More and more common and very damaging if you handle them wrong - interesting approach

1. THE
VOL. I, NO. 3 NEWSLETTER
PRICING AND SATISFYING CUSTOMERS —
WELCOME TO THE 1990’S
Back in the 1980’s, pricing was not a major issue for most manufacturers or service
providers and their customers. More often than not, annual (or more frequent) price
increases were the norm, as companies often achieved their financial targets through
aggressive pricing activity. Prices were passed on down the trade channel and, while there
was occasional griping, the end-users ability to pay was rarely in question.
So much for ‘the good old days’ - they are now long gone!
Instead, the 1990’s have taught every business that pricing cannot be taken for granted.
There is a global transformation, seen in industrial, business and consumer markets, towards
buyers wanting - and demanding - better value. This trend of more discerning customers
means that all elements of the buyer/seller interface (including price as a key component)
are coming under scrutiny. For many companies, according to Fortune magazine, this means
“giving customers all of what they’ll pay for – and none of what they won’t”.
At The Advantage Group, we have seen first-hand from our
WHAT’S INSIDE various measurement programs just how important customer
2-3 satisfaction has become, and how price perceptions have become
FEATURE a key “satisfaction driver”. In recognition of this increasing
HOW TO AVOID A attention on pricing issues and the inter-relationship with
PRICE WAR customer service, we have expanded our own focus, with pricing THE
3
strategy consulting now being provided as an integral part of ADVANTAGE
our practice. Paul Hunt has recently joined The Advantage Group
PRICING to assist clients in this area; over the past eight years, Paul has
SEMINARS done extensive work in strategic consulting and has advised
4 leading North American companies on pricing, channel
management, and customer value issues.
HAPPENINGS
• AG/FAIRCHILD PUBLICATIONS:
APPAREL INDUSTRY In the feature article for this issue, found on Pages 2-3, Paul
INFORMATION BASE outlines one of the critical pricing issues that organizations face
• FOODSERVICE TRACK in dealing with customers. We trust that you find this outline not
1995 REPORT only informative, but also usable for your organization to better
GROUP INC.
• JOINT VENTURE ON ECR deal with pricing issues in the “value decade” of the 1990’s. Helping clients build
successful relationships
• BENCHMARKING STUDY ON with their business
CUSTOMER SATISFACTION customers
• NEW BOOK TO BE RELEASED

2. THE
How to Avoid A P R ICE WA R
A 1. BE CAREFUL ABOUT 2. SELECTIVELY
s most business
managers know, MISREADING YOUR COMMUNICATE YOUR
pricing has a more COMPETITORS’ STRATEGY -
significant impact on ACTIONS - By no means should an organization
the bottom-line than Often price wars are started due to participate in collusive or predatory
any other item on a company’s misreading competitors’ actions or pricing. But there are situations
income statement. For the intentions. The results can be a where companies should selectively
average company, a 1% drop in downward spiral in prices that communicate their strategies to
price can slash operating profits ruins profitability. minimize the chances of a price war.
by up to 12% - 15%. This creates
a strong motivation to avoid In the packaged goods industry, a When Chrysler, for instance, was
price wars. A price war is every company recently discovered the cost under the threat of a deluge of new
of not having accurate information. minivan competitors entering the
manager’s worst nightmare.
It misread a 10% price cut by a market, the president made a speech
War is an appropriate word competitor by assuming that it was to its dealers covered by the business
since, like conventional warfare, a long-term strategic repositioning press. In the speech he indicated that
it leaves lots of casualties and of its product, but that was not the Chrysler would be building a new
rarely does anybody really win. case. In fact, the competitor was very low-priced minivan but he also
There are many ways in which a responding to an FDA requirement explained that it was something in the
price war can get started, but that all nutritional information desk drawer in case it was needed. To
about packaged foods be reset to 6 make himself abundantly clear he
often managers from different
oz. Hence, the competitor was only finished by saying “If it comes to a
companies will have different trying to get rid of its obsolete 6 1/2 price war in minivans, I’m convinced
versions of what precipitated the oz package before launching the 6 oz we can win it.” By making Chrysler’s
price war. None of them started product. By misreading the intent of intentions to defend its market share
it, yet they’re all in it. the price cut, the company clear, Chrysler indicated to the comp-
responded with its own deep price etition that they would lose a lot of
The following guidelines on ways
cut. If it had not done so, prices money by trying to build market share
your company can successfully would have returned to normal in a through low pricing.
avoid price wars and maintain month or so; instead, the result was
profitability are based on our The value of communicating your
a price war that destroyed industry
experience in helping clients strategy at times is that it forces com-
profits for the year.
deal with pricing challenges. petitors to take off the rose-colored
glasses when preparing their forecasts,
and hence dampens their enthusiasm
for aggressive price competition.

3. 3. HAVE GOOD A manufacturer of lighting products
recently faced aggressive price
•Are our competitors’ forecasts
realistic?
INFORMATION ABOUT
YOUR CUSTOMERS’ competition and was slow to •How much industry capacity
respond. By the time it did respond its is being added?
LEVEL OF PRICE
competitor had benefited substantially, •Can we diversify the use of
SENSITIVITY –
and decided to make another our capacity to minimize risk
Understanding customer price sensit- when demand is down?
ivity is essential to any effective pricing aggressive price move. This pattern
•How significant a cost advan-
strategy, but it becomes critical during continued until the company which
tage will we have over our
times when new competitors enter the was slow to respond almost went out competitors?
market place. of business. •Are there market niches that
will support our require-
A client in the packaged goods The lesson is, that if you want to ments for profitability?
industry found this out when minimize price competition, then
it suddenly faced a new private you must be willing to respond to By asking these questions you can
label product that was positioned aggressive pricing moves consistently avoid some of the painful lessons
directly against one of its flag- and quickly. This will minimize the learned by companies which have
ship brands. The company was benefits which an aggressive com- not done so.
unsure how to react in the face of
petitor can accrue, and this sets the Price wars are detrimental to all
this new threat. The horror stories
of companies which did not stage for the understanding that deep involved. They destroy industry profits
effectively respond to private labels discounting will not be to anyone’s and rarely lead to long-term advantage
are industry legends, yet dropping advantage. for anyone. Even if a company does go
prices substantially based on this fear bankrupt due to a price war, its capacity
would cost millions. To respond
rarely disappears, which is evident from
strategically, the company knew it
had to better understand the price 5. MANAGE YOUR the U.S. airline industry. Instead, the
best approach is to apply these tips and
tradeoffs customers would make with COMPANY’S CAPACITY
this new private label brand in the CAREFULLY – minimize your chances of a price war.
market. By undertaking pricing The single biggest cause of price wars
research, the company was able to is industry over-capacity. Price wars Seminars on:
forecast the short-term and long-term
are almost unavoidable once there is “PRICE AS A STRATEGIC WEAPON”
impact of alternative pricing
strategies. What the company significant over-capacity, since everyone The Advantage Group is pleased to be conducting
learned was that its brand was very is fighting to maintain critical mass. the following seminars on behalf of the Canadian
strongly positioned and that it could Management Centre (Division of American
af ford to charge a substantial Numerous industries have suffered Management Association).
premium and still retain its chronic capacity problems – airlines,
customers. The strategy chosen was to printed circuit boards (PCB’s), and 1995 Dates
maintain the premium price, and to October 23-24 - Toronto (Sold Out)
newsprint (until recently) are a few October 26-27 - Toronto
“add value” to the brand which examples. Managing capacity correctly December 4-5 - Toronto (Sold Out)
would further insulate it from price is a tricky issue that has many different December 7-8 - Toronto
wars.
strategic implications. However,
companies often fail to account for 1996 Dates
January 29-30 - Toronto
the possibility of over-capacity. The
March 25-26 - Montreal
result is that they end up in a costly
4. BE CONSISTENT IN price war.
May 27-28
August 12-13
- Toronto
- Whistler, B. C.
YOUR RESPONSE AND September 23-24 - Toronto
Some questions to consider when November 25-26 - Toronto
MOVE QUICKLY –
assessing the ramifications of adding
If competitors perceive that they will
capacity are as follows: For further information on these programs call the
benefit from making aggressive price CMC at (416) 214-5678 or Paul Hunt at
moves then they will do so. •Are our forecasts realistic? The Advantage Group, (416) 863-0685 Ext. 121.

4. AG AND FAIRCHILD AG HAPPENINGS
DEVELOP APPAREL INDUSTRY
INFORMATION BASE • The Foodservice Track 1995 program, the first ever industry-wide
The Advantage Group has been measurement of supplier performance among Canadian foodservice
selected by Fairchild Publications distributors, provided comprehensive benchmark information to suppliers
to do a series of exclusive in-depth from senior personnel, buyers, marketers, sales managers and distribution
apparel industry reports on critical managers at major foodservice distributors. Program expansion is already
issues. Fairchild’s flagship publications planned for 1997. Introduction into the United States is anticipated later
include Women’s Wear Daily and this year. Key among the findings of the 1995 study is that there are very
Supermarket News. Initial topics for wide gaps between the views of senior personnel and line personnel with
trade survey research and reporting regards to supplier performance.
are Globalization(recently published), • Kurt Salmon Associates and The Advantage Group Form Joint
Role of Brands and Private Label, Venture on ECR – The Advantage Group and Kurt Salmon Associates
Strategic Alliances, Consumer Trends (KSA), based in Atlanta, Georgia are joining forces to market ECR- related
and Non-Traditional Retail Formats. consulting services in Canada. This collaborative effort combines the
extensive ECR experience of KSA with AG’s in-depth understanding of the
Highlights from the special issue on Canadian grocery industry. Initially, this joint venture will focus on providing
globalization in apparel include the an ECR Readiness Assessment (ERA) process to assist Canadian grocery
following: distributors to manage the “ECR labyrinth”. This assessment program will
• Globalization and regional provide a comprehensive, overall guide for charting an organization’s current
alliances are viewed favorably position and progress on ECR. The benefit for Canadian distributors will be to
• Less protection will raise avoid the ECR management pitfalls encountered by many U. S. organizations
competitive requirements and thereby shorten the timelines for Canadian ECR implementation and
• New forms of trade barriers capture of ECR-related savings.
will emerge
• AG Selected for Major Benchmarking Study on Customer
• Specialized regional skills will Satisfaction – The Advantage Group is excited about having been selected
be developed as competitive as an expert advisor for a major benchmarking study being conducted by the
advantages prestigious American Productivity and Quality Center, based in Houston,
• Globalization requires structural Texas. The study will define ‘best practices’ for customer satisfaction
and strategic changes measurement, based on on-site fact-finding at leading U. S. organizations.
• Different success determinants Although the study is currently in progress, opportunities to join the study
exist for big and small companies sponsorship group are still available. For further information about the study,
• Competitive advantages accrue contact Ron Pirie at (416) 863-0685 ext. 111.
to home market experience
• Soon to be Released – Don Belfall has just finished researching and
The report concluded that ultimately writing a book, due to be released in October this year, regarding industry
there is nothing foreign about global and professional associations in Canada. The book discusses how industry
business. “It is the difference between associations may increase the potential for their future impact and influence.
managing the business by responding The areas reviewed include matters regarding member satisfaction and
to opportunities from customers, and value perceptions, as well as the means by which trade associations may
organizing the business to create become increasingly relevant to their members’ businesses. (Copies may
opportunities for customers.” be obtained through contacting the Canadian Society of Association
Executives at 416-596-6433.)
For further information contact
Doug Rossiter at (614) 436-9575.
LISTENING TO YOUR CUSTOMERS ... OR NOT
DILBERT® UNITED FEATURE SYNDICATE
THE
ADVANTAGE FOR MORE INFORMATION about
The Advantage Group or to provide comments
or suggestions on this newsletter, please contact
Joan Lavers (ext. 112) or Gren Norton
GROUP INC.
(ext. 113) at: (416) 863-0685
or fax us at (416) 863-0787
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