both the account’s and the company’s perspective to achieve real revenue and dollar profit gains.

Retailers and manufacturers (brands) rarely share the same strategic objectives.  While the goals of increased revenue and profits are universal, it is the question of whose revenue and whose profits where there is usually disagreement.  Thus the role of the manufacturer is to understand the intersection of common goals. Remember the clash between Wal-Mart and dominant market share leader Rubbermaid in the 1990’s? Rubbermaid tried to increase prices in order to pass along raw material cost increases to the consumer rather than suffer a margin decline, a move resisted by the massive retailer. Wal-Mart changed suppliers and Rubbermaid was forced to merge with Newell to survive. Talk a about a bad guess about who had market strength.

Turning to the strategy of increasing prices, it is critical to understand your key accounts’ accounting and merchandise management compensation structures. In addition, a solid strategic basis which supports the key accounts’ own growth strategies is essential. Writing a universal equation is impossible but we can describe a pathway for understanding how to approach price increases:

• Product margin alone is often not how retailers measure profitability. For example, co-op advertising, broadcast & Internet advertising, promotion spending, allowances for damages, markdown money and returns all enter into the equation at the merchandising level. Frequently there are “puddles” of margin in the financials that are not visible to the buyer teams. On the other hand retailers’ financial officers often do not focus on how much a brand spends on support.  

• Retail brand marketing and sales teams need to find these “puddles” and reallocate spending, with a clear eye to increasing sell-through and building market share, while enabling the buying and merchandising executives to hit their MBOs. These objectives usually include increasing number of catalog pages sold, exclusive promotion events and even special sizes, packs etc. while demonstrating to their management that a price increase along with larger open-to-buys makes solid business sense. 

• Price increases combined with reallocated spending by the manufacturer, supported by a sound strategic basis and communicated clearly to the buying team, should avoid trade alienation, a euphemism for losing support from your account(s). 

• In short, one price increase strategy is to find “puddles” of margin that of are no financial, strategic or executive award value but still represent lost manufacturer margin. By reallocating the balance of support and working closely with the category buying team, manufacturers can increase prices and generate additional funds which can be used to increase short-term spending. 

• In turn, retailers’ brand marketing teams need to recommend this strategy to their management on the basis of increased dollar margin (volume increases at lower margin) for longer-term share gain and increased profitability in both dollars and percentages mid- to long-term.

We are working with two product marketing and sales teams to affect this strategy, starting with a very clear understanding of key account accounting practices and executive awards programs.

What price strategy does your company use? How have you approached increasing prices? Please let us know for shared learning.

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