CFO Concerns Regarding Price Pressures And Margins

In the September Duke/CFO Magazine Global Business Outlook Survey, one of the reports is titled “Tables of Key Numbers.” (pdf) Two areas underscore CFO concerns with regard to pricing pressures and margins.

As seen on the bottom of page 2, there is a list of items seen under “Top Concerns for U.S. Businesses.”

Under the “MACRO CONCERNS” is seen the following:

  • Consumer Demand
  • Price pressure from competitors
  • Federal Government Agenda/Policies
  • Global financial instability

Under the “INTERNAL TO OWN FIRM” is seen the following:

  • Ability to Maintain Margins
  • Cost of health care
  • Attracting and retaining qualified employees
  • Ability to forecast results

_____

StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with the views expressed by these outside parties.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Comments Concerning Price Elasticity

On September 6, Forbes.com published an article, titled “Big Tobacco Takes Its Last Drag As Economic Change Looms,” that discusses price elasticity in the cigarette industry.

While any thorough discussion of price elasticity (of demand) would be lengthy and complex, here are a few brief comments:

  • As seen in the above-mentioned Forbes article, price elasticity can change over time.
  • While the concept of price elasticity can be a powerful and valuable tool, it can also be misapplied.  As such, caution is warranted.
  • Although price elasticity, at times, comes across as being a “new concept,” such is not the case.  As mentioned in the Forbes article, price elasticity dates back to (at least) 1890.
  • Many different factors determine price elasticity; as such, changes in price elasticity can arise from disparate sources.

With regard to this last point, factors that impact price elasticity can be grouped into various categories, including firm-specific, industry-specific, and general economic (macroeconomic) factors.

While, as with any discussion of pricing and pricing strategy, it is difficult to generalize among firms as each company can have varying characteristics and dynamics that need to be considered, at this point among the three categories listed above, from an “all things considered” basis the largest (and most unexpected) changes to price elasticity will be driven by changing economic factors.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Offering Lower-Priced Products

On September 4, The Wall Street Journal published an article titled “For Tide, A New Wave,” which discusses product strategy and pricing issues concerning a contemplated lower-priced Tide laundry detergent product.

Notable excerpts from the article include:

A decision to offer a lower-priced version of the premium brand carries the risk that buyers of regular Tide could trade down and stay there.

Indeed, three years ago P&G scrapped a lower-priced powdered detergent called Tide Basic, which was tested for about a year. P&G said consumers were having a hard time distinguishing between the bargain version and the regular priced variety. The company’s concern was that regular Tide users would trade down to Tide Basic, for instance, but be unhappy that it didn’t clean as well as regular Tide.

also:

In the year ended June, 41% of U.S. households were buying value-priced laundry brands, while just 29% who were buying premium brands, according to Nielsen data cited in an investor presentation Tuesday by Church & Dwight.

Since 2009, the value tier is the only segment of the liquid laundry detergent category that has grown. The value-segment’s dollar share grew to 29.2% from 25.9% during that time, according to Church & Dwight. Premium and mid-tier brands, meanwhile, lost share.

The article also mentions concerns over “cannibalization” as well as concerns over launching a category “price war.”

The issue of whether to offer cheaper versions of premium products is common, especially in challenging business environments.

There appears to be a variety of complex issues inherent in whether P&G should offer a lower-priced Tide product.  While the article doesn’t mention it, it should be noted that the premium laundry detergents sell at a price considerably above (and in some instances multiples of) the prices of competing “value-priced” offerings.

Some of the challenges facing Tide and other higher-priced and/or premium products relates to affordability issues.  The March 5, 2013 blog post (“Product And Service ‘Affordability’ Concerns“) discusses various issues that should be contemplated when dealing with product and service affordability.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Rising Costs And Pricing

How to deal with rising costs is an important topic at this juncture, especially given various characteristics inherent in today’s business environment.  Some of these characteristics include increasing material costs; overhead costs that have already been reduced to low levels; and a confluence of issues that cumulatively make it difficult, in many cases, to “automatically” increase prices.

Recently, the Wall Street Journal published a feature titled “Tips for Companies Battling Rising Costs.” Twelve respondents answered the question of “What advice would you give companies whose costs are rising, but are afraid of raising prices?”

While I don’t necessarily agree with any or all of what is said in these responses, I think that the article’s topic is valuable, as is awareness and discussion of these issues.

As with any discussion of pricing and pricing strategy, I strongly believe that such pricing issues need to analyzed and handled on a company-specific level, as each company almost certainly will have company- and industry-specific characteristics and dynamics that need to be considered.  As such, following generalized advice concerning pricing will likely be suboptimal, if not harmful.  There are many factors that should be taken into account, encompassing many different functional areas (such as finance, marketing, sales and corporate strategy) and issues.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Pricing Strategy Of Taking The Costs Out Of Products

On July 25 the Wall Street Journal published an article titled “‘Desheeting’ Shrinks Rolls, Plumps Margins.”  The article discusses the practice of shrinking the volume of a product but keeping the price the same, referred to in the article as “desheeting”,”taking the weight out”,”volume shrinking” and “downsizing.”

An excerpt from the article:

Companies, particularly in the food business, have long shrunk packages as an alternative to hiking prices in the face of higher raw-material costs. Cereal boxes and bags of chips have in many cases become lighter over the years in what the food industry refers to as taking “weight out.” A regular Snickers bar now weighs 1.86 ounces, down from 2.07 ounces in the past, which Mars says was done to cut calories to 250 per bar. Tropicana Pure Premium orange juice is now sold in 59 ounce bottles, versus 64 ounce cartons prior to 2010.

My comments:

The practice of shrinking the product’s volume, instead of raising prices, seems (very) common.  Of course, a similar practice is often used for durable goods, in which costs are removed from the product in order to maintain (or increase) product profitability.

While these practices are widespread, and may seem like a “sensible” approach to deal with rising product costs and/or substandard product profitability, there are many potential drawbacks and caveats to these types of pricing “tactics.”  Adverse impacts can occur in a variety of areas, including competitiveness, product positioning, and value proposition, to name a few of the more readily apparent areas.  As such, I don’t believe that such pricing “tactics” should be done without a comprehensive analysis of the impact of such implementations.

Of note, many of the (full) adverse impacts may not immediately manifest and/or become readily apparent until some time in the future.

—–

StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.