Another company was considering a significant price increase to protect margin from rising raw material costs but was unsure if their competitors would follow. Analysis of the competitor’s past price increase levels and timing revealed a pleasant surprise. While the analysis validated that the company’s price leader status it also revealed they were traditionally the first mover for price actions in their industry in North America. Their key competitor had always followed them. At my recommendation, the company announced a price increase and the competitors followed as expected.

The point of these two examples: Managers feel frustrated when the lack of reliable competitive information mars their ability to plan precise price actions. They try to find validation by sketching their competitors’ as irrational, opportunistic or short-sighted but that is hardly useful. Managers seeking dependable competitive intelligence should start by defining clear objectives prior to gathering competitive intelligence. The problem definition should determine requirements, where and how much competitive data to collect, how to analyze it, and how to share it within the organization.

In many companies, existing methods for gathering competitive data are flawed. Recent examples of low-ball pricing tend to influence critical price decisions leading to money being left on the table. Customers, the key source of competitive information, are likely to bluff or provide partial competitive data in expectation of concessions. Similarly, front-line employees also tend to share competitive sound bites somewhat selectively. The information gleaned from such data is understandably misleading. Even when quality data is forthcoming, the input is seldom analyzed sufficiently or relayed to the data providers hence leaving them unenthusiastic about contributing in the future. Also, competitive data collection tends to follow the problem-du-jour rather than an ongoing and consistent process. Few companies nominate a manager to coordinate and gather competitive information for addressing questions such as:
• Is the competitor a wild card across the country or can we spot consistent patterns?
• Do they price aggressively everywhere or only in specific sales regions or for certain customers or products?
• How does the competitive offering compare with our product features?
• Is the competitor irrational are just reacting to our aggressive behavior?

Intelligence gathering should be pragmatic rather than a wasteful collection of data. For instance, it is pointless to demand large amounts of detail from sales reps for tracking market share or to justify their quoted price levels. Instead, requesting concise data sets for pre-determined and well-explained needs is better suited to explain competitive behavior in a given context. As such, the objectives for competitive intelligence vary by industry and nature of problem. Retailers may use sophisticated software to track real-time prices and competitive promotions to stay in the ballpark. Industrial manufacturers typically estimate costs from competitive 10-Ks and elicit price points from sales reps, channel members or customers.

Careful review of past competitive actions can guide precise price planning for future actions. Useful competitive intelligence is mission critical but it should not drain scarce resources. The experience of the aforementioned companies exemplifies that small scale efforts for competitive analysis not only expedite planning and execution of price actions but also increase the certainty of success.

Despite obvious gains, the traditional method of slicing product offering by simply purging items with the lowest dollar sales needs to be revisited.  A senior manager at a major retailer discussed their current approach with me as follows:

1. Develop lists of SKUs by category in descending order of sales and also margin
2. Identify SKUs, including top sellers, which compete with each other with the intent of keeping the smallest number of items that will deliver at least the same sales and profits. For example, if two-three (or more) products from competing suppliers represent 100% of sales mix but fewer items can generate all of it, the rest are candidates for removal. The procurement teams negotiate price and extract further concessions from vendors in exchange of more shelf space.
3. Check items with low sales carefully for several factors before chucking out any product. For example, consider keeping new items showing rapid sales growth and items that are part of a natural basket of goods so that a missing small piece does not hurt healthy incremental sales.
4. Replace branded staples with private label products where viable

The process of product rationalization has its share of pitfalls hence the need for caution. Unless the execution is overseen by an influential senior manager in a well-laid out process, such projects tend to go haywire, for instance, because of turf battles between product managers within a company.   For example, product teams at an industrial company would phase-out products to “make the numbers” but later add them to a list of custom manufactured products to even greater detriment of their company.   Some questions to consider if your company is considering product rationalization:

• How do I make sure that my product rationalization process is not flawed?
• What if sourcing from a sole vendor fails to deliver on quality or time?
• What about customer choice if only major brands supported by deep pockets survive?
• Would customers move to competition to buy what they need?

The one-stop-shop concept gets unprofitable if a grocer stocks, say, ten competing products with cheddar flavored microwave popcorn or a manufacturer offers good-better-best variations of a product without differentiating them by value or price.  Yet, manufacturers and retailers who understand customer value in the context of a complete shopping experience and set commensurate prices will survive the days of deep cuts.

A fortune 500 manufacturing executive recently mentioned that his company is positioning and pricing their new green products based on well-researched real and perceived benefits. Here are a few more cases of opportunity and realized success:

The Yale School of Forestry and Environmental Studies conducted the telephonic survey last summer to understand the environmental knowledge, attitudes, policy preferences, and behavior of the American people. Many said they are willing to pay more for “green” products. Half responded that they would “definitely” or “probably” pay 15% more for eco-friendly clothes detergent (51%) or an automobile (50%). Four in ten say they would spend 15% more on “green” computer printer paper (40%) or wood furniture (39%). Perhaps surprisingly, Americans who perceive their current financial situation as either “fair” or “poor” indicated they are just as willing as those more confident of their current finances to spend 15% more on detergent and wood furniture.

According to Target Corporation’s ad insert with the last Sunday’s newspaper, they are installing ultra-low flow faucets which are 80% more efficient than traditional faucets, have eliminated 400,000 pounds of petroleum-based packaging, recycled 983 million pounds of cardboard, providing 10% energy savings using fewer bulbs without decreasing light, now offering 700 organic foods in SuperTarget stores, worked with other partners to save 1,370,920 tons of carbon dioxide emissions, and so forth. For a company invested heavily in the customer’s shopping experience but is constantly compared with rival Walmart on price, is this not the right step?

GE launched Ecoimagination as a marketing and PR effort in May 2005 with a $90 million investment. In 2007, the company generated $12 billion in sales of ecomagination products, which include wind turbines, super-efficient jet engines and long-lasting light-bulbs. By 2010, GE wants to make $20 billion in sales of energy-efficient, environmentally friendly products and funnel $1.5 billion a year into related research.

Reduce, reuse, recycle, waste-reduction, eco-friendly, organic, efficient, green, gentle on nature, clean environment, natural, Energy Star rating, eco-options, eco-conscious, clean technology, clean energy, environmental conservation, locally growth foods, green buildings

While researching pricing increases related to raw material inflation, I noticed an interesting pattern at Continental AG, the leading global tire company, which seems to be treading (no pun intended) very carefully. Since mid-2007, the price of petroleum crude, a key raw material for the tire industry, has doubled and the company had no choice but to raise prices. Here is the schedule of their price actions announced over one year along with my observations[2]:

a) Europe: No price increases in any segment throughout 2007
b) North America: 6% in passenger and light trucks only effective Oct 2007 (Notice no large trucks!)
c) Europe: 3% in summer tires only effective Jan 2008 (Limited scope – deferring to summer in snowy Jan)
d) Europe: 3-4% in car tires only effective Jun 2008, (Notice no trucks)
e) North America: 8% in OE truck tires only effective Aug 2008
(Notice no cars)

Apparently, Continental sliced and diced markets for execution by segment, season, and geography based on known or perceived customer and competitor-related risks. Assuming this strategy addressed raw material inflation, what should they and other companies do to realize their price increases to full extent?

Companies should monitor discount activity for any sporadic increases at appropriate levels of granularity – market, brand, product line, sales territory etc. Higher than usual discounts following a price increase typically suggest, a) sales people are holding back, b)customers are pushing back, or c) the competition is being opportunistic. During my early years in pricing at a global airline, I learned the necessity of following competitive changes not just for price and booking levels but also frequency of service, routes served, type of plane, and passenger capacity. By organizing public data and feedback from frontline employees, managers can spot trends in competitive price actions. For instance, managers can gauge competitive threat by monitoring the level of consistency in price execution over time which helps validate their own company’s discounting practices. Such market intelligence supports price realization efforts and helps prevent price-related customer attrition without giving too much away.

Let’s never forget the 4×100 meter men’s relay at the Beijing Olympics. The US men’s team was a favorite to win a medal but got disqualified in the prelims for dropping the baton. Actually, this was the fifth instance for the US men’s team to drop the stick in the last 12 global championships. The root cause is that the US athletes do not practice enough as a team. So it was “not bad luck but bad execution”.[3] Somehow, it always comes down to coordination and simple processes whether it is performing at the Olympics or in the corporate world.

Notes:
1. The McKinsey Quarterly, How Companies Respond to Competitors: A McKinsey Global Survey, April 2008
2. Company announcements in Europe and North America over one year
3. Comment by USA Track and Field CEO Doug Logan